KARACHI: State Bank of Pakistan on Monday allowed Islamic Banking Institutions (IBIs) to invest in share markets of the country on the basis of two financial instruments -Mudarabah and Musharakah.
The central bank also allowed IBIs to enter into “cross-border transactions” which means Pakistani IBIs now can go to overseas. IBIs are also allowed hedging of foreign currencies but keeping the Sharia compliant principles.
The set guideline said, “IBIs exposure in general FX spot rate, changes in cross-border transactions, foreign currency receivables and payables may be hedged using Sharia Compliant methods.”
The commodity and seasonal financing, for cotton, rice, wheat will be conducted under “Salam Contracts”. The manufacturing sector and building sector (construction industry) will be financed under “Istisna contract”.
IBI will act as “seller” to provide finance for manufacturers and builders then the IBIs would enter into another parallel Istisna contract as buyer with a “supplier” (manufacturer or builder) using the specifications drawn up for the original contract. If the supplier fails to deliver the manufactured goods or the building according to agreed specifications, IBIs would equally be in default of their obligation.
The central bank itself said the proposed 15- risk management guidelines for Islamic banks are based on Basel committee on banking supervision, which means that central bank has brought the banking operations under Basel-II agreement, thus settling the long controversy.
The enforcement of Basel-II on Pakistani IBIs will bring credibility to their operations worldwide and at the same time the role of central bank will be recognized as effective. The permission to investment in shares will be for a listed company, privately held equity or investment in a specific project, portfolio or through a pooled investment vehicle.
In case of a specific project, IBI may invest at different investment stages. The guidelines have differentiated between Mudarbah and Mushrakah. In Mudhrabah, the IBIs invest their money as silent partner and the management is an exclusive responsibility of the other party.
In Mushrakah financing, the IBIs and its partner or partners invest their funds together and the IBIs may be silent partner or may participate in management, regardless of the authority under which the profit sharing instruments are used.
In case of a change of the partnership’s shares in a Mushrakah, the shares changing hands shall be valued at fair value or on some other mutually agreed basis. The guidelines said Board of Directors of IBIs should approve limits on aggregate financing and investment exposure to avoid concentration of risk and ensure that IBIs hold adequate capital against these exposures.
Central bank has also asked IBIs to establish new department to be called as finance administration department, which will monitor the acquisition of documents as per requirement of the product.
IBIs shall ensure, whenever possible that there is sufficient Sharia Compliant insurance coverage of the value of the assets, subject to availability. If necessary, IBIs shall engage an insurance advisor at an early stage to review the insurance coverage of the leased assets.
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