Strengthening the Islamic banking industry’s compliance with Sharia in line with international best practices is one of the key pillars of the State Bank of Pakistan’s (SBP) Third Strategic Plan for the Islamic Banking Industry 2021-25.
As part of the plan, SBP will systematically and progressively adopt the Sharia standards of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI). The standardization and harmonization of Sharia practices and procedures helps bring the local Islamic banking industry on par with international best practices.
After an extensive evaluation and consultation process with internal and external stakeholders, taking into account the local environment, the SBP on Monday adopted four more AAOIFI Sharia standards: 1) Salam and Parallel Salam, 2) Istina and Parallel Istina. , 3) Combination of Contracts and 5) Irrigation Partnership (Musaqat), with some clarifications and changes.
Salam is a financing method commonly used in agriculture while istina is a method commonly used by Islamic banking institutions to provide financing involving manufacturing/assembly/processing.
The Irrigation Partnership Standard (Musaqat) can be used in the agricultural sector, particularly for orchard financing, while the Contract Combination Standard allows Islamic banking institutions to use multiple contracts in their various agreements to meet customer needs. Provides guidance while it can be noted that previous SBP has already issued detailed general guidelines on Islamic finance for the agricultural sector.
With the adoption of these four standards, the total number of AAOIFI Sharia standards adopted by the SBP has reached twenty, while work on the remaining standards is ongoing.
In addition, there are certain AAOIFI standards that have already been adopted by SBP as part of their various rules, directives and guidelines issued from time to time.
AAOIFI is a leading international organization primarily responsible for developing and issuing standards for the global Islamic finance industry. SBP continues to be a key member of AAOIFI’s Board of Trustees.