SBP Adopts 4 More AAOIFI Shariah Standards for Islamic Banking Industry

The State Bank of Pakistan has adopted four additional Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) Shariah standards to further enhance Islamic Banking in the country. Strengthening Shariah compliance in the Islamic banking industry in line with the best international practices is one of the key pillars of SBP’s 3rd Strategic Plan for Islamic Banking Industry 2021-25. Under the plan, SBP has been adopting Shariah standards of Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) systematically and gradually. The standardization and harmonization of Shariah practices and procedures are helping in elevating the local Islamic banking industry to par with the international best practices. After a comprehensive process of evaluation and deliberations with the internal and external stakeholders, keeping in view our local environment, today, the State Bank of Pakistan (SBP) has adopted four more AAOIFI Shariah standards: i) Salam and Parallel Salam ii) Istisna’a and Parallel Istisna’a iii) Combination of Contracts iv) Irrigation Partnership (Musaqat), with certain clarifications and amendments. Salam is a mode of finance frequently used in agriculture, while Istisna’a is a mode generally used by Islamic banking institutions to provide financing where manufacturing/assembling/processing is involved. Irrigation partnership (Musaqat) standard can be used in the agriculture sector, especially for orchard financing, while the standard on a combination of contracts guides Islamic banking institutions when making use of multiple contracts in their various arrangements to meet the needs of the customers. It may be noted that earlier SBP had already issued detailed general guidelines on Islamic financing for the agriculture sector. With the adoption of these four standards, the total number of AAOIFI Shariah standards adopted by SBP has reached twenty, while work on the remaining standards is underway. Besides, there are a few AAOIFI standards, which have already been adopted by SBP as part of its various regulations, instructions, and guidelines issued from time to time. AAOIFI is a leading international organization primarily responsible for the development and issuance of standards for the global Islamic finance industry. SBP has remained a key member of AAOIFI’s Board of Trustees.