Shariah-compliant business: SBP issues guidelines for Development Finance Institutions

The main objective of these guidelines is to deal with the establishment of a complete Islamic Bank, Islamic banking subsidiaries, and Islamic banking branches.

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In an aim to enlarge the scope of Shariah-compliant financial services in the country, guidelines have been issued for Development Finance Institutions (DFIs) by the State Bank of Pakistan (SBP) to undertake Shariah-compliant businesses and operations.

Due to the changes in licensing and regulatory regime for banks, guidelines, introduced in 2004, have also been updated by SBP for establishing Islamic banking institutions.

Applying to SBP for issuance of license and grant of permission will be required by Conventional Banks and DFIs that are aiming to start Shariah-compliant business.

Facilitating the new entrants in Islamic financing:

These guidelines are seen as a way to facilitate new entrants in the Islamic banking field by establishing complete Islamic banks by SBP. Islamic banking subsidiaries by conventional banks, and start if Shariah-compliant business and operations by conventional banks and DFIs.

As per the latest development according to a circular issued, the Guidelines and Criteria for Establishing Islamic Banking Institutions (IBIs) and Commencement of Shariah Compliant Business and Operations by DFIs have been issued.

The main objective of these guidelines is to deal with the establishment of a complete Islamic Bank, Islamic banking subsidiaries, and Islamic banking branches.

These guidelines also cover the requirements related to sponsor directors, business plan, Shariah governance, fees of applications, and preconditions for the commencement of business as well as minimal capital adequacy.

The guidelines for conventional banks and DFIs to undertake Shariah-compliant business and operations also cover the eligibility criteria for in-principle approval, proposal requirements, Shariah governance, minimum capital requirement, systems, and controls.

Requirements:

CB and DFI are required to submit a full strategy for Shariah-compliant businesses and operations, a study of the feasibility of a long and short-term business plan to the Islamic Banking Department, along with SBP’s Banking Policy and Regulations Department.

State Bank will evaluate the proposal of the CB/DFI keeping in view merits before issuance of grants and licenses.

The CB or DFI will make sure that effective systems and controls are in present to enable segregation of funds between Shariah-compliant and conventional business and operations and to also in order to protect the interest of all stakeholders.

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