ion of Munir Ahmed

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MUNIR AHMAD

Joint DirectorH E A D ,

SHA RIA H COMPLIA NCE DIVISIONI S L A M I C B A N K I N G D E P A R T M E N T

S T A T E B A N K O F P A K I S T A N

Islamic Banking

Shariah ComplianceFramework

(SCF)



Shariah and Banking

yShariah - a Law

yShariah - the Law

y It covers all aspects of human lifeincluding Financial matters

y Islamic Banking is a Banking

yThe Difference - Shariah



y SCF-the need

y The Structure

A t Central Bank-Central SBs

A t IBIs- S A s, SBs

yDifferent practices- Malaysia, Bahrain, Pakistan

y

The Role & Responsibilities Shariah Bodiesy The Criteria- Qualification, Experience etc.

y F&P Criteria for A ppointment of «

Why SCF



Other Steps

y Shariah Inspection of IBIs/IFIs

-Specially Designed Manual

y Shariah A udity To Provide Guidelines, (Micro finance, A gri.

Finance)

y To Prepare Essentials of Islamic Modesy Standardization of IB Practices-

International Standards ( AAOIFI-IFSB)



The IB Systems ± Two Models

yFull-Fledged- (Iran, Sudan)

yParallel Banking ± Pakistan,

Malaysia, Bahrain and many othercountries)

Three Pronged Strategy



Pre Requisites

yTraining of Banking staff

yTraining of Shariah staff yGeneral A wareness,

yCertificate/Degree Courses



Islamic Modes of

Financing



Islamic Banking Modes

Participatory Modes:

y i) Mudaraba

y ii) Musharaka

y iii) Diminishing Musharaka

y iv) Equity Participation in the

form of shares in a corporate entity

Trading Modes:

y v) Ijarah

y vi) Murabaha

y vii) Musawamahy viii) Salam

y ix) Istisna

y Tawarruq may also be used in exceptional

cases requiring specific prior approval of IslamicBanking Department of SBP

Debt Based Modes:

y xi) Qard

y d. Other Modes:

y xii) Wakalah

y xiii) A ssignment of Debt

y xiv) Kafalah

y

Isl. A

gri. fin: Musaqah,

Muzara¶a

Mughaerasa



Murabaha

A margin of profit based sale where the seller expressly

mentions the cost of commodity and adds agreed margin of profit.Price must be fixed in an

unambiguous manner. If deferred,due date should be known andspecific.



«Murabaha

Subject of sale must exist and it should be inownership of the seller at the time of sale.

Bank makes purchases through agent; Payment to supplier and issuance of invoice by him; Price once agreed cannot change; Penalty in case of delay. To go to charity; Buyer may be asked to furnish security; No rollover is possible; Buyback arrangement is prohibited A ll conditions of sale must be met;



Ijara

y Ijara is an alternative to financing in which afinancer buys and rent a productive asset to a personshort of funds and is in need of such asset. The aim

of such arrangement is to obtain the rentals andproceeds by receiving the benefits of the assetsthrough time.



«Ijara

Lessors¶s ownership;· - Delivery of assets to lessee essential to claim

rentals;· - Lessor¶s ownership during the entire term of

lease;· - Rental in absolute terms.

Predetermined lease period· - Penalty for delay;

· - Lessee bear the operating expenses;;· - Unilateral promises



Istisna¶

A mode of sale, being an exceptionto the norm, whereby an order is

placed by the buyer, with theseller, to assemble, construct ormanufacture, or cause so to do,

anything to be delivered at afuture date, at an agreed price.



«Istisna¶

y Known and specified commodity;

- Fixation of price in absolute / unambiguous manner.

- Flexibility in manner of payment.

y O btaining of material cannot be the buyer¶sresponsibility;

y Penalty for delay.



Salam

y A sale where the seller agrees tosupply specific goods by a future

date in consideration of a price fully paid in advance, at the time of contract.

ySuitable for A gr. finance.



«Salam

Full payment of price at the time of contract

a must

- Firm agreement on quality, quantity,

specifications- Date and place of delivery must be specified

- Commodities which can be offered in Salam

- A vailability of commodity;

- Salam cannot be tied- No buy back with the Seller

- Security can be asked for



Mudaraba

A n arrangement where one or morepersons participate with their

investment and other(s) with theirefforts/skills to participate in profit in apredetermined ratio. The Manager

(Mudarib) can be a natural person, agroup of persons or legal entity.



«Mudaraba

- Conduct of business within aframework;

- Sharing of profit in agreedproportion;- Financial loss on capital only;

- Liability of investor limited to hisinvestment;



Musharaka

y Relationship established under a contract throughmutual consent of the parties for sharing of profits,losses from a joint enterprise, venture. Investmentcomes from all partners.

GENERAL:- A ll assets joint property of all partners;- Capital contribution in terms of money orspecies at an agreed valuation.



«Musharaka

SHARING OF PROFITS:- in strict proportion, mutually agreed- no lump sum payment for anyone or at a ratetied to capital invested;

SHARING OF LOSS:- Losses to be shared in strict proportion of investment.



Diminishing Musharaka (DM)(For Shrikatul-Milk)

DM is a form of co-ownership in which two or morepersons share the ownership of a tangible asset in anagreed proportion and one of the co-owners

undertakes to buy in periodic installments theproportionate share of the other co-owner until thetitle to such tangible asset is completely transferredto the purchasing co-owner.



Wakalah

Wakalah is a contract of agency in which one personappoints another person to perform a certain task onhis behalf on agreed terms and conditions, usually

against a certain fee. A contract of Wakalah can takeplace only in respect of such acts which the principalis competent to perform himself, provided such actcan be performed by the agent.



Kafalah

Kafalah is a contract in which a third party becomessurety i.e. provides guarantee for the payment of debt on behalf of the debtor. It is a pledge given by a

third party to a creditor to the effect that if thedebtor defaults in payment of the debt, it will be paid by such third party as Kafeel i.e. Surety



Tawarruq

Tawarruq literally means toliquidate. In the Fiqhi term it is to

sell a commodity on Cash after itspurchase on deferred basis.

In practice, Tawarruq is an arrangement in which one party sells a commodity to the other party on deferred payment at cost plus profit. The other party,namely, the buyer, then sells the commodity to a third party on cash with apurpose of having access to liquidity.



A dditional Information



Takaful

Takaful is an A rabic word meaning³guaranteeing each other´ or joint guarantee.

The principles of Takaful insurance are asfollows:

Policyholders cooperate among themselves fortheir common good.

Every policyholder pays his subscription to helpthose that need assistance.

Losses are divided and liabilities spreadaccording to the community pooling system. Uncertainty is eliminated in respect of

subscription and compensation.



Islamic A gri. Finance

Guidelines on Islamic A gri. finance issued by SBP.

Islamic Banking Department and A griculture

Credit department of SBP on February 3rd

, 2009issued ³Guidelines on Islamic Financing for A griculture´ to help banks develop specificShariah compliant products in order to meet thefinancing needs of the farming community.

These Guidelines have been developed inconsultation with stakeholders while keeping in

view the potential and demand for Islamic banking products in the field of agriculture.



Allah Hafiz



y [email protected]

y A [email protected]

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