Pakistan's central bank has updated guidance on sharia governance for Islamic finance institutions, expanding the scope of external audits to help mitigate conflicts of interest and increase transparency.

There are growing calls across the Islamic finance industry to strengthen the certification process of Islamic banks and their products to improve the consumer appeal of the sector.

Religious scholars who members of an Islamic bank's sharia board are now barred from serving in any external audit firm, the State Bank of Pakistan said in a circular that complements original guidance from 2015.

External sharia audits, which review operations to determine whether Islamic banks are operating in accordance with Islamic principles, would also have to cover pool-management practices and technology systems.

This includes the way Islamic banks calculate distribution of profit and loss to depositors, the tracking of assets, and the allocation of income and expenses.

The move is designed to separate the verification of profit and loss distribution between the banks and the external auditors, in contrast to the joint verification that was allowed under earlier guidance.

Fit and proper criteria must also be applied to scholars serving as part of an external audit, the central bank said.

While Pakistan is the world's second most populous Muslim nation, its Islamic finance sector is struggling to gain market share from conventional peers despite double digit growth.

The sector includes five full-fledged Islamic banks and 16 conventional banks offering Islamic financial products, which held a combined 1.85 trillion rupees ($17.7 billion) of total banking assets as of December, reflecting an annual growth rate of 15.1 per cent.

This gave Islamic finance a market share of 11.7pc of total banking assets versus the 11.4pc the sector held a year earlier.

Follow Dawn Business on Twitter, LinkedIn, Instagram and Facebook for insights on business, finance and tech from Pakistan and across the world.

Opinion

Editorial

Judiciary’s SOS
Updated 28 Mar, 2024

Judiciary’s SOS

The ball is now in CJP Isa’s court, and he will feel pressure to take action.
Data protection
28 Mar, 2024

Data protection

WHAT do we want? Data protection laws. When do we want them? Immediately. Without delay, if we are to prevent ...
Selling humans
28 Mar, 2024

Selling humans

HUMAN traders feed off economic distress; they peddle promises of a better life to the impoverished who, mired in...
New terror wave
Updated 27 Mar, 2024

New terror wave

The time has come for decisive government action against militancy.
Development costs
27 Mar, 2024

Development costs

A HEFTY escalation of 30pc in the cost of ongoing federal development schemes is one of the many decisions where the...
Aitchison controversy
Updated 27 Mar, 2024

Aitchison controversy

It is hoped that higher authorities realise that politics and nepotism have no place in schools.