The Securities and Exchange Commission of Pakistan (SECP) has directed all Islamic financial institutions to establish Shariah compliance units as well as hire internal and external auditors.
According to the SECP’s directive to the Islamic financial institutions on Friday, every Islamic financial institution is encouraged to establish a Shariah compliance unit headed by a Shariah compliance officer suitably qualified, trained, and experienced in the field of Islamic finance.
The Shariah compliance unit can work under the overall guidance and supervision of the Shariah supervisory board, with parallel reporting to the head of the compliance department or internal audit department, as the case may be.
The Shariah compliance officer can coordinate between the Shariah advisor, the Shariah advisory board, and management and may be entrusted with responsibility for reviewing all the product proposals and related agreements, contracts, manuals, and process flow before presenting these to the Shariah supervisory board for approval ensure that the operations of Islamic financial institutions are in conformity with Shariah principles and rules and periodically submit a Shariah compliance report to the management on the overall Shariah compliance environment.
The SECP further directed that every Islamic financial institution is encouraged to strengthen its internal audit department, either by appointing an internal Shariah audit resource having relevant qualifications or expertise in the field of Islamic finance or by training at least one of its employees in the internal audit department for the purpose of internal Shariah audit from a reputable training institute.
The scope and methodology of the internal Shariah audit may be reviewed and approved by the board of directors or audit committee of the Islamic financial institution. The internal Shariah audit resource may follow the same reporting norms as are applicable to the internal auditor.
Under the directive, an Islamic financial institution may opt for an external Shariah audit for each financial year, which may be undertaken by the existing external auditors or an independent external Shariah auditor. For the purpose of this clause, the provisions of sections 223 and 247 of the Companies Act, 2017, can be followed with regard to an external Shariah audit and an external Shariah auditor, respectively, and the audit firm that has expertise in Islamic finance may be preferred.
The scope of an external Shariah audit may include an independent and objective assessment of compliance of operations with Shariah principles and rules and any further conditions imposed by the Commission from time to time. The external Shariah auditor may assess the compliance of the Islamic financial institution’s financial arrangements, contracts, and transactions with the Shariah principles and rules, SECP added.
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