KARACHI, March 25: The State Bank of Pakistan has empowered Shariah advisers of Islamic banks that if any income is declared as non-Shariah compliant, the entire amount will be credited to ‘charity account’ opened for this purpose.

The SBP on Tuesday issued fresh instructions for the Islamic Banking Institutions (IBIs) to further strengthen the Shariah compliance framework in Islamic banking industry.

“These instructions and guidelines for Shariah compliance have been finalised in consultation with various stakeholders as well as reviewed and approved by the SBP Shariah Board,” said a SBP circular.

According to SBP in terms of duties and responsibilities of the Shariah adviser (SA), he will be responsible to review operations of the IBI on periodic basis in coordination with officials responsible for Shariah compliance to ensure that all the products and services being offered by the IBI conform to the injunctions of Shariah.

“If any income is declared as non-Shariah compliant by the SA, the same shall be credited to the charity account opened for this purpose,” said the SBP. According to the instructions, the SA will also be required to prepare a report on the IBI’s annual financial statements in respect of its Shariah compliance.

The instructions for Shariah compliance in IBIs’ cover various areas related to appointment, removal and working of Shariah advisers (SAs); conflict resolution in Shariah rulings; Shariah compliant modes; use of charity fund, introduction of new products and services and schedule of service charges etc.

The essentials of Islamic modes of financing, issued by SBP in April 2005, have now been augmented and made part of these instructions.

According to these instructions, every IBI will be required to appoint a Shariah adviser in line with a clear set of instructions issued by the SBP, including that the appointment of Shariah adviser will be approved by the board of directors; Shariah adviser will be required to meet the ’fit and proper criteria for Shariah advisers’ notified by the SBP; the fatawas and rulings of the Shariah adviser in all financial matters shall be binding on the IBIs, etc.

These instructions also deal with conflict resolution in Shariah rulings wherein in case of any difference of opinion arising between the SA of an IBI and the State Bank’s inspection staff or other SBP departments regarding Islamic banking practices, the central bank may refer the case to its Shariah Board and the decision of the board will be final.

The State Bank has also introduced a complete new set of Shariah-compliant modes of banking and financing for IBIs that include Mudaraba; Musharaka; Diminishing Musharaka; Equity participation in the form of shares in a corporate entity; Ijarah or Ijarah wa Iqtina; Murabaha; Musawamah; Salam; Istisna; Tawarruq; Qard; Wakalah; Assignment of Debt and Kafalah.

These instructions also prescribe essentials of Islamic modes of financing as minimum requirement for Shariah compliance in respect of products developed on the basis of such modes. For the Islamic modes for which essentials have not been prescribed, Accounting and Auditing Organisation for Islamic Financial Institution (AAOIFI) Shariah standards may be used as guidelines by IBIs in consultation with their shariah advisers.