state bank of pakistan regulation for islamic bank1

8/10/2019 State Bank of Pakistan Regulation for Islamic Bank1

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State Bank Of Pakistan Regulation For Islamic Bank

By State Bank Of Pakistan

Policies For Promotion Of Islamic Banking

In order to promote Islamic Banking in Pakistan, State Bank is following a three prongedstrategy as under:

I) Establishment of full-fledged Islamic banks) in the pri!ate sector"II) Setting up of subsidiaries for Islamic Banking by e#isting commercial banks" andIII) $llowing Stand-alone branches for Islamic banking in the e#isting commercial banks%

&% In line with Part-I of this strategy, on 'st (ecember, &', State Bank of Pakistan had issued detailedcriteria for setting up of Scheduled Islamic *ommercial banks based on Shariah Principles in the Pri!ateSector in the form of a Press +elease, which is reproduced at $nne#ure-I%

% $s regards Part-II of this strategy, in terms of Banking *ompanies $mendment) rdinance, &&notified in the .a/ette of Pakistan dated 0o!ember 1, &&, inter alia, a new clause aa) has now beeninserted in sub-section ') of section & of the Banking *ompanies rdinance as follows:

2aa) the carrying on of banking business strictly in conformity with the In3unctions of Islam as laiddown in the 4oly 5uran and Sunnah6%

1% 7herefore, the scheduled commercial banks are henceforth allowed to open subsidiaries for IslamicBanking operations% $ccordingly, a (etailed *riteria for setting up of Islamic Banking Subsidiaries bye#isting *ommercial Banks has been prepared, which is enclosed at $nne#ure-II%

8% 9or Part-III of this strategy, .uidelines for opening of Stand-alone branches for Islamic banking by

e#isting commercial banks, enlisting Eligibility *riteria, icensing +e;uirements and other operationalguidelines on the sub3ect ha!e been prepared% 7hese .uidelines are enclosed at $nne#ure-III%

anuary ' & !ide the abo!e-mentioned circular% 7he applyingbank is re;uired to submit proposal to the State Bank, outlining the following details:

? 0umber of branches along with name of city where the Islamic Banking Branch IBB) isto be offered within the ne#t financial year% Products and ser!ices to be offered by the IBB includingdeposits, financing, in!estment,etc%

? @ethod of segregating the funds of IBB from the funds of commercial banking of theapplying bank%

? Infrastructure and logistic re;uirements, including manpower and training programs%

? 7he name, ;ualification and e#perience of Shariah $d!iser s), and


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? $ccounting aspects, such as accounting policies to be followed, profit and loss sharing mechanism,manuals, etc%

7he bank will also be re;uired to set up Islamic Banking (i!ision at the 4ead fficeA*ountry fficein Pakistan% 7he responsibilities of this (i!ision ha!e been depicted in detail% 7he bank would alsoappoint a Shariah ad!iserAShariah Super!isory *ommittee consisting of Shariah scholars) of repute toad!ise the Islamic Banking (i!ision on matters pertaining to Shariah%

@oreo!er, the bank shall ensure that proper systems and controls are in place in order to ensuresegregation of funds and to protect the interest of depositors% 7he banks shall ensure propermaintenance of records for all transactions for disclosure of assets, liabilities, e#penses and income ofIB(AIBBs)% 7he Islamic Banking (i!ision will also comply with statutory li;uidity and cash reser!ere;uirements determined by SBP%'

' 9or detail see: BP( *ircular 0o% ', Ist >anuary, &%

$nne#ure-I to IB( *ircular 0o% & of &1

DETAILED CITEIA FO SETTI!" #P OF SC$ED#LED ISLA%IC CO%%ECIAL BA!&BASED O! PI!CIPLES OF S$AIA I! T$E PI'ATE SECTO

7he State Bank of Pakistan has issued a detailed criteria for the setting of Scheduled Islamic *ommercialBank for conducting business based on the principles of Sharia in the pri!ate sector%7hose interested in establishing the Scheduled Islamic *ommercial Bank ha!e been asked to apply to the(irector, Islamic Banking (epartment, State Bank of Pakistan, P%% Bo# 0o% 118


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!iii) Sponsor (irectors) subscribing more than 8 of the total paid up capital shall clearly indicate theirre;uest separately% 4owe!er such re;uest should commensurate with his net worth%

i#) Sponsor (irectors shall not dispose of their shares in any manner whatsoe!er for a minimum periodof years and thereafter only with the specific written appro!al of the State Bank%

#) 9oreign in!estment by sponsor (irectors shall be permissible only on the basis of capital being non-repatriable, but di!idends will be remittable abroad%

#i) $pplication shall stand dis;ualified if any of the sponsors andAor (irectors their spouses or firms:-

a) has been con!icted by a *ourt of law in Pakistan or abroad for a criminal offence%

b) has been associated with any illegal acti!ity especially banking business, deposit taking, financialdealings and other business"

c) has failed to meet his or her obligations to banks and other financial institutions%7hey shall furnishnames of the banksA(9Is along with the names of the branches with which they ha!e had dealings%Bank reports are also re;uired to be submitted"

d) has defaulted in payment of ta#es% 7hey shall indicate their 0ational 7a# 0umbers"

e) is or has been associated as (irectorA*hief E#ecuti!e with the *orporate Bodies whose corporate andta# record including customs duties, central e#cise and sales ta# has been unsatisfactory% 7hey shallname the corporate bodies, their bankers and disclose their ta# numbers and di!idend record% 7hosenot so associated with *orporate Bodies would be re;uired to indicate their occupationAprofessionAtradeand highlight their achie!ements"

f) in the opinion of the sanctioning authority en3oys ad!erse reputation regarding integrity andperformance%

#ii) 0either one person can be a (irector in more than one financial institution nor one group shouldha!e more than one bank%

#iii) 0ot more than &8 of the sponsor (irectors shall be from the same family as defined in Section8ff) of the Banking *ompanies rdinance%

#i!) 7he *hief E#ecuti!e would be a professional with no ad!erse information regarding his integrity andperformance and shall re;uire prior clearance of State Bank of Pakistan%

&% 7he applicant will also submit the following documents along with the re;uest :-

i) 9easibility Study for setting up of Bank including rgani/ation structure and the name of the proposed*hief E#ecuti!e%

ii) Short 7erm and ong term Business Plan%

iii) +isk management guidelines, Plans for Internal control system and scale of authority

i!) Dorking system and procedures for business operations

!) ist of companies A firms and their bankers in which sponsor directors and their family members asdefined in Section 8ff) of Banking *ompanies rdinance, are interested as (irectors, *hief E#ecuti!e,Partner, Proprietor, or ma3or shareholders holding 8 or more shares

!i) *ertificate that a Shariah $d!isor has been appointed in the light of SBP Shariah Boards 29it andProper *riteria6 and the appro!al of SBP% 4owe!er, Islamic Banks are free to appoint a Shariah

*ommittee at their own discretion and not as part of SBP regulation%


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% 7he bank which may be permitted to be established, shall be sub3ect to the pre!alent banking andother laws, rules and directi!es issued by SBP from time to time%

1% 7he Bank must commence operation within si# months of the grant of permission% 7hey must open atleast fi!e branches within a period of twel!e months from the date of permission%

8% 7he applicant shall deposit +s ',,A- +upees one million) along with the application asprocessing fee% 7he fee so deposited shall be non-refundable%


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i#) Banking companyies) shall not dispose of their shares in any manner whatsoe!er for a minimumperiod of years and thereafter only with the specific written appro!al of the State Bank%

#) $pplication shall stand dis;ualified if any of the sponsors andAor (irectors, their spouses or firms:-

a) has been con!icted by a *ourt of law in Pakistan or abroad for a criminal offence%

b) has been associated with any illegal acti!ity especially banking business, deposit taking, financialdealings and other business"

c) has failed to meet his or her obligations to banks and other financial institutions% 7hey shall furnishnames of the banksA(9Is alongwith the names of the branches with which they ha!e had dealings% Bankreports are also re;uired to be submitted"

d) has defaulted in payment of ta#es% 7hey shall indicate their 0ational 7a# 0umbers"

e) is or has been associated as (irectorA*hief E#ecuti!e with the *orporate Bodies whose corporate andta# record including customs duties, central e#cise and sales ta# has been unsatisfactory% 7hey shall

name the corporate bodies, their bankers and disclose their ta# numbers and di!idend record% 7hose notso associated with *orporate Bodies would be re;uired to indicate their occupationAprofessionAtradeand highlight their achie!ements"

f) in the opinion of the sanctioning authority en3oys ad!erse reputation regarding integrity andperformance%

#i) E!ery (irector of the subsidiary shall meet the 9it and Proper 7est prescribed by SBP and wouldre;uire prior clearance from State Bank of Pakistan%

#ii) ne person cannot be a (irector in more than one bankAfinancial institution%

#iii) 0ot more than &8 of the (irectors shall be from the same family as defined in Section 8ff) of the

Banking *ompanies rdinance%

#i!) 7he *hief E#ecuti!e would be a professional fulfilling the conditions stipulated in the 9it and Proper7est issued by State Bank and shall re;uire prior clearance of State Bank of Pakistan%

1% 7he applicants) will also submit the following documents along with the re;uest:-

i) 9easibility Study for setting up of Subsidiary including rgani/ation structure and the name of theproposed *hief E#ecuti!e%

ii) Short 7erm and ong term Business Plan%iii) +isk management guidelines, plans for Internal control system and delegated appro!al authorities

i!) Dorking system and procedures for business operations

!) ist of companies A firms and their bankers in which the banking companyies), sponsor directors andtheir family members as defined in Section 8ff) of Banking *ompanies rdinance, are interested as(irectors, *hief E#ecuti!e, Partner, Proprietor, or ma3or shareholders holding 8 or more shares

!i) *ertificate that a Shariah $d!isor has been appointed in the light of SBP Shariah Boards 29it andProper *riteria6 and the appro!al of SBP% 4owe!er, Islamic Banking Subsidiaries are free to appoint aShariah *ommittee at their own discretion and not as part of SBP regulation%

8% 7he subsidiary, which may be permitted to be established, shall be sub3ect to the pre!alent bankingand other laws, rules and directi!es issued by SBP from time to time%


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G% 7he applicants) shall deposit +s% ' million +upees ne million only) along with the application asprocessing fee% 7he fee so deposited shall be non-refundable%C% Incomplete application shall be returned and processing fee retained% +e-submission would attractfresh fee%

Anne(ure-III to IBD Circular !o) *+ of +**,

"#IDELI!ES FO OPE!I!" OF STA!D ALO!E BA!C$ES FO ISLA%IC BA!&I!" BE.ISTI!" BA!&S

Dith the ob3ecti!e of promoting Islamic banking in Pakistan, the following .uidelines for opening ofStand-alone branches for Islamic Banking by e#isting commercial banks ha!e been prepared by StateBank of Pakistan% 7he banks desirous of offering Shariah compliant products and ser!ices are re;uiredto apply to the State Bank for issuance of a license under these .uidelines%

/) Definitions

7he following terms, as used in these .uidelines, shall ha!e the following meanings:-

i) 2banks6 means commercial banks, including branches of foreign banks operating in Pakistan, whichdesire to offer Shariah compliant products and ser!ices"

ii) 2IBB6 or 2branch6 means the Islamic Banking Branches of commercial banks, which offer the Shariahcompliant products and ser!ices only"

iii) 2Shariah compliant products and ser!ices6 means banking products and ser!ices offered by banks totheir clients duly appro!ed by their Shariah ad!iserAShariah Super!isory *ommittee"

i!) 2IB96 means the Islamic Banking 9und set up by the banks to fund the operations of their IslamicBanking Branches"

!) 2IB(6 means the Islamic Banking (i!ision set up at the head office of the banksA country offices inPakistan to administer, super!ise and regulate all matters pertaining to IBB%

!i) 2deposit6 means deposits mobili/ed under section &


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3) 4orking Pa5er6Pro5osal

7he applying bank is re;uired to submit a proposal to the Islamic Banking (epartment of the State Bankof Pakistan, outlining the following details:-

i) 0umber of branches alongwith name of city where the IBB is to be offered within the ne#t financial

year%

ii) Products and ser!ices to be offered by the IBB including deposits, financing, in!estment, etc%

iii) @ethod of segregating the funds of IBB from the funds of commercial banking of the applying bank%

i!) Infrastructure and logistic re;uirements, including manpower and training programs%

!) 7he name, ;ualification and e#perience of Shariah $d!isers)%

!i) $ccounting aspects, such as accounting policies to be followed, profit and loss sharingmechanism, etc%

7he banks will be re;uired to submit such further information as re;uired by State Bank whileprocessing the case%

,) Issuance of License

i) State Bank will e!aluate the proposal of the bank keeping in !iew merits of the case and upon itssatisfaction, will grant an appro!al in principle to the bank for opening of branches) upon such termsand conditions as it deems fit% 4owe!er, license for indi!idual branch opening shall be issued on receiptof formal application on prescribed format under the pro!isions of Section &C of the Banking *ompanies

rdinance, 'Fanuary-(ecember) during which it plans to openbranches% 7he plan would, inter alia, indicate the number of the new branches proposed to be opened inurban and rural areas, location of each of the proposed branch and the area which it would ser!e,

branches proposed to be closed if any), the number of e#isting branches incurring losses consecuti!elyfor the last three years, arrangements for managerial and other staff members and informationtechnology access and linkage for the proposed branches and arrangements for housing each of theproposed branch% State Bank will consider the Plan for new branches keeping in !iew the need of the

system and grant appro!al in principle for number of new branches) that bank will be allowed to openduring the gi!en calendar year within days from the date of receipt of the Plan complete in all respect%7he appro!al in principle granted under a particular Plan shall lapse in case bank fails to submit aformal application for issuance of license at least days before the e#piry of that particular year%Similarly license issued under the respecti!e Plan shall e#pire where a bank fails to open the branch

before 'st (ecember of that year%

iii) +e;uest for a new branch in $/ad =ashmir will ha!e to be supported by the $>H= .o!ernment%

i!) 7he branches) shall be sub3ect to the pre!alent banking and other laws, rules and directi!es issuedby SBP from time to time%

!) Banks will be free to shift or reallocate their branches within the same cityAtownA!illagewithout prior appro!al of State Bank% Intimation of shifting of a branch will be sent by the bank

concerned to the State Bank within '8 days from the date of its shifting on prescribed performa


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$nne#ure $)%

!i) 7he license may be re!oked in case it subse;uently transpires that the bank had made materialmisrepresentation of facts or concealment of material information and the responsible officials) shallpersonally be liable for action under the rele!ant laws%

7) Commencement of Business

Before commencement of business, the bank will ensure that all the (ocuments and agreementspertaining to each type of products and ser!ices along with +isk management guidelines, Plans forInternal control and Information 7echnology systems are in place% $ll rele!ant documentsAagreementsand guidelines should be duly certified by their Shariah $d!iserA*ommittee and a certificate in thisregard will be submitted to the State Bank alongwith the $pplication 9orm% $ll these documents should

be made readily a!ailable to the SBP Inspection 7eam during inspection of the bank%

8) Islamic Banking Di9ision

i) 7he bank will be re;uired to set up an Islamic Banking (i!ision 2IB(6) at the 4eadfficeA*ountry ffice in Pakistan%

ii) 7he bank will submit the organi/ational structure of the IB( along with details of key persons f thedi!ision ;ualification and years and type of e#perience) to Islamic Banking (epartment of the StateBank of Pakistan along with the $pplication 9orm%

iii) 7he responsibilities of the IB( shall be as follows:-

a) 7o manage and be responsible for the operations of IBBs), including policy and procedural matters"

b) 7o liaise with other departments in the bank and Shariah $d!iserA*ommittee to ensure smoothoperations of IBBs)"

c) 7o ensure that all funds pooled into the IB9 are channeled into Shariah compliant financing andin!estment acti!ities"d) 7o arrange training of staff on Islamic banking"e) 7o arrange for compilation and submission of such returns, as may be re;uired to be submitted toState Bank from time to time"

f) 7o ensure that all directi!es and guidelines, particularly those applicable to Islamic banking, issuedby State Bank are strictly complied with"

g) 7o maintain the Statutory *ash +eser!e and i;uidity +e;uirement with State Bank as prescribedby State Bank from time to time%

h) ther roles and responsibilities as determined by the bank or State Bank form time to time% i!) 7heIB( shall be headed by a senior and e#perienced officer directly reporting to the *hief E#ecuti!e incase of foreign banks, the *ountry @anager) and manned by ;ualified staff%

:) Islamic Banking Fund

i) 7he bank shall be re;uired to maintain a minimum fund of +s 8 million or C of the riskweighted assets of IBBs), whiche!er is higher%

ii) 7he IB9 shall be funded by way of an allocation by the head office of the bank or in case of foreignbank, its country office%


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iii) 7he IB9 shall be placed under the control of IB( to fund the operations of the IBBs)%

;) Phuirements


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In order to maintain the Statutory *ash +eser!e and i;uidity re;uirement in respect of IBB operations,the IB( will open a separate current account with State Bank% In this account, IB( will maintain the*ash +eser!e with State Bank in the manner prescribed for commercial banks at present J 8 of timeand demand liabilities)% 9or Statutory i;uidity +e;uirement S+), till the de!elopment of Shariahcompliant appro!ed securities, they will for the present, maintain an additional cash amount e;ui!alentto


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F% Dorking results of the branchAbooth at the old place, i%e% deposits ad!ances and profit H loss accountsfor

the last three financial years

'% 0o of $ccounts category-wise) as at the end of last financial year and on the date of shifting%

''% (istance in metersAkilo meters) of the old premises with nearest branches of other banks%

S% 0o% 0ame of Bank 0ame of Branch (istance

'&% (istance in metersAkilo meters) of the new premises from the nearest branches of other banks%

S% 0o% 0ame of Bank 0ame of Branch (istance

'&% *ertified that location of new premises does not !iolate the 7own Planning +egulations of theconcerned authority%

'% *ertificate from the competent authorities that both the e#isting and proposed premises are: a)within the same locality in case of branches at banked places including big cities)" b) within the sameterritorial

limits of the same !illage in case of branches at un-banked places)%

state bank of pakistan regulation for islamic bank1

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