Shari'a Governance in Pakistan

The institutional integrity of Islamic financial institutions is tied to compliance with the Shari'a principles. So, there should be a robust Shari'a Governance Framework to ensure that the institutions comply with the Shari'a rules and give confidence to the masses about the Shari'a compliance of the institution.

As the regulator, the State Bank of Pakistan (SBP) issued the Shari'a Governance Framework in 2015, which was applicable for three years until 2018. In 2018, the Shari'a Governance Framework was updated, keeping in view the recent developments.

Organs of the Shari`a Governance Framework

We briefly define the organs of the Shari'a Governance Framework along with their essential roles:

1. Board of Directors

• The Board of Directors is responsible for conforming to the institution's operations with the Shari'a principles. The Board of Directors should be fully aware of the Shari'a non-compliance risk and shall introduce a Shari'a compliance oversight mechanism.

• The Board of Directors shall meet the Shari'a Board on a half-yearly basis to brief on the Shari'a compliance issues. The minutes of the meeting are submitted to the Islamic banking department (IBD) of SBP.

2. Role of Executive Management

• The Executive Management shall ensure that all product papers and documents are made available to staff of respective functional areas. 

• The Executive Management shall take actions against staff who fail to ensure Shari'a compliance, and such instances shall have a strong bearing on performance appraisals of the staff.

• The institution shall ensure that trainings are imparted to the Board of Directors and Executive Management. 

3. Shari'a Board

• Every Institution shall have at least three members of the Shari'ah Board who fulfil the Fit & Proper criteria set out by the Central Bank (SBP). The tenor of the Shari'ah Board is three years which is extendable. 

• The services of lawyers, accountants, and other professionals may also be sought to assist the Shari'ah Board.

• One of the Shari'ah Board members shall be the Resident Shari'a Board Member (RSBM), who shall sit in the institution on a -time basis and explain Shari'a matters.

• Prior to July 2021, any Shari'ah Board member, except RSBM, was allowed to serve as a Shari'ah Board member up to 3 Islamic banks in Pakistan. As per the new regulation, every institution shall have at least 2 unique members, i.e. who are not working as a Shari'ah Board member with another institution.

• The appointment, resignation, re-appointment, and termination shall be subject to clearance from the Central Bank (SBP).