Case Study: Shariah

Governance Framework of

Pakistan

Ahmed Ali SiddiquiExecutive Vice President and Head of

Product Development & Shariah Compliance

Meezan Bank Limited

ahmed.ali@meezanbank.com

Overview: Islamic Banking in Pakistan

Pakistan, in recent years has showed strong inclination towards Islamic

Banking

The first Commercial Islamic Bank in the country was established in the

2002

within 13 years only, the Islamic Banking share is more than 10% of

the entire Banking Industry

Over the last decade, Islamic Banks have been successful in providing

end to end alternatives to all conventional banking products

Overview: Islamic Banking in Pakistan

The support from the central bank of the country is one of the major factors of the

rapid growth of Islamic Banking industry

With more than 1400+ Islamic Banking branches and a 20%+ growth in deposits,

assets, financing and investments, the Pakistani Islamic Banking industry is set to

become the hub of Islamic Banking of the region

Shariah compliance is the single most important aspect for the Islamic Banking &

Finance industry

Steps Taken for Promotion of Islamic Banking by SBP

Establishment of a Shariah Board & a separate Islamic Banking Department at SBP to directly

supervise & monitor the Islamic Banking industry

Instructions for Shariah Compliance in IBIs.

5 year Strategic Plan for Islamic Banking Institutions

Introduction of Shariah Governance Framework

Adoptions of AAOIFI Standards.

Islamic Export Refinance Scheme

Media Campaign for Promotion of Islamic Banking

Islamic Open Market Operation Liquidity Management Solution

Minimum capital requirement

Center of Excellence for Islamic Finance

Shariah Governance Framework in Pakistan

Pakistans central bank has been encouraging Islamic banking in the

country and supporting the growth by means of policy making and

overcoming the awareness challenges that exist in the masses

In order to promote interest free banking, the central bank has

introduced a Shariah governance framework

The purpose of Shariah governance framework was to strengthen a

Shariah compliance environment for Islamic Financial institutions. The

Shariah framework is applicable to full fledge Islamic banks, Islamic

banking subsidiaries and Islamic banking divisions of conventional

banks

Objectives & Significance

Primary objective of Shariah governance framework is to strengthen the

overall Shariah compliance environment in the IBIs and explicitly define

the roles and responsibilities of various organs of IBIs including:

1. The Board of Directors (BOD),

2. Executive management (EM),

3. Shariah Board (SB),

4. Shariah Compliance Department (SCD) and

5. Internal and external auditors towards Shariah compliance

Confidence to general public about Shariah conformity of IslamicBanking Institutions product and services

SBP ensures the operations of IBIs in accordance to the rules andprinciples of Shariah

Major Highlights

An effective mechanism for the BOD

Accountability of executive management

An independent and effective Shariah Board appointed as per Fit and Proper Criteria

(FAPC) of SBP

A Shariah Compliance Department to assist the SB and to serve as conduit between

the SB and the management of the IBI

Shariah compliance review mechanism

An independent Internal Shariah Audit Unit (ISAU)

External Shariah Audit to be undertaken along with the annual audit of the IBI

Role of Board of Directors

BoD is responsible to ensure that operations of the institution are in

conformity with Shariah principles

BoD must introduce effective mechanism for the proper functioning of

the framework

The BoD must be aware of their fiduciary responsibility towards

Investment Account Holders/ Profit and Loss Sharing depositors and

must introduce risk management system to safeguard the rights of the

IAHs

BoD is also required to appoint a Shariah Board that will advise them on

all Shariah related measures

Role of Executive Management

The executive management is responsible for the implementation of the

framework

Executives must ensure that adequate training is provided to the

employees

Accountable and responsible for implementation of the SB

decisions/Fatawa relating to his group/functional area

Executives must show no tolerance in case of Shariah non-compliance

and must take needed actions against individuals who have failed to

comply with the Shariah guidelines

Shariah Board

Shariah board consists of qualified and expert Shariah scholars

Shariah governance framework of Pakistan indicates that Shariah board

will consist of at least 3 Shariah scholars

The purpose of Shariah Board is to guide the executive management on

all Shariah related measures and all the decisions taken by the Shariah

Board are binding on the IBI

The Shariah board will ensure that products and services, contracts,

structure, process flows, product manuals, marketing advertisements,

sales, illustrations and brochures etc are in conformity with the rules and

principles of Shariah

Shariah Board

All the reports of internal Shariah audit and Shariah compliance reviews

should be submitted to the Shariah board for recommending appropriate

action

Shariah board has to prepare a report on IBIs Shariah compliance

environment. The report shall be signed by all the members of the

Shariah board and must be published in the IBIs annual report

Resident Shariah Board Member

The Shariah board shall appoint one of its members other than the

chairperson as Resident Shariah Board Member (RSBM). The RSBM will

provide guidance in day to day Shariah related affairs

It also provide post product approval clarification on various Shariah

related issues and queries of management, staff and approve routine

document, process flows, etc

Shariah compliance department is lead and advised by RSMB in

conducting Shariah compliance reviews of key business areas on sample

and test check basis

Supervise the preparation of Shariah training material and collaborate

with SCD and training department in designing and delivering of Shariah

related trainings

Shariah Compliance Department

The department will review all the proposals and related agreements,

contracts, manuals, process flows, checklists etc submitted by

management before presenting them to the SB for approval

The Shariah compliance department shall submit all internal and

external Shariah audit reports on Shariah compliance to the Shariah

board

The Shariah compliance department is also responsible for the

implementation of the actions recommended by the Shariah board

Internal Shariah Audit

It is necessary for every IBI to have an Internal Shariah Audit Unit

(ISAU) which maybe a part of internal audit department or an

independent unit depending on the size of the bank

The Shariah auditor have a unique role and position in the operational

assessment of banks, their role in providing feedback on strategy can be

enhanced

Head of ISAU will report to the head of Internal Audit or Board Audit

Committee (BAC)

ISAU will prepare a separate Shariah Audit Plan and the final Shariah

audit report shall be submitted to the Shariah Board for prescribing

appropriate actions

External Shariah Audit

An external auditor will evaluate the Shariah governance environment of

the bank and will provide an objective evaluation. External auditors

assessment will be published in annual audited accounts

The role of external Shariah audit is to evaluate finance statement,

Shariah governance processes, organizational structure, people, process

and IT

External Shariah audit is conducted to enable the opinion that the

operations of IFIs are conducted in accordance with the fatwas, rulings

and guidelines issued by the relevant authorities

Conflict Resolution

The decisions and Fatawa of the Shariah board are obligatory on the IBI.

However in case of difference of opinion between the Shariah board and

the IBIs management on any Shariah related matter, the fatwa/opinion

of the Shariah board etc, the issue shall be referred to the SBP Shariah

Board for decision

JazakAllah!!