Shariah Framework &

Philosophy for IFIs

Prof. Dr. Ashfaq Ahmad (HEC Approved PhD Supervisor)

Professor, Hailey College of Commerce
[Acknowledgement for the content to CEIF-IBA]
 Shariah ‫الشريعة‬

Then We have put you (O prophet) on a plain

way of (our) commandment. So follow it and
do not follow the desires of those who do not
know. (45:18)

2
 Shariah ‫الشريعة‬
• Lexically, a plain way. ‫الصراط المستقيم‬
•
• Terminologically, shariah is the body of Islamic
religious law.

• But its scope extends beyond law as it regulates

both public and private aspects

• Shariah is the totality of religious, political,

social, domestic and private life.

3
 Shariah ‫الشريعة‬

These four are the fountainheads from which the spring of

Jurisprudence flow:
• Quran

• Hadeeth

• Ijma

• Qiyas
 Basic Permissibility &
Prohibition:
A solid foundation for a
stable economic system
 Guidelines for Commercial
Dealings

Allah (SWT) has ordained in Holy Quran

“Allah has permitted trade and prohibited Riba”

 Al Baqarah 275

“Those who devour Riba shall rise up before Allah like men whom
Shaitan has demented by his touch; for they claim that trading is like
usury. But Allah has permitted trading and forbidden usury. He that
receives an admonition from his Rabb and mends his ways may keep
what he has already earned; his faith is in the hand of Allah. But he that
pays no heed shall be among the people of fire and shall remain in it
forever.”
Al Baqarah 278 - 279

“O you who believe, Fear Allah and give up what

remains of your demand for Interest, if you are indeed a
believer. If you do not, then you are warned of the
declaration of war from Allah and His Messenger; But if
you turn back you shall have your principal: Deal not
unjustly and you shall not be dealt with unjustly.”
 Riba

in Hadith Definition

From Hazrat Jabir Ibn-e-Abdullah (RA):

The Prophet, peace be on him, cursed :
• The receiver and the payer of interest, Every Debt that pulls any kind of gain is Riba
• The one who records it and
• The witnesses to the transaction
And said: "They are all alike [in guilt]."
• Riba means any pre agreed excess
compensation over and above the principal
(Muslim, Tirmidhi and Musnad Ahmad) • Compensation may include monetary as well
as non monetary benefits
Prohibitions in Commercial Dealings
1. All type of Riba
 Riba Al Nase’ah
 Riba Al Fadl

2. Maysir / Gambling

3. Gharar (transaction with uncertainty)

Bai Qablal Qubz, Short sale, Future sale, Bai
Dain /Sale of debt,sale of artificial
instruments like derivatives/options etc

Thus, Islamic banking system has a clear mandate

to promote real economic activity by refraining
from all prohibited transactions
 Riba
(Usury)
Future
Gharar
Sale

PROHIBITION IN
Gambling/ ISLAMIC
Qimar
Maysir FINANCIAL
SYSTEM

Unfair &
Speculative Unjust
Trading of
Money Unlawful Contracts
&
unethical
trade
 What is Islamic Banking?
Islamic banking is the form of financial intermediation based
on the Islamic modes of partnership, sale, and rent, free from
Riba (interest), Maysir (gambling), Gharar (uncertainty) and
other elements prohibited in Shari’ah.

Interest based dealings

Sale
Uncertainty Unethical business

Invalid Sale Bonds, T-bills

Agency
Partnership
Derivatives Trade of Artificial Instrument
Rent
Gambling Short / Future sell
What distinguishes Islamic banking
from conventional banking
We find the differences are on 3 levels

Product

Business

Conceptual
Distinguishing Features
We find the differences are on three levels:

1. Conceptual & Socio-religious level

- Islamic banks are not money lenders

- cannot deal in interest & non permissible

industries/goods.

- Decision making has to be ethical and abide moral

values

2. Business model & Governing framework

- IB actively participates in trade and production process
- Governing framework in terms of Shariah Advisor &/or SSB
Deal in Real Assets
Distinguishing Features
3. Product Level Implementation
- usually asset backed & involve trading/renting of
asset & participation on profit & loss basis

- Implementation is not just a mere change of paper

work and terms but it involves
- having the right intention,
- the correct sequence of steps and timing of execution
- clarity of roles of contracting parties

Without a clear understanding of these differences some people even

experts tends to makes a common mistake of equating Islamic banks as
just another bank with mere change of name.
Framework for Socio & Economic Accountability

To ensure Islamic banks are focus towards their objective and

are creating real economic value & efficiency for the society
we need a strong Framework.

Four Components of the Framework

Regulatory Guidelines, Supervision & Support

Corporate Shariah Governance

Transparent/Enhanced Accounting
& Reporting Regime

Shariah Compliance & Audit

Islamic Banking
Inception & today
 Global Islamic Finance Industry

Islamic Finance
Assets expected
USD 5 trillion
by 2025

Source: Islamic
Finance Development Global Islamic Finance Assets – (USD Billion)
Report 2021
Global Islamic Finance Industry

63
1 Source: Islamic Finance
Development Report 2021
IB Share in Total Banking Assets by Jurisdiction

• Islamic banking is recognized by international

financial institutions including the IMF, World
Bank, ADB and Basel.
• Market Size: USD 3.374 Trillion
• 1595 financial Institutions globally
• Global/emerging centres: UAE, UK, Malaysia,
Turkey & Bahrain
Recognized by:

IMF World Bank ADB

Data Sources: IFSB Report
2022
 Global Sukuk Issuance
Total Global Sukuk Issuance (Jan 2001 – Dec
11,053 2020) – All Tenors – (USD Billion)
Sukuk Issued Globally worth over

USD 1.42 Trillion

By
36 Countries
Including both Muslim majority
countries

Eg: Malaysia, Turkey, Bahrain, UAE,

Oman, Indonesia, Pakistan &
Western countries like
USA, UK, Japan, Germany etc.
A large number of these Sukuk are issued by
Government to
Source: IIFM Sukuk Report 2021
generate Shariah Compliant funding
Islamic Banking - a Success Story
 More than 120 countries have ISLAMIC BANKING
Institutions

 Approx. 50 Muslim countries including Kuwait, Dubai,

Saudi Arabia, Iran, Malaysia, Brunei and Pakistan

 Approx 60+ non-Muslim countries including USA, UK,

Canada, Switzerland, Srilanka, South Africa and Australia

 New players include Oman, Tanzania, Djobouti,

Singapore, Germany, Hong-Kong , Russia, Ukraine etc
Global Bodies for Islamic banking

AAOIFI

IFSB

IIRA

CIBAFI
Islamic finance
in Pakistan
 Constitution of Pakistan
The Preamble of the 1973 Constitution of Islamic
Republic of Pakistan states:

..the Muslims shall be enabled to order their lives in the

individual and collective spheres in accordance with the
teachings and requirements of Islam as set out in the Holy
Quran and Sunnah…

- The Section 38 (f) of the constitution of Pakistan

states
“The State shall eliminate Riba (interest) as early as
possible.”

- Section 227 of the constitution of Islamic Republic

of Pakistan reads as;

“All existing laws shall be brought in conformity with the

Injunctions of Islam as laid down in the Holy Quran and
Sunnah, in this Part referred to as the Injunctions of Islam,
and no law shall be enacted which is repugnant to such
Phase 1: Efforts for Islamic Financial system in Pakistan (till 2000)

1948 Objectives Resolution

1962 Creation of Council of Islamic Ideology (CII) in 1962

1973 Approval of clauses in the constitution of Pakistan demanding for elimination of Riba

1979 Pakistan adopted a policy of gradual transformation of its banking system

1980 A 15 member committee of CII prepared a report on elimination of banking & commercial
interest from Pakistan and outlining the Islamic modes of financing

1980 Modaraba Companies were introduced

1980 / 83 Introduction of zakat system /Introduction of Ushr system

1985 Introduction of mark-up based financing system in banks

1991 Federal Shariat Court (FSC) Declared mark-up procedure un-Islamic

1999 Shariah Appellate Bench of Supreme Court rejected all appeals against the previous and
called for the establishment of an interest free financial system

2000 - A Commission for Transformation of Financial System (CTFS) was setup at SBP.
- A Task force was setup at Ministry of Finance to suggest the ways to eliminate interest
from Government financial transactions.
- Task Force was set up in the Ministry of Law to suggest amendments in legal framework
 Phase 2 : Efforts for Islamic Financial system in Pakistan (post 2000)

2001 SBP developed criteria for issuance of License for Islamic banks
2002 Meezan Bank established as Pakistan’s first Commercial Islamic Bank
2003 Establishment of Islamic Banking Department at SBP
2003 SBP offered first Musharakah Based Islamic Export Refinance Scheme
2003 A Shariah Board was established at SBP
2005 & 07 Islamic Accounting standard developed by ICAP were approved by SECP for Murabaha & Ijarah

2008 SBP issue Instruction & Guidelines for Shariah Compliance in Islamic banks
2008 Government of Pakistan Ijarah Sukuk Program to finance its needs on Islamic basis
2010 Development of first 5 year Strategy Plan for Islamic banking
2010 SBP started the Adoption of AAOIFI Shariah Standard in Pakistan as part of its regulatory
framework
2014 SBP issued 2nd Strategic Plan for Islamic banking (2014-2018)
Formation of Steering Committee for Islamic Banking, Appointment of Deputy Governor for
Islamic banking, Re-composition of Shariah Board of SBP headed by Mufti Taqi Usmani sb
2015 Shariah Governance Framework for IBIs issued by SBP
Establishment of a separate Islamic Finance Department SECP
Establishment of 3 Centers for Excellence in Islamic Finance at IBA Karachi, LUMS, IM Sciences.

2016 All Shares Islamic Index launched at PSX

2018 Shariah Governance Regulations 2018, issued by SECP for Companies
First Pakistan Energy Sukuk issued & listed in PSX worth PKR 200 bn
Current Regulatory Development at SBP
 Separate Islamic banking Department at SBP
 A high powered Shariah Advisory Committee at SBP
 Legal framework in place, licenses available for
 Islamic commercial bank
 Islamic Subsidiary of a conventional bank
 Stand alone Islamic branches of a conventional bank

Guidelines are available for

 Conversion of a conventional bank into an Islamic Bank
 Conversion of a conventional branch into an Islamic
Banking branch

 Legal framework hybrid of Bahrain and Malaysian

model
Current Regulatory Development at SBP
 Comprehensive Shariah Governance Framework for Islamic
Banking Institutions 2018
 Profit and Loss Distribution and Pool Management Guidelines
for Islamic Banking Institutions
 Prudential Regulations
 Adoption/Issuance of Shariah Standards
 15 AAOIFI Shariah Standards have been adopted
 1 SBP Shariah Standard has been issued
 Essentials of Islamic Modes
 SBP Shariah Compliance Inspection / Guidelines for External
Shariah Audit
 SBP has offered Islamic alternatives to Conventional Refinance
schemes for the Customer on Mudaraba / Musharakah
 Shariah Complaint Open Market Operations started in 2014

 SBP Strategic Plan for Islamic banking – 30% share by

2025
Islamic Banking – in Pakistan
• Full Fledged Islamic Banks – 5
 Meezan Bank
 Al-Baraka Bank Pakistan Limited
 Dubai Islamic Bank
 Bank Islami Pakistan
 MCB Islamic Bank
• Many conventional banks operating Islamic Banking
Branches: Bank of Khyber, Bank Alfalah, Habib Metro Bank,
Bank Al Habib, Standard Chartered Bank, Soneri, HBL, UBL,
Askari, NBP, Silk Bank, Summit, BOP, ABL, Faysal, Sindh
Bank etc. (17) – as they have accepted the reality and
difference of Islamic banking.
 Local Islamic Finance Industry
Highlights

•
Islamic Banking Asset Growth – (PKR Billion)
Branch network of IB participants –
5,520 (4,086 branches + 1,463
windows)

• Asset base of IB – Rs 6,781 Billion

• Deposit base of IB – Rs. 4,856 Billion

• Growth rate YoY of Asset base is around

41.4%

• Growth rate YoY of Deposit base is

around 27.1%

• Share of IB in the overall Banking

system stands at 20.5%

• 5 Full Fledged Islamic Banks & 17

Islamic Banking Windows

Source: Dec 2021, SBP IB Bulletin

Jun 2022, SBP IB

Bulletin
Market Share of Islamic Banks -
Pakistan

01

02

03
 Driving Forces

Religious Duty and Constitutional Requirement Quaid Vision delivered at

requirement - the Quran ask of Islamic Republic of the Inauguration of SBP
the Muslims believers Pakistan

Federal Shariat Court Ruling Demand of the People of

Pakistan
Major Sukuk issued in Pakistan

 Pakistan Energy Sukuks

 Hub Power Holding – Long term Sukuk
 HUBCO Sukuk – based on Shirkat-ul-Aqd
 Engro PowerGen Thar – Long term Sukuk
 WAPDA Sukuk
 PMRC Sukuk –based on housing finance portfolio
 K-Electric Sukuk
 PIA Sukuk
 Engro Polymer & Chemicals Sukuk
 TPL Tracker Sukuk
 Sitara Peroxide Sukuk
 Agha Steel Sukuk
 BYCO Sukuk
Current Regulatory Regime at SECP for Islamic Finance

During last 15 years, several regulations were issued by SECP related to Capital Markets,
Takaful Companies, Modaraba sector, Mutual Funds, REITs and private Shariah Complaint
firms.

 Establishment of a separate Islamic Finance Department SECP in 2015

 Shariah Board setup at SECP

 “SECP (Amendment) Act 2016” amended the previous SECP Act 1997 to empower
SECP for regulating Shariah compliant financial products in the financial services
market.

 Shariah Advisors Regulations 2017, issued by SECP

 Shariah Governance Regulations 2018, issued by SECP

 In 2018 three AAOIFI standards were adopted by SECP

 Being member of Islamic Financial Services Board (IFSB) Malaysia, SECP has
implemented the IFSB standards (IFSB-6, IFSB-9, IFSB-10, IFSB-19) through its Shariah
governance framework
Current Regulatory Regime at SECP for Islamic Finance

Capital Markets

 In 2008, KMI 30 Shariah compliant index was launched by Meezan Bank & Karachi Stock
Exchange
 In Jan 2016, All Share Islamic Index is launched at PSX
 In 2017 – SECP introduced the concept of a Shariah compliant company and Shariah
compliant security through provisions incorporated in the Companies Act 2017, Section 451

 In May 2017 – Additional disclosure requirements for listed companies have been
prescribed, in the 7th schedule of the Companies Act 2017

Sukuk

 Public Offering Regulations, 2017 issued for public offering of Sukuk / Shariah-compliant
securities
 Sukuk (Privately Placed) Regulations 2017 issued by SECP

Takaful

 In 2005, SECP Issued “Takaful Rules 2005” for development of Takaful sector
 In 2012, Revised “Takaful Rules 2012” were issued by SECP with improvement
 To improve the Accounting disclosure - Takaful Accounting Regulations, 2019