KARACHI: State Bank of Pakistan (SBP) directed Islamic banks and financial institutions to adopt the Shariah standards and practices defined by the International Regulator for Islamic Banking and Finance, Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) to harmonize Shariah practices in Islamic Banking Institutions (IBIs) in Pakistan.
The AAOIFI Shariah standards and practices are to be adopted in the following domains:
No. 4 – Settlement of Debts by Set-Off
This standard covers the settlement of debt by way of set-off. The standard shall not apply to discharge of liability by way of transfer, waiving of obligation, settlement through reconciliation of debt, acquisition of a right payable, or bilateral cancellation of a contract, as their respective Standards cover them.
No. 7 – Hawalah, No. 16 – Commercial Papers
This standard covers Hawalah transactions that involve a change of debtor, i.e. assignment of debt. The scope of this standard does not cover the transfer of rights and banking remittances except the remittances that take the form of Hawalah (transfer of debt).” The following is added for clarity: “This standard does not, in any way, permit fund transfers through Hawala/Hundi, which are illegal.”
No. 48 – Options to Terminate Due to Breach of Trust (TrustBased Options)
This Standard covers the ‘option to revoke due to reasons of defect’, ‘option to revoke owing to deal fragmentation’, and ‘option to revoke due to absence of desired attribute(s)’. It does not cover the ‘option to revoke arising from breach of trust (dishonest inducement, deception, and overcharging)’ or the option of due diligence (‘cooling-off option’, and ‘options to revoke due to non-payment’) as they have separate Shari’ah standards dedicated to them.
No. 51 – Options to Revoke Contracts Due to Incomplete Performance and Option to revoke due to non-payment of due price’ is permissible in contracts that do not require possession of price at the time of contract.
This is not permissible in Salam and currency exchange contracts. The circular of the SBP also mentioned the Shariah standards, including concession contracts and options to reconsider (cooling-off options, either-or options, and options to revoke due to non-payment.
These Shariah Standards are applicable with the clarifications and amendments as mentioned against each clause(s) of the respective standard.
The new standards will further strengthen the Shariah compliance framework and harmonize the Shariah practices in the Islamic banking industry developed by the AAOIFI.
Last year, the banking regulator asked banks to adopt the Shariah standards termed as Ju’alah and Al-Wakalah Bi Al-Istithmar which explained the rules of business for the mortgage and its contemporary applications and investment agency.
