Islamic Finance Products & Regulatory Framework for Islamic Banking in Pakistan 20-07-2014

8/16/2019 Islamic Finance Products & Regulatory Framework for Islamic Banking in Pakistan 20-07-2014

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Modes of Islamic Financing

Murabaha (Agreed profit margin salewith cash or deferred payment ofprice)

Musawamah

Ijarah (Leasing)Salam (Advance payment--eferred

elivery Sale)

Mushara!a ("artnership)Mudaraba

Istisna


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Based on the criteria for selection of modes, theappropriate mode(s) is/(are) applied to fulfill thecustomer’s need.

Example

NeedMode

SelectionMode

Application

Need: Raw material

Tenure: 6 month

Rate: Fixed

Payment: At maturity

Murabaha

Application of Mode


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• Promise of client to purchase units of share of financier is alsoallowed.

• The Transactions cannot e comined in a sin!le arran!ementsand the" ha#e to e executed independentl".

• This is ecause it is a well settled rule of $slamic %urisprudencethat one transaction cannot e made a condition for another.

• $nstead of ma&in! the transactions a pre'condition for oneanother there can e one'sided promises from one part" toanother

Shariah Principles


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Murabaha

Muraaha is a particular &ind of sale where the transaction isdone on a cost plus profit asis i.e. the seller disclosesthe cost to the u"er and adds a certain profit to it toarri#e at the final sellin! price.

• Pa"ment of Muraaha price ma" e*

+) At spot

) $n installments

-) $n lump sum after a certain time


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" "

Do NOTs for Murabaha financing:

e'ne!otiation of price and roll o#er ofMuraaha are not permitted.

iscountin! of Muraaha instrument is notpermitted.

Murabaha


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Supplie

r Bank

Client

Muraaha 0 1e" features

1. Payment of Cost

2# $eli%ery o& 'ood(

# Payment o& Murabaha price


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) )

There are a numer of documents in#ol#ed in a Muraahafinancin! transaction. The most essential of thesedocuments are*

Master Muraaha 2inancin! A!reement

A!enc" A!reement

3rder 2orm

eclaration 4 Muraaha 5ontract

Purchase E#idences

emand Promissor" 6ote Pa"ment 7chedule

Murabaha Documentation


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* *

+. Timin! of 83ffer 4 Acceptance9 . ollo#er in Muraaha-. eate on Earl" pa"ment:. Penalt" in ;ate pa"ment. Purchase E#idence

?. irect Pa"ment@. Profit reco!nition. Trainin! of 5ustomer 4 Ban& staff +. Process of Muraaha differ from product to products

Issues in Murabaha


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+

$stisna ' features

+. $stisna9a A!reement 4pa"ment

. eli#er" of Coods as perschedule

-. 7ale of Coods

:. 7ale Proceeds

,an-.u(tomer ,uyer

/ltimate buyer


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7alam ' features

Customer

MarketBank

1# Payment o& price

# Payment o& price2# ood( deli%ery

# ood( deli%ery


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$%AAD

CUSTOMERISLAMIC BANK VENDOR


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nderta&in! to $=arah

$=arah A!reement

escription of the $=arah Asset

7chedule of of $=arah entals

eceipt of Asset

emand Promissor" 6ote

nderta&in! to Purchase $=arah Asset

7ale eed

Ijarah Documentation


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;etter of A!enc"

;ease A!reement

nderta&in! to Purchase

7ale eed

nderta&in! to ;ease

Ijarah Documentation


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$n iminishin! Mushara&ah the financier and theclient participate either in =oint ownership of

a propert" or an eFuipment, or in a =ointcommercial enterprise

The share of the financier will e di#ided into anumer of units

The client will purchase these units one " oneperiodicall" until he is the sole owner of thepropert"

Diminishing Musharakah-


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Ar!ument*$n the case of promise to sell units of share " financier onemi!ht ar!ue that if the promise to sale has een done eforeenterin! into actual sale This is practicall" puttin! a condition onthe sale itself

Answer*

There is a difference etween* Puttin! a condition on a sale andma&in! a separate promise , without ma&in! it a condition.

$n case of condition, the sale will e #alid onl" if the condition isfulfilled.

Shariah Principles


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CUSTOMERBANK

JointOwnership

Mushara

ka

Rent

Graual Trans!er o! O"ners#ip

A((et(iminishin! Mushara&ah


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➢An e$porter #as to prepare %oos to meet an

e$port orer& 'e nees to (u) *otton )arn anapproa*#es a (ank !or +nan*in%& ,#at options area-aila(le.➢A su%ar mill nees to (ut su%ar*ane !or prou*in%

su%ar *ane& Su%%est Islami* moes o! +nan*in%alternati-es&➢A o*tor nees an /0ra) ma*#ine an approa*#esan Islami* (ank !or S#aria#0*ompliant +nan*in%&,#at options "oul )ou su%%est !or t#etransa*tion.➢An Islami* (ank "ants to o1er *ar +nan*in% (utoes not "ant to assume !ull o"ners#ip risk urin%t#e tenure o! t#e +nan*e& ,#at moe o! +nan*e

s#oul it use.


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1*

REGULATORYFRAMEWORK

OF ISLAMIC BANKING INAKISTAN


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#he $egulators%Supervisors

The Government of Pakistan/Ministry of

Finance Di1erent la"s2re%ulations

Bankin% A*t Islami* Se*urities

State Bank of Pakistan Banks

D3Is

Mone) Market

Securities & Exchange Commission of

Pakistan

NB3Cs REITs


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S&" as a $egulator of &an!ing Sector

Reguation an! su"ervision of the

#nancia system to ensure its

soun!ness an! sta$iity as %e as to

"rotect the interests of investors an!!e"ositors

'( Com"rehensive )ega Frame%ork

*( Pru!entia Reguations

+( E,ective Monetary an! Exchange

Rate Poicy

-( E.cient Su"ervisory Techniues


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Fail!"e of "e#io!s E$o"%s

• Non-availability of Shariah compliant

government securities

• Ineffective code of conduct for professionals

• Lack of continued research and development

in the field of Islamic finance and economics

• Disoriented education system devoid of Islamic

principles• Weak olitical resolve of successive

governments for Islami!ation of economy


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Fail!"e of "e#io!s E$o"%s

• "bsence of Shariah compliance mechanism in

financial institutions

• Ineffective enforcement of contracts and

inefficient system for early recovery• Inade#uate training to the staff of S$ and banks

• Lack of public a%areness about Islamic economic

system


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CURRENT STRATEGY

• &radual approach for 'ransformation ofeconomy

( )ull fledged Islamic banks be established

in rivate sector( Islamic banking Subsidiaries in e*isting

banks be allo%ed

( Stand alone branches for Islamic banking

be allo%ed in e*isting banks• +ore emphasis on Shariah ,ompliance

+echanism


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2!

REGULATORY

FRAMEWORK • A""LI'A&L $*LA#I+,S( ,riteria for establishment of Islamic

,ommercial banks in rivate Sector

( ,riteria for establishment of Islamicbanking Subsidiaries

( &uidelines for pening of Islamic

$anking $ranches( rudential .egulations/ .isk +gmt0 ,orp0&overnance/ Internal ,ontrols and otherdirectives issued by S$


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2"

FORMATION OF ISLAMICBANKS

• ,learance of +emorandum and "rticles of"ssociation from S$

• License from S$ u1s0 23 of $,/ 45620• "uthori!ed businesses listed in section 3 of $,

• ,ommencement of $usiness as Scheduled Islamic$ank( "ll business transactions be Shariah compliant0( Shariah $oard or Shariah "dvisor approved by S$

( roducts and services be cleared by Shariah"dvisor( Working rocedures and .isk +anagement policies

be in place


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C"i%e"ia fo" Es%a&lis'men% ofIslamic Ban(s

• " ublic Limited ,ompany listed on the Stock

7*change0

• +inimum of 89: of shares shall be offered to

the general public0

• )inancial transactions be in accordance %ith

in;unctions of 0

• Indicate the modes of finance to be used for

raising resources and e*tending financial

assistance0


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2)

• Sponsor Directors( Number of Sponsor Directors not be less than seven0( +inimum of 48: of shares be subscribed by Sponsor

Directors

( Not to dispose off their shares %ithin ? years andafter%ards %ith prior approval of S$0( Should not be convicted/ defaulters or have adverse

reputation0( Not more than 28: of the sponsor Directors shall be

from the same family( " person cannot be a Director in more than one

financial institution

• ,hief 7*ecutive re#uires prior clearance of S$



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Documents re#uired %ith application)easibility Study1 Short 'erm and Long term $usiness

lan@

Industry overvie%

.egulatory )rame%ork

Introduction of Sponsors and their net%orth

,apital +obili!ation lan1,apital Structure

roducts and 'arget +arket

,ompetitors’ analysis

)inancial +odel1ro;ections

rgani!ation structure/ name of proposed ,hief

7*ecutive0

+emorandum and "rticles of "ssociations



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• .isk management guidelines/ lans for Internalcontrol system and scale of authority

• Working system and procedures for businessoperations

• List of associated companies 1 firms of sponsordirectors and their bankers

• Shariah "dvisor according to )it and roper ,riteria• +ust commence operation %ithin 6 months of the grant of

permission• +ust open at least five branches %ithin a period of 42 months

from the date of permission

• Shall be sub;ect to the prevalent banking and other la%s/ rulesand directives issued by S$ from time to time



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Islamic Ban(ing B"anc'es

• Whether e*clusive branches or I$%indo%s

• 7ffective oversight by =ead office• Shariah ,ompliance +echanism-

"dviser 1$oard

• "de#uate 'raining to staff and.esearch A Development• ,omplete Segregation of )unds


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Islamic Ban(ing B"anc'es

• .isk management guidelines/ lans forinternal control system and scale ofauthority0

• Working system and procedures for businessoperations

• List of associated companies1firms ofsponsor directors and their bankers0

• Shariah "dvisor according to )it and roper,riteria0


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IB)*IBBs + Seg"ega%ion of

B!siness*F!nds• " separate daily trial balance of I$D 1 I$$soperations

• I$D1I$$s have to operate as a bank %ithin the bank0

• 'he common services can be shared bet%een the

conventional and Islamic banking segments0

• In case of online banking/ "'+s and for sellingShariah-based products through conventionalbranches/ same day transfer of funds to I$$ is

mandatoryB not permissible to charge any kind ofmark-up on such funds’ balances0

• "ny financing by the parent bank@ on Shariahcompliant basis0


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Acco!n%ing As,ec%s

• $ased on International "ccounting Standards CI"S• )orms of )inancial Statements for $anks revised in 4553

and 2994 to conform to I"S0

• .evie%ed in light of ""I)I standards

• I," ,ommittee for developing "ccounting and "uditingStandards on Islamic modes- comprises representativesfrom I,"/ S$/ S7,/ Islamic banks and e*perts from thefields of Islamic )i#h and la%0

• )irst Islamic )inancial "ccounting Standard CI)"S ( 4

notified by S7,B made effective from 4 st Ean 29960• I)"S-2 regarding I;arah has been notified in "pril 93 for

implementation from Euly 93

• Work on +usharaka standard is in process0


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!

S'a"ia' com,liance

mec'anism 'hree ronged Strategy Shariah $oard of S$

7ssentials of Islamic modes CF modes

Shariah "dvisor in every I$Iroduct certification

Internal control

Liaison %ith S$ for Shariah compliance issues

Internal Shariah .evie%

S$ Shariah Inspection


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"

SB S'a"ia' Boa"d

,entral Shariah $oard for the industry

established at S$ and is fully functional

,urrent membership consists of five persons

'%o Shariah scholars

ne ,hartered accountant

ne la%yer

ne banker


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SB S'a"ia' Boa"d • )ormally established in December 299?

• "pproved 7ssentials of Islamic +odes of )inancing

• "pproved +odel "greements

• "pproved )it A roper ,riteria for Shariah "dvisors• "pproved structure of &ovt0 I;ara Sukuk

• "pproved other Sukuk structures

• "pproved Instructions A &uidelines


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)

S'a"ia' Based A!di%

Internal Shariah .evie%

7*ternal Shariah .evie%

S$ Shariah ,ompliance Inspection

Shariah ,ompliance .atings


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*

S'a"ia' Com,liance

Ins,ec%ion Man!al • Inspection +anual prepared by )ord .hodes Sidat=yder

• 'argeted roduct 7*amination has been carried out to

kno% more issues• 'he Shariah $oard of S$ has approved the +anual for

Shariah ,ompliance inspections

• It %ould bring improvement A standardi!ation in

operations


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+

Islamic Ban(ing B!lle%in

'his bulletin gives update on local as %ell international

developments

It contains statistical analysis/ as %ell

"ppreciated by many cornersasted on S$ Website

http@11%%%0sbp0org0pk1ibd1I$$0pdf

Islamic Finance Products & Regulatory Framework for Islamic Banking in Pakistan 20-07-2014

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Transcript of Islamic Finance Products & Regulatory Framework for Islamic Banking in Pakistan 20-07-2014