- Preamble
1.1. The Securities and Exchange Commission of Pakistan (the “Commission”) is pleased to
issue the Guidelines for Offering Islamic Financial Services 2023, under Section 40B
and in pursuance of clause (x) of sub-section 4 of Section 20 of the Securities and
Exchange Commission of Pakistan Act, 1997.
1.2. These guidelines shall be applicable to persons engaged in offering Islamic financial
services in the financial services markets, except for any financial service exclusively
regulated by the State Bank of Pakistan.
1.3. These guidelines are not meant to amend or modify the existing legal and regulatory
frameworks issued or administered by the Commission.
1.4. These guidelines are voluntary in nature, and regulated persons, Shariah-compliant
companies, issuers of Shariah-compliant securities, and others concerned are
encouraged to apply them.
- Interpretations
2.1. In these guidelines, unless there is anything repugnant in the subject or context,
(a) “Act” means the Securities and Exchange Commission of Pakistan Act, 1997
(XLII of 1997);
(b) “Commission” means the Securities and Exchange Commission of Pakistan,
established under section 3 of the Act;
(c) “Islamic financial institution” means a company, entity, or institution offering
Islamic financial services as its main business activity, including but not limited
to the following;
(i) an NBFI, as defined in clause (n) of sub-section (1) of section 2 of the Act;
(ii) a regulated person, as defined in clause (pb) of sub-section (1) of section
2 of the Act;
(iii) a financial institution as defined in clause (31) of sub-section (1) of
section 2 of the Companies Act, 2017; and
(iv) any other type of company, entity, or institution, as may be notified by
the Commission from time to time,
but shall not include a banking company as defined in clause (c) of section 5 of
the Banking Companies Ordinance, 1962 (LVII of 1962) or any other company,
entity, or institution regulated by the State Bank of Pakistan;
(d) “Islamic financial services” include Shariah-compliant financial products and
other financial services offered by an Islamic financial institution under the Act
or any administered legislation in accordance with Shariah principles and rules;
(e) “Shariah principles and rules” means requirements, standards, rulings, or
permissions pertaining to Islamic financial services, derived from the following:
(i) legal and regulatory framework administered by the Commission;
(ii) Shariah standards issued by the Accounting and Auditing Organization
for Islamic Financial Institutions (AAOIFI), as notified by the Commission;
(iii) Islamic Financial Accounting Standards, developed by the Institute of
Chartered Accountants of Pakistan, as notified by the Commission;
(iv) guidance and recommendations of the Shariah advisory committee, as
notified by the Commission; and
(v) approvals, rulings, or pronouncements of the Shariah supervisory board
or the Shariah advisor of the Islamic financial institution, in line with (i)
to (iv) above;
(f) “Shariah compliant company” means a company as defined in clause (64) of
sub-section (1) of section 2 of the Companies Act, 2017 (XIX of 2017) and
declared a Shariah compliant company under sub-section (1) of Section 451 of
the Companies Act, 2017;
(g) “Shariah compliant security” means a security declared under sub-section (2)
of Section 451 of the Companies Act, 2017 (XIX of 2017) as a Shariah compliant
security;
(h) “Shariah advisory committee” means the Shariah advisory committee
constituted by the Commission under section 11A of the Act to advise the
Commission on Shariah-related matters; and
(i) “Shariah supervisory board” means a board constituted, appointed, or
engaged by the Islamic financial institution to advise it on matters concerning
Shariah principles and rules and Islamic products.
2.2. Words and expressions used but not defined in these guidelines shall have the same
meanings as are assigned to them in the Act or applicable administered legislation.
- Conditions for offering Islamic financial services
3.1. An Islamic financial institution may offer Islamic financial services in the financial
services market, subject to any approvals that may be required under the applicable
laws.
3.2. Every person offering Islamic financial services needs to:
(a) ensure that its board of directors and management are fully aware of their
fiduciary responsibility regarding Shariah compliance and governance towards
its stakeholders and endeavour to discharge the same in true letter and spirit;
(b) prudently recognize any additional considerations or exceptional
circumstances that may require it to apply proportionality and/or other
considerations towards the implementation of the Shariah principles and
rules.
3.3. It is necessary for every Islamic financial institution that is a company to obtain a
certificate of Shariah-compliant company in terms of sub-section (1) of Section 451 of
the Companies Act, 2017.
3.4. It is necessary for every security to be issued by an Islamic financial institution to
obtain a certificate of Shariah compliance as required under Section 451 of the
Companies Act, 2017.
- Shariah-compliant structure and operations
4.1. With respect to the Shariah-compliant structure and operations of a person offering
Islamic financial services, it is recommended to ensure that;
(a) its constitutive documents clearly provide for offering Islamic financial
services;
(b) its policy framework, including policies and manuals as approved by its board
of directors for operational matters, adheres to Shariah principles and rules,
particularly the following;
(c) relationships should preferably be established under Shariah-compliant
arrangements;
(d) endeavour to avoid using conventional insurance and instead obtain
reasonable takaful coverage, where required;
(e) any material for the promotion of a product or service shall state the names
of members of the Shariah supervisory board who reviewed the product or
service and the contents of the marketing material.
(f) its product development process is based on Shariah principles and rules;
(g) it has a framework and arrangements in place to ensure Shariah compliance
with respect to its operations, affairs, and activities on an ongoing basis; and
(h) it has a framework in place for adequate disclosure of the status of
compliance with Shariah principles and rules.
- Shariah-compliant products
5.1. For offering Shariah-compliant products in the financial services market, applicable
Shariah principles and rules are required to be adhered to at product development as
well as product offering stages.
5.2. A Shariah-compliant financial product may be offered with the approval of the
respective Shariah supervisory board. However, in the case of a Shariah-compliant
product that has been approved by the Commission and/or is being offered through a
centralized platform by a regulated person with the approval of the Commission, no
further review or approval from the respective Shariah supervisory board may be
required.
5.3. All proposed Shariah-compliant financial products may be reviewed by the Shariah
supervisory board in light of Shariah principles and rules. Any observations of the
Shariah supervisory board or deviation from the requirements of the Shariah
principles and rules, if any, must be justified and explained with rationale.
5.4. For any deviation from the requirements of any Shariah standards that have been
adopted and notified by the Commission, prior written approval of the Commission
shall be obtained as required under Section 225 of the Act.
5.5. The Shariah pronouncements of the Shariah supervisory board, including
observations, restrictions, and deviations as mentioned above, are to be made part of
the Shariah opinion and adequately disclosed to the customers of such Shariahcompliant financial products.
- Shariah-compliant investments
6.1. An investment policy may be approved by its Shariah supervisory board for guiding
Islamic financial institutions in Shariah-compliant investments that may include
investments in Shariah-compliant companies, Shariah-compliant securities, or any
other entity whose core business is based on Shariah principles and rules.
6.2. For securities investments, the Shariah screening criteria outlined in the Shariah
Governance Regulations, 2018, can be followed.
- Disposal of Shariah-noncompliant investments
7.1. Shariah-noncompliant investments above the applicable threshold and any such
Shariah-compliant investments that may subsequently become Shariah-noncompliant
investments, may be divested in a manner and within such a time period as may be
determined by the Shariah supervisory board.
7.2. A policy for the purification of its income and the disbursement of Shariahnoncompliant income as charity may be made and implemented by an Islamic financial
institution with the approval of its Shariah supervisory board.
- Shariah-compliant mobilization of financial resources
8.1. Financial resources can be mobilized through Shariah-compliant securities.
8.2. Except for Modarabas, an Islamic financial institution before mobilizing financial
resources through Shariah compliant securities shall obtain the necessary approval as
required under Section 451 of the Companies Act, 2017.
8.3. Financial resources can also be mobilized from the Islamic banks or Islamic windows
of conventional banks through Shariah-compliant modes, as permitted by the State
Bank of Pakistan.
- Conversion of a financial institution into an Islamic financial institution
9.1. In the event that a conventional financial institution intends to convert itself into an
Islamic financial institution, either all at once or in phases, it may do so through the
following process:
(a) initiate the conversion process with the approval of the board of directors;
(b) form a dedicated team, function, or department to prepare the conversion
plan and spearhead conversion activities;
(c) prepare a conversion plan in light of the Shariah principles and rules and the
Shariah screening criteria provided in the Shariah Governance Regulations,
2018;
(d) appoint or engage a Shariah supervisory board to review and vet the
conversion plan and oversee its implementation;
(e) obtain approval of the conversion plan from the board of directors, if required,
and may voluntarily intimate the Commission for information;
(f) appropriately disclose the approved conversion plan to the relevant
stakeholders.
9.2. The conversion plan referred to above can, inter alia, include the following:
(a) changes required to be made, if any, to the mission and vision statements and
constitutive documents;
(b) regulatory approvals required to be obtained, if any;
(c) determination of a cut-off date of conversion beyond which the financial
institution shall not enter into any new Shariah-noncompliant business on
either the asset or liability side. However, it can continue settlement of Shariah
non-compliant business undertaken previously, as per plan;
(d) a three- to five-year business plan with assumptions and projected financial
figures;
(e) feasibility study on business viability as an Islamic financial institution;
(f) operational and execution plans;
(g) strategy to deal with Shariah impermissible items, including but not limited to,
existing assets, liabilities, off-balance sheet items, non-performing assets,
Shariah non-compliant income or earnings, collaterals and securities, etc.;
(h) a detailed plan for the conversion or replacement of existing Shariahnoncompliant products with alternative Shariah-compliant products;
(i) a detailed plan regarding existing portfolio investments and the proposed
Shariah-compliant alternative;
(j) comprehensive plan regarding the training and capacity building of existing
employees and the induction of a new workforce to undertake Shariahcompliant business;
(k) changes required to be made in manuals and procedures relating to financing,
risk management, credit management, information technology, internal
control, human resources, etc.;
(l) strategy for compliance with the requirements of the Shariah Governance
Regulations, 2018;
(m) mechanism for separate account-keeping of Shariah-compliant and interestbearing businesses until complete conversion into an Islamic financial
institution;
(n) Shariah governance policy, including the appointment or designation of a
Shariah compliance officer, the mechanism for undertaking Shariah internal as
well as external audits, the reporting and disclosure framework, etc.
(o) policy for resolution of adverse findings in internal, external, and statutory
audits;
(p) marketing plan and strategy, particularly concerning the brand name, logo,
and tagline for the Islamic financial institution, if applicable;
10 | P a g e
(q) strategy for dealing with existing customers about the conversion, including
obtaining consents, revising agreements, revising terms and conditions of the
relationship, if any, and devising mechanisms to deal with unwilling customers;
(r) strategy for dealing with existing vendors, suppliers, service providers, etc.
about the conversion, including obtaining consents, revising agreements,
revising terms and conditions of relationships, if any, and devising mechanisms
to deal with unwilling persons;
(s) plan for the conversion of non-Shariah-compliant employee benefit schemes;
and
(t) summary of cases under litigation along with any possible impact of conversion
on such cases.
9.3. During the execution of the conversion plan, the Shariah supervisory board may be
mandated to oversee its progress and report any issue concerning Shariah compliance
to the board of directors for necessary corrective action.
9.4. After meeting the Shariah screening criteria provided in the Shariah Governance
Regulations 2018, the financial institution may seek and obtain a Shariah compliance
certificate as provided in the said regulations.
- Islamic windows of conventional financial institutions
10.1. A conventional financial institution may establish an Islamic window for providing
Islamic financial services through the following options:
(a) it may establish an independent legal entity wholly owned by the financial
institution or establish an identifiable unit within the financial institution;
(b) it shall comply with the relevant registration or licencing regime, as may be
introduced for Islamic windows, with the obligation to follow the minimum
regulatory requirements of capital allocation and maintenance, governance, and
operations.
(c) a specialized Shariah governance framework can be prepared and implemented
to ensure meticulous compliance with Shariah principles and rules;
(d) an “institution within institution” model can be followed, allowing maximum
independence of the Islamic window to pursue its activities without unnecessary
and undue interference or influence from the management of the parent
financial institution;
(e) all business units and functions, including products, sales, service, and marketing,
can be directly managed by the Islamic window, while control and support
functions may be shared with the parent financial institution provided that there
are defined cost allocation and service level agreements;
(f) Islamic windows may ideally operate through dedicated Islamic-only branches
and dedicated staff for these branches, serving only Islamic window customers.
No customer-facing staff of any function may be allowed to serve both
conventional and Islamic window customers;
(g) Islamic window may be allowed to spin off into a separate legal entity if and when
it reaches a certain threshold of assets and regulatory capital;
(h) Islamic windows are encouraged to maintain separate books of accounts and
prepare a supplementary set of financial statements accordingly;
(i) external auditors, as part of their review, may certify that separate controls and
systems have been maintained to ensure that there is no commingling of funds
from the Islamic window with those of the parent financial institution;
(j) the Shariah supervisory board may be empowered to express an opinion in its
report as to whether the Islamic window’s funds were commingled with those of
the parent financial institution during the reporting period;
(k) the ultimate responsibility of the Islamic window is with the board of directors of
the parent financial institution; and
(l) the Islamic window can receive funds from its parent financial institution under
a Shariah-compliant contract. However, it may not place funds with its parent
financial institution or with any other conventional financial institution, either
directly or through a third party.
- Shariah governance framework
11.1. Every Islamic financial institution may have in place a comprehensive Shariah
governance framework, which encompasses a set of institutional and/or system-wide
arrangements for the effective and independent oversight of Shariah compliance of
its products, services, processes, and business operations.
11.2. The key objectives of the Shariah governance framework are to:
(a) provide a structure and a system for governing all the business activities of
the Islamic financial institution in order to ensure Shariah compliance at all
times and at all levels;
(b) enable the Islamic financial institution to be acknowledged as Shariahcompliant by the stakeholders, including the general public; and
(c) protect the Islamic financial institution from financial and reputational loss
on account of Shariah non-compliance.
11.3. The Shariah governance framework can at least cover the following:
(a) appointment, engagement, constitution, or establishment of a Shariah
supervisory board, a Shariah compliance function, an internal Shariah audit
function, and an independent external Shariah audit. For this purpose,
governance standards issued by the Accounting and Auditing Organization for
Islamic Financial Institutions (AAOIFI) can be referred to as “good practices.”
(b) roles and responsibilities of its board of directors and senior management
towards upholding the Shariah compliance of its activities and operations;
(c) in the case of an Islamic window or an Islamic subsidiary of a conventional
financial institution, a specialized Shariah governance framework for the
operations of such an Islamic window or Islamic subsidiary, as the case may be;
(d) mechanism to prudently recognise any additional considerations or exceptional
circumstances that may require it to apply proportionality and/or other
considerations for ensuring compliance with Shariah principles and rules;
(e) suitable disclosure and transparency in Shariah governance to its shareholders,
customers, other relevant stakeholders, and market participants; and
(f) code of ethics and code of conduct, focusing on Shariah principles and rules, for
the financial institution and its employees.
11.4. Every Islamic financial institution is encouraged to ensure that:
(a) its business is carried out in conformity with Shariah principles and rules under
the guidance of its Shariah supervisory board;
(b) significant changes in any of the existing product structures, financing
agreements, terms, and conditions require prior written approval from the
Shariah supervisory board;
(c) all material changes in the existing product structures, agreements, terms, and
conditions are duly disclosed to the concerned stakeholders;
(d) a monitoring and review system for Shariah compliance has been introduced that
encompasses all activities and products of the Islamic financial institution;
(e) its human resources are sufficiently trained to perform duties concerning Shariah
compliance; and
(f) irregularities, if any, recorded and reported by internal Shariah auditors are
rectified under the guidance of the Shariah supervisory board.
- Shariah supervisory board
12.1. Every Islamic financial institution is encouraged to constitute, appoint, or engage a
Shariah supervisory board, at the earliest possible time, comprising at least two
persons qualified to be registered as Shariah advisors under the Shariah Advisors
Regulations, 2017, to advise the board of directors and management of the Islamic
financial institution on all Shariah-related matters and perform such other functions
entrusted under these guidelines. However, one of the members of the Shariah
supervisory board shall be registered as a Shariah advisor with the Commission.
12.2. Until a Shariah supervisory board is constituted, appointed, or engaged by an Islamic
financial institution, the institution may appoint or engage a Shariah advisor, who can
also perform the functions of the Shariah supervisory board until such time.
12.3. The Shariah supervisory board or the Shariah advisor, as the case may be, are
recommended to be empowered to enjoy such powers as provided in the Shariah
Advisors Regulations, 2017 and perform such functions as may be provided in these
guidelines and the Shariah Advisors Regulations, 2017.
12.4. In case of any dispute or difference of opinion arising between the Islamic financial
institution and the internal Shariah auditor on matters relating to Shariah
interpretation, the same can be referred to the Shariah supervisory board for a
decision.
12.5. In case of any difference of opinion between the Shariah supervisory board and the
Islamic financial institution, the matter can be referred by the Commission for
consideration by the Shariah advisory committee, the Shariah board for Takaful, or
the Religious board for Modarabas, as the case may be.
- Shariah compliance function
13.1. 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.
13.2. 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.
13.3. The Shariah compliance officer can coordinate between the Shariah advisor, the
Shariah advisory board, and management and may be entrusted with responsibility
for:
(a) review all the product proposals and related agreements, contracts, manuals,
and process flow before presenting these to the Shariah supervisory board for
approval;
(b) ensure that the operations of Islamic financial institutions are in conformity with
Shariah principles and rules; and
(c) periodically submit a Shariah compliance report to the management on the
overall Shariah compliance environment.
- Internal Shariah audit
14.1. 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.
14.2. 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.
14.3. The internal Shariah audit resource may follow the same reporting norms as are
applicable to the internal auditor.
14.4. The duties of the internal Shariah audit may include, but are not limited to, the
verification of:
(a) transactions entered into are consistent with the Shariah principles and rules;
(b) financing agreements entered into are Shariah-compliant and are in the formats
approved by the Commission, if all the related conditions are met;
(c) offering documents, investments, and contracts have been reviewed by the
Shariah supervisory board;
(d) product structure, process flow, and operations are duly vetted by the Shariah
supervisory board;
(e) process for purification of income has been carried out, and Shariah-noncompliant income has been transferred into a charity account and distributed to
approved charitable institutions;
(f) findings are shared with the management and Shariah supervisory board in
respect of all the above items, including irregularities, inadequacies in risk
management, governance, and internal controls, which are necessary to avoid
non-Shariah compliant business transactions; and
(g) investments in securities and other instruments and fund-raising are in
accordance with the requirements of these guidelines.
14.5. The internal Shariah auditor may submit an internal Shariah audit report annually to
the board of directors or audit committee.
14.6. The internal Shariah auditor may maintain liaison with the Shariah supervisory board
and may seek his guidance in ensuring Shariah compliance.
14.7. An Islamic financial institution may outsource its internal Shariah audit function.
- External Shariah audit
15.1. 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.
15.2. 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.
15.3. 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.
15.4. 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.
15.5. The external Shariah auditor may be mandated to prepare a report in a format as may
be prescribed by the Institute of Chartered Accountants of Pakistan or any other
suitable format for the board of directors of the Islamic financial institution, giving
their opinion on:
(a) the status of Shariah compliance;
(b) the risks associated with Shariah non-compliance;
(c) the capacity and quality of the internal controls to measure, manage, and
mitigate the Shariah non-compliance risks;
(d) the adequacy and effectiveness of the Shariah governance framework;
(e) the level of awareness and sensitivity of the management and the board of
directors in addressing the Shariah risks; and
(f) any other issues deemed significant by the external auditors with respect to
Shariah compliance.
- Accounting, auditing, and governance standards
16.1. Financial statements of Islamic financial institutions are to be prepared in accordance
with all the applicable Shariah and other standards, as notified by the Commission for
adoption under Section 225 of the Companies Act, 2017, or any other regulatory
framework, from time to time.
- Reporting by the Islamic financial institution
17.1. An Islamic financial institution, in addition to any other reporting requirements under
the respective regulatory framework, may be required by the Commission to submit
additional information and documentation from time to time.
- Power of the Commission to intervene
18.1. Subject to the powers of the Commission under the Act, it may impose restrictions on
the Islamic financial institution through a directive under Section 40B of the Act, if:
(a) the Islamic financial institution does not operate in conformity with Shariah
principles and rules; or
(b) any condition imposed by the Commission is not adhered to; or
(c) there exist sufficient reasons to believe that Shariah compliance is not being
observed;
(d) there are sufficient reasons to believe that the acts and conduct of an Islamic
financial institution, from the standpoint of ethics and adherence to values and
objectives, create a reputation risk for the Islamic finance industry; and
(e) the penalty, if any, imposed by the Commission has not been paid within the
stipulated time period.
18.2. For the purposes of clause 1, the Commission may prohibit an Islamic financial
institution from doing any one or more of the following, namely:
(a) entering into transactions;
(i) of a specified description or other than a specified description; or
(ii) in specified circumstances or other than in specified circumstances; or
(iii) to a specified extent or other than to a specified extent.
(b) soliciting business from persons of a specified description or from persons other
than those of a specified description; or
(c) carrying on business in a specified manner or other than in a specified manner.
18.3. For the information of stakeholders, the Commission may publish a press release
about its imposition of restrictions on the Islamic financial institution in at least two
newspapers of wide circulation in Pakistan and/or place the same on its official
website.
Like this:
Like Loading...
Related