ISLAMIC BANKING DEPARTMENT (IBD)

GROUP MEMBERS

M. Shahryar Saeed (SP10-BB-0039 ) Nabeel Hassan Khan (SP10-BB-0053) M.Ahsan Baig (SP10-BB-0035)

Arsalan M. Khan (Sp07-BB-0032)

INTRODUCTION

Department of State Bank of Pakistan. Established on September 15, 2003. Task of promoting and developing Shariah Islamic bank. Currently there are six licensed full fledged Islamic Banks and twelve conventional banks. Over 336 branches operating in more than 50 cities.

VISION STATEMENT

To make Islamic banking the banking of first choice for the providers and users of financial services.

MISSION STATMENT
To promote and develop Islamic Banking industry in line with best international practices, ensuring Shariah Compliance and transparency.

RULES AND REGULATIONS

Instructions and Guidelines for Shariah compliance. Guidelines for Islamic Microfinance Business by Financial Institutions. Risk Management Guidelines for Islamic Banking Institutions. Guidelines on Islamic Financing for Agriculture. Guidelines For Opening Of Stand Alone Branches for Islamic Banking. Fit & Proper Criteria for Appointment of Shariah Advisors.

MONETARY POLICY

WHAT IS MONETARY POLICY?

The term monetary policy refers to actions taken by central banks to affect monetary magnitudes or other financial conditions. Monetary Policy operates on monetary magnitudes or variables such as money supply, interest rates and availability of credit. Monetary Policy ultimately operates through its influence on expenditure flows in the economy. In other words affects liquidity and by affecting liquidity, and thus credit, it affects total demand in the economy.

AIMS OF MONETARY POLICY

MP is a part of general economic policy of the govt. Thus MP contributes to the achievement of the goals of economic policy. Objective of MP may be: Full employment Stable exchange rate Healthy BoP Economic growth Reasonable Price Stability Greater equality in distribution of income & wealth Financial stability

Instruments
1. Discount Rate (Bank Rate) 2.Reserve Ratios 3. Open Market Operations

OPERATION OF MONETARY POLICY

Operating Target
Monetary Base Bank Credit Interest Rates

Intermediate Target
Monetary Aggregates(M3) Long term interest rates

Ultimate Goals
Total Spending Price Stability Etc.

INSTRUMENTS OF MONETARY POLICY Direct Instruments:

These are direct controls on the financial prices (interest rates) or quantities ( deposits or credits) of financial institutions.

Indirect Instruments:
These influence the behavior of financial institutions by affecting initially the central bank's own balance sheet or the pricing (interest rates) of central bank facilities, and are used mainly in liberalizing or liberalized financial systems.
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DIRECT INSTRUMENTS
Direct instruments are typically directives given by the central bank to control the quantity or price (interest rate) of money deposited with commercial banks (and sometimes other financial institutions) and credit provided by them. Examples of Direct Instruments are: Interest Rate Controls Credit Ceilings Directed Lending Statutory Liquidity Requirements
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INDIRECT INSTRUMENTS
SBP uses targeting monetary aggregates for its monetary management function, So Indirect instruments are used for controlling price or volume of the supply of its own liabilities i.e. reserve money, which in turn affects interest rates and the quantity of money and credit in the whole banking system. Examples of Indirect instruments are T-bill and PIB Auctions Open-Market Operations Discounting Facility Foreign Exchange Management
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CIRCULARS OR NOTIFICATIONS

POLICIES FOR THE PROMOTION OF ISLAMIC BANKING

1.

Establishment of full-fledged Islamic bank(s) in the private sector. Setting up of subsidiaries for Islamic Banking by existing commercial banks. Allowing Stand-alone branches for Islamic banking in the existing commercial banks.

2.

3.

2004

Contact Details of Islamic Banking Department. FIT AND PROPER CRITERIA FOR SHARIAH ADVISORS . Essentials and Model Agreements for Islamic Modes of Financing.

Minimum Shariah Regulatory Standards.

SUBMISSION OF RETURNS TO ISLAMIC BANKING DEPARTMENT.

Banks are required to submit the copies of following returns to Islamic Banking Department: Weekly statement of position Quarterly report of condition Half yearly/Quarter Ended Financial statement Annual Accounts

1. 2. 3. 4.

INFORMATION ABOUT ISLAMIC BANKING WINDOWS

Banks having Islamic banking branches may authorize some of their branches to sell Islamic banking deposit schemes. Conventional banks having IB window shall submit following to IBD: Details of products & services. Details of systems and controls. Commission/fee arrangement with authorized branch. Details about training of Human Resource in Islamic Banking. Contact details of Islamic Banking Window.

GUIDELINES FOR ISLAMIC MICROFINANCE BUSINESS

Focus on the products and services to low income segments of the society in a Shariah compliant manner. Stipulates four types of institutions: Establishing Full Fledged Islamic Microfinance Banks (IMFBs) Islamic Microfinance Services by Full-fledged Islamic Banks Islamic Microfinance Services by Conventional Banks Islamic Microfinance Services by Conventional Microfinance Banks (MFBs)

1.

2. 3. 4.

DIRECTIVE UNDER SECTION 41 OF BCO, 1962

No bank can sell Islamic mode product without getting Islamic Banking license from SBP. It is directed under section 41 of Banking Company Ordinance, 1962. Failure to comply with these instructions may invoke penal action under the provisions of Banking Companies Ordinance, 1962.

SALIENT FEATURES OF PRODUCTS AND SERVICES

It is required to send information to IBD about product or service before its launch. Under this process, IBIs shall submit salient features of the products along with Certificate from their Shariah Advisor to the Director Islamic Banking Department, State Bank of Pakistan.

DECLARATION OF WEIGHT AGES & PROFIT SHARING RATIOS

Weight ages & Profit sharing ratios must be made available to all constituents and websites before beginning of period.

The statement of declaration must mention: I. Minimum contain date of declaration II. Period for which they remain effective, III. All categories/pools & banks equity share. IV. Types, sizes, tiers of accounts and actual rates paid during the preceding period.

CONTINUE

The Statement of weight ages & Profit sharing ratios must be prominently displayed in all Islamic Banking Branches. All Islamic Banking Institutions are advised to update the weight ages & Profit sharing ratios on their websites within 7 days form issuance date of Circular Letter.

RISK MANAGEMENT GUIDELINES FOR ISLAMIC BANKING INSTITUTIONS

Issued by Islamic Financial Services Board (IFSB). Applicable to six categories: Credit risk Market risk Liquidity risk Operational risk Equity investment risk Rate of return risk.

1. 2. 3. 4. 5. 6.

INSTRUCTIONS AND GUIDELINES FOR SHARIAH COMPLIANCE IN IBD

Cover various areas related to:

Appointment, removal and working of Shariah advisors. Shariah compliant modes. Use of charity fund. Introduction of new products and services and schedule of service charges. Shariah compliance. Internal Shariah audit. Investment in shares. Policy for profit distribution. Financial reporting and general disclosure.

CONTINUE

The invoice issued by the supplier shall be in the name of bank. Murabaha financing debited after offer and acceptance. Record valid reason for difficulties in payment to supplier by IBI. The reason shall be submitted by agents to supplier. Failure to comply invoke penal action under the provisions of Banking Companies Ordinance, 1962.

FIT AND PROPER CRITERIA FOR SHARIAH ADVISORS

The Shariah Advisor of an Islamic Banking Institution (IBI) shall not work in any other IBI.
No Shariah Advisor shall approve a transactions. Shariah Advisor of an IBI shall not hold any executive position except working as member Shariah Board/Committee of other financial institutions.

ISLAMIC FINANCIAL ACCOUNTING STANDARD FOR IJARAH

IBIs shall ensure that henceforth all returns/statements submitted to State Bank as well as the Quarterly/Annual Financial Statements shall be prepared in line with this Standard.

REVISION OF CAPITAL ADEQUACY REQUIREMENT (CAR) FOR IBBS

All conventional Banks having Islamic Banking License for IBBs should maintain a minimum Islamic Banking Fund of Rs 50 million, at any point of time as seed capital and should also maintain Capital Adequacy Ratio (CAR).

AAOIFI

Adoption of Shariah standards issued by Accounting and Audit Organization for Islamic Financial Institutions.
AAOIFI Shariah Standards will be adopted in gradual manner, after a detailed review, keeping in view the local environment and needs of Islamic Banking Industry in Pakistan.

COLLECTION OF UTILITY BILLS AFTER DUE DATE

Some Islamic Banking Institutions (IBIs) refuse to accept payment of bills after the due date as the late payment includes a penalty which in their opinion is Riba and thus cannot be collected by them. The Shariah Scholars opined that keeping in view the larger public interest and convenience, the IBIs can collect /accept utility bills after the due date with Karahiat() (displeasure).

INVOICE OF MURABAHA TRANSACTIONS

In case where obtaining invoice in the name of IBI is not possible, the invoice in the name of client may also be acceptable.

In transaction where obtaining formal invoice either in the name of bank or the client is not possible, then the document like Truck Receipts, Delivery Note, Goods Received notes, Physical Inspection Report etc may be accepted in place of invoice with the approval of Shariah advisor.

CONTINUE

Shariah advisor shall document all reasons in payment difficulties to suppliers. The Shariah Advisors shall also, either themselves or through suitably trained staff of the IBIs, make onsite verifications of such transactions on sample basis. The reason shall be submitted by agents to supplier.