17 April 2004	Saturday	26 Safar 1425

KARACHI, April 16: The Shariah Board of the State Bank has approved the essentials of the Islamic modes of financing to ensure compliance with minimum Shariah standards by the banks conducting Islamic banking in Pakistan.

These essentials have been placed on SBP website as general guidelines to be followed by banking institutions conducting Islamic banking in the country, the central bank announced on Friday.

These guidelines are proposed to be enforced as Prudential Regulations for Islamic banks in due course. "The State Bank invites suggestions and views for enforcing them as part of Prudential Regulations from all concerned, particularly by the Shariah scholars, academics, bankers and business community.

The SBP has also posted on its website model agreements for the following modes of Islamic financing vetted by its Shariah Board.

(i) Murabaha (ii) Musawamah (iii) Ijarah or Islamic leasing (iv) Salam (v) Musharaka (vi) Istisna (vii) Interest free loan (viii) Mudaraba; and (ix) Syndication Mudaraba. The purpose of developing model agreements is to facilitate the existing Islamic banking sector and the potential market players to create awareness about Islamic banking products as well as to develop such products.

"These are model agreements, which can be modified, according to the products designed by the banks conducting Islamic banking business, with the approval of the Shariah Board of Islamic Commercial Banks or Shariah Adviser of banks having Islamic banking branches, ensuring that such changes are consistent with the principles of Shariah."

The central bank has invited suggestions and views in this regard. These could be sent to Mr Pervez Said, Director, Islamic Banking Department/Adviser to the Governor on Islamic Banking through fax number 021-9212472 or through email (pervez.said@sbp.org.pk).

Essentials of Islamic Modes of Financing: The Commission for Transformation of Financial System set up in the State Bank pursuant to the Supreme Court judgment on Riba in December 1999 approved essentials of seven Islamic modes of financing. The recently established SBP Shariah Board has reviewed and approved the same. Following are brief definitions of these seven Islamic modes of financing. (The details of their essentials or the guidelines governing them can be downloaded from the SBP website).

1. MURABAHA: Murabaha means a sale of goods by a person to another under an agreement whereby the seller is obliged to disclose to the buyer the cost of goods sold either on cash basis or deferred payment basis and a margin of profit included in the sale price of the goods agreed to be sold.

2. MUSAWAMAH: Musawamah is a general kind of sale in which price of the commodity to be traded is stipulated between the seller and the buyer without any reference to the price paid or cost incurred by the former. Thus it is different from Murabaha in respect of pricing formula. Unlike Murabaha, the seller in Musawamah is not obliged to reveal his cost. All other conditions relevant to Murabaha are valid for Musawamah as well. Musawamah can be an ideal mode where the seller is not in a position to ascertain precisely the costs of commodities that he is offering to sell.

3. IJARAH: In Ijarah the corpus of leased commodity remains in the ownership of the lessor. Any thing which cannot be used without consuming the same cannot be leased out like money, edibles, fuel, etc. Only such assets that are owned by the lessor can be leased out except that a sub-lease is effected by the lessee with the express permission of the lessor.

4. SALAM: Salam means a kind of sale whereby the seller undertakes to supply specific goods to a buyer at a future date in consideration of a price fully paid in advance at the time the contract of sale is made.

5. MUSHARAKA: Musharaka means relationship established under a contract by the mutual consent of the parties for sharing of profits and losses from a joint enterprise or venture.

6. MUDARABA: Mudaraba means an arrangement in which a person participates with his money and another with his efforts and shall include banks, unit trusts, mutual funds or any other institutions or persons by whatever name called.

7. ISTISNA: Istisna is an exceptional mode of sale, at an agreed price, whereby the buyer placed an order to manufacture, assemble or contract, or cause so to do anything to be delivered at a future date.