In order to promote Islamic banking in Pakistan, inter alia, a new clause (aa) has been now inserted in sub-section (1) of section 23 of the Banking Companies Ordinance, 1962, in terms of Banking Companies (Amendment) Ordinance, 2002 notified in the Gazette of Pakistan dated November 4, 2002, as follows:

"(aa) the carrying on of banking business strictly in conformity with the Injunctions of Islam as laid down in the Holy Quran and Sunnah".

2. The existing scheduled commercial banks are therefore now also allowed to open subsidiaries for Islamic Banking operations. The banks interested in establishing a subsidiary for Islamic banking ("subsidiary") may apply to the Director, Islamic Banking Department, State Bank of Pakistan, Post Box No. 4456, I.I. Chundrigar Road, Karachi. Applications may be made giving details with supporting documents, forms for which can be obtained from the State Bank. Applications, which are not complete in all respects, shall not be considered.3. The following shall be the broad criteria for setting up of a subsidiary, of the existing scheduled commercial banks, for Islamic banking:-

i) The proposed subsidiary would be a Public Limited Company and would be listed on the Stock Exchange. A maximum of 49% of shares shall be offered to the general public.

ii) The subsidiary may be granted a license under section 27 of the Banking Companies Ordinance, 1962 to conduct the banking business strictly in accordance with Sharia and would be considered as a Scheduled Islamic Commercial Bank.

iii) All financial transactions of the subsidiary will be in accordance with the injunctions of "SHARIA".

iv) The application shall indicate the modes of finance proposed to be used for raising resources and extending financial facilities.

v) The applicant(s) will also indicate expertise and other facilities available with them for ensuring compliance of their banking business with Sharia.

vi) To be able to commence business, the subsidiary shall have a minimum paid up capital of Rs 1,000 million and also shall at all times maintain minimum capital adequacy Ratio of 8% based on risk weighted assets.

vii) At least 51% of the total paid up capital shall be subscribed by the banking company(ies).

viii) Banks meeting the Capital Adequacy guidelines issued by State Bank and having CAMELS rating of 1, 2 and 3 during the last three years ON-SITE inspection shall be eligible for opening the subsidiary.

ix) Banking company(ies) shall not dispose of their shares in any manner whatsoever for a minimum period of 3 years and thereafter only with the specific written approval of the State Bank.

x) Application shall stand disqualified if any of the sponsors and/or Directors, their spouses or firms:-

a) has been convicted by a Court of law in Pakistan or abroad for a criminal offence.

b) has been associated with any illegal activity especially banking business, deposit taking, financial dealings and other business;

c) has failed to meet his or her obligations to banks and other financial institutions. They shall furnish names of the banks/DFIs alongwith the names of the branches with which they have had dealings. Bank reports are also required to be submitted;

d) has defaulted in payment of taxes. They shall indicate their National Tax Numbers;

e) is or has been associated as Director/Chief Executive with the Corporate Bodies whose corporate and tax record including customs duties, central excise and sales tax has been unsatisfactory. They shall name the corporate bodies, their bankers and disclose their tax numbers and dividend record. Those not so associated with Corporate Bodies would be required to indicate their occupation/profession/trade and highlight their achievements;

f) in the opinion of the sanctioning authority enjoys adverse reputation regarding integrity and performance.

xi) Every Director of the subsidiary shall meet the Fit and Proper Test prescribed by SBP and would require prior clearance from State Bank of Pakistan.

xii) One person cannot be a Director in more than one bank/financial institution.

xiii) Not more than 25% of the Directors shall be from the same family as defined in Section 5(ff) of the Banking Companies Ordinance.

xiv) The Chief Executive would be a professional fulfilling the conditions stipulated in the Fit and Proper Test issued by State Bank and shall require prior clearance of State Bank of Pakistan.

4. The applicant(s) will also submit the following documents along with the request:- 

i) Feasibility Study for setting up of Subsidiary including Organization structure and the name of the proposed Chief Executive.

ii) Short Term and Long term Business Plan.

iii) Risk management guidelines, plans for Internal control system and delegated approval authorities

iv) Working system and procedures for business operations

v) List of companies / firms and their bankers in which the banking company(ies), sponsor directors and their family members as defined in Section 5(ff) of Banking Companies Ordinance, are interested as Directors, Chief Executive, Partner, Proprietor, or major shareholders holding 5% or more shares

vi) Certificate that a Shariah Advisor has been appointed in the light of SBP Shariah Board’s "Fit and Proper Criteria" and the approval of SBP. However, Islamic Banking Subsidiaries are free to appoint a Shariah Committee at their own discretion and not as part of SBP regulation.

5. The subsidiary, which may be permitted to be established, shall be subject to the prevalent banking and other laws, rules and directives issued by SBP from time to time.

6. The subsidiary must commence operation within six months of the grant of permission.

7. The applicant(s) shall deposit Rs. 1 million (Rupees One million only) along with the application as processing fee. The fee so deposited shall be non-refundable.

8. Incomplete application shall be returned and processing fee retained. Re-submission would attract fresh fee.

With the objective of promoting Islamic banking in Pakistan, the following Guidelines for opening of Stand-alone branches for Islamic Banking by existing commercial banks have been prepared by State Bank of Pakistan. The banks desirous of offering Shariah compliant products and services are required to apply to the State Bank for issuance of a license under these Guidelines.

The following terms, as used in these Guidelines, shall have the following meanings:-

i) "banks" means commercial banks, including branches of foreign banks operating in Pakistan, which desire to offer Shariah compliant products and services;

ii) "IBB" or "branch" means the Islamic Banking Branches of commercial banks, which offer the Shariah compliant products and services only;

iii) "Shariah compliant products and services" means banking products and services offered by banks to their clients duly approved by their Shariah adviser/Shariah Supervisory Committee;

iv) "IBF" means the Islamic Banking Fund set up by the banks to fund the operations of their Islamic Banking Branches;

v) "IBD" means the Islamic Banking Division set up at the head office of the banks/ country offices in Pakistan to administer, supervise and regulate all matters pertaining to IBB.

The eligibility of a bank to open Islamic banking branch(es) shall be considered by the State Bank keeping in view, among others, the financial strength of the bank as evident from its capital base(net capital free of actual and potential losses), adequacy of its capital structure, record of earning capabilities, future earning prospects of the bank, managerial capabilities, bank’s liquidity position, track record of the bank’s adherence to prudential regulations, credit discipline, quality of customer services and the convenience and the needs of the population of the area to be served by the proposed branch. In addition, the following considerations will also be taken in the grant of the license:-

(i) Banks having CAMELS rating of 1, 2 and 3 in the last ON-SITE inspection shall be eligible for opening Islamic Banking Branches.

(ii) There should not be major adverse inspection findings against the bank.

(iii) The bank shall identify experienced and trained key staff to handle the IBB operations.

The applying bank is required to submit a proposal to the Islamic Banking Department of the State Bank of Pakistan, outlining the following details:-

i) Number of branches alongwith name of city where the IBB is to be offered within the next financial year.

ii) Products and services to be offered by the IBB including deposits, financing, investment, etc.

iii) Method of segregating the funds of IBB from the funds of commercial banking of the applying bank.

iv) Infrastructure and logistic requirements, including manpower and training programs.

v) The name, qualification and experience of Shariah Adviser(s).

vi) Accounting aspects, such as accounting policies to be followed, profit and loss sharing mechanism, etc.

The banks will be required to submit such further information as required by State Bank while processing the case.

i) State Bank will evaluate the proposal of the bank keeping in view merits of the case and upon its satisfaction, will grant an approval in principle to the bank for opening of branch(es) upon such terms and conditions as it deems fit. However, license for individual branch opening shall be issued on receipt of formal application on prescribed format under the provisions of Section 28 of the Banking Companies Ordinance, 1962 (Application Form). This will be issued when requirements of para 5 hereof are complied with and evidence is provided that adequate security arrangements have been provided at the proposed place of business and the Town Planning Regulations are not violated.

ii) In subsequent years, if the bank wishes to open more branches, the bank shall submit to State Bank of Pakistan for approval, an Annual Islamic Banking Branch Expansion Plan (the Plan) at least 30 days before the commencement of each calendar year (January-December) during which it plans to open branches. The plan would, inter alia, indicate the number of the new branches proposed to be opened in urban and rural areas, location of each of the proposed branch and the area which it would serve, branches proposed to be closed (if any), the number of existing branches incurring losses consecutively for the last three years, arrangements for managerial and other staff members and information technology access and linkage for the proposed branches and arrangements for housing each of the proposed branch. State Bank will consider the Plan for new branches keeping in view the need of the system and grant approval in principle for number of new branch(es) that bank will be allowed to open during the given calendar year within 30 days from the date of receipt of the Plan complete in all respect. The approval in principle granted under a particular Plan shall lapse in case bank fails to submit a formal application for issuance of license at least 30 days before the expiry of that particular year. Similarly license issued under the respective Plan shall expire where a bank fails to open the branch before 31st December of that year.

iii) Request for a new branch in Azad Kashmir will have to be supported by the AJ&K Government.

iv) The branch(es) shall be subject to the prevalent banking and other laws, rules and directives issued by SBP from time to time.

v) Banks will be free to shift or reallocate their branches within the same city/town/village without prior approval of State Bank. Intimation of shifting of a branch will be sent by the bank concerned to the State Bank within 15 days from the date of its shifting on prescribed performa (Annexure ‘A’).

vi) The license may be revoked in case it subsequently transpires that the bank had made material misrepresentation of facts or concealment of material information and the responsible official(s) shall personally be liable for action under the relevant laws.

Before commencement of business, the bank will ensure that all the Documents and agreements pertaining to each type of products and services alongwith Risk management guidelines, Plans for Internal control and Information Technology systems are in place. All relevant documents/agreements and guidelines should be duly certified by their Shariah Adviser/Committee and a certificate in this regard will be submitted to the State Bank alongwith the Application Form. All these documents should be made readily available to the SBP Inspection Team during inspection of the bank.

(i) The bank will be required to set up an Islamic Banking Division ("IBD") at the Head Office/Country Office in Pakistan.

(ii) The bank will submit the organizational structure of the IBD alongwith details of key persons of the division (qualification and years and type of experience) to Islamic Banking Department of the State Bank of Pakistan alongwith the Application Form.

(iii) The responsibilities of the IBD shall be as follows:-

(a) To manage and be responsible for the operations of IBB(s), including policy and procedural matters;

(b) To liaise with other departments in the bank and Shariah Adviser/Committee to ensure smooth operations of IBB(s);

(c) To ensure that all funds pooled into the IBF are channeled into Shariah compliant financing and investment activities;

(d) To arrange training of staff on Islamic banking;

(e) To arrange for compilation and submission of such returns, as may be required to be submitted to State Bank from time to time;

(f) To ensure that all directives and guidelines, particularly those applicable to Islamic

banking, issued by State Bank are strictly complied with;

(g) To maintain the Statutory Cash Reserve and Liquidity Requirement with State Bank as prescribed by State Bank from time to time.

(h) Other roles and responsibilities as determined by the bank or State Bank form time to time.

(iv) The IBD shall be headed by a senior and experienced officer directly reporting to the Chief Executive (in case of foreign banks, the Country Manager) and manned by qualified staff.

(i) The bank shall be required to maintain a minimum fund of Rs 50 million or 8% of the risk weighted assets of IBB(s), whichever is higher.

(ii) The IBF shall be funded by way of an allocation by the head office of the bank or in case of foreign bank, its country office.

(iii) The IBF shall be placed under the control of IBD to fund the operations of the IBB(s).

Every licensed branch of a bank shall carry a name, and shall invariably be required to prominently display the name of the branch as stipulated in the license.

A Shariah Advisor has to be appointed in the light of SBP Shariah Board’s "Fit and Proper Criteria" and the approval of SBP. However, Banks are free to appoint a Shariah Committee at their own discretion and not as part of SBP regulation.

The bank shall ensure that proper systems and controls are in place in order to ensure segregation of funds and protect the interest of depositors, including but not limited to the followings:-

i) The bank shall be required to prepare procedure manuals for the IBD and IBB operations duly approved by their Shariah Adviser/Shariah Supervisory Committee as well as the Board of Directors or in case of branches of foreign banks operating in Pakistan, by their Head Office.

ii) The bank shall prepare a full set of documents pertaining to the deposit, investment and financing products pertaining to IBB operations.

iii) The full set of the documents duly vetted by their Shariah Adviser/Shariah Supervisory Committee shall be maintained by the IBD. Similarly, all documents in respect of new schemes offered by IBB(s) shall also be prepared and maintained by IBD before launching of the scheme.

iv) All documents (including ledgers, registers, pay-in-slips, cheques, receipts, passbooks, etc.) used in the IBD and IBB(s) shall be appropriately marked, so as to easily distinguish them from the documents pertaining to commercial banking.

v) In order to efficiently utilize the existing branch network, the bank may authorize some of its branches to sell the Islamic banking deposit schemes. However, in such cases proper systems and control should be in place to ensure that the fund transfer takes place on the same day to/from the IBB. The authorized branches shall not, in any manner whatsoever, receive/pay interest on such services. The authorized branches may charge a reasonable fee/commission on sale of such deposit schemes under a policy to be approved by the Board of Directors or in case of branches of foreign banks, their Head Office. Proper training in Islamic banking should also be provided to the staff of authorized branches dealing with such deposit schemes.

vi) The bank shall be required to undertake comprehensive internal audit including internal Shariah Review on the operations of the IBB(s) and IBF at least once in a year.

(i) The banks shall keep separate book of accounts in respect of Islamic banking operations and ensure proper maintenance of records for all transactions for segregation of funds.

(ii) The banks shall prepare a separate daily trial balance of the operations arising from the IBB(s).

(iii) Based on the balances of all the items (assets, liabilities, expenses and income) relating to the operations of the IBD/IBB(s), the bank shall prepare and submit separate annual as well as quarterly financial statements for its IBB operations alongwith its periodical financial statements on the format prescribed by State Bank from time to time.

In order to maintain the Statutory Cash Reserve and Liquidity requirement in respect of IBB operations, the IBD will open a separate current account with State Bank. In this account, IBD will maintain the Cash Reserve with State Bank in the manner prescribed for commercial banks (at present @ 5% of time and demand liabilities). For Statutory Liquidity Requirement (SLR), till the development of Shariah compliant approved securities, they will for the present, maintain an additional cash amount equivalent to 6% of their TDL in the same current account with State Bank in lieu of SLR (i.e., 40% of 15% SLR at present). Therefore, in all, IBD will maintain 11% of time and demand liabilities (TDL) of the Islamic banking branches in this current account with State Bank on weekly average basis and 10% of TDL on daily basis in lieu of CRR and SLR for IBB operations of the bank.

i) In the Weekly Statement of Position submitted to the State Bank, the banks shall submit separately the position of IBB operations.

ii) The banks shall also be required to submit such other statements regarding their Islamic banking operations as prescribed from time to time.

A processing fee @ Rs. 25,000/- per branch applied in the Proposal/Plan has been fixed. The banks while submitting the Proposal/Plan shall invariably enclose a cheque in the name of State Bank of Pakistan as processing fee. The Proposal/Plan without the amount of processing fee shall not be entertained. The processing fee will be non-refundable.

1. Name of the Bank ____________________________________________________

2. Name of the Branch shifted ____________________________________________

3. Licence No.___________________ Dated_______________________________

4. Premises from which shifted____________________________________________

5. Exact location of the premises to which shifted_____________________________

6. Distance between the old and new branch/booth premises ____________________

7. Date of shifting______________________________________________________

8. Reasons necessitating the shifting (in detail)_________________________________________________________________________________________________

9. Working results of the branch/booth at the old place, i.e. deposits advances and profit & loss accounts for the last three financial years

10. No of Accounts (category-wise) as at the end of last financial year and on the date of shifting.

11. Distance (in meters/kilo meters) of the old premises with nearest branches of other banks.

12. Distance (in meters/kilo meters) of the new premises from the nearest branches of other banks.

12. Certified that location of new premises does not violate the Town Planning Regulations of the concerned authority.

13. Certificate from the competent authorities that both the existing and proposed premises are: (a) within the same locality (in case of branches at banked places including big cities); (b) within the same territorial limits of the same village (in case of branches at un-banked places).

___________________________                                                                                                                                                     _________________________

Annexure-IV to IBD Circular No. 02 of 2004
ISLAMIC BANKING DEPARTMENT
STATE BANK OF PAKISTAN

FIT & PROPER CRITERIA FOR APPOINTMENT OF SHARIAH ADVISORS

1. MINIMUM QUALIFICATION AND EXPERIENCE

a. The Shariah Advisor must have an experience of at least 5 years giving religious rulings.

b. He should have knowledge of or at-least be familiar with the banking industry.

c. Minimum qualification is Dars-e-Nizami. Higher education like M.A. Islamiat, economics or in the discipline of banking and finance may be an added qualification.

d. Relaxation in number of years of experience may be considered in case of experience as teacher of Islamic Fiqh in a reputable institution other than banking institutions, for a period of not less than three years with a proven track record.

2. TRACK RECORD

a. The Shariah Advisor must have an impeccable track record in the companies he/she has served either in the capacity of an employee or director/chief executive or as chairman.

b. Has not been terminated or dismissed in the capacity of employee, director/chairman of a
company.

3. SOLVENCY & FINANCIAL INTEGRITY

a. Has not been associated with any illegal activity especially relating to banking business.

b. Has not been in default of payment of dues owed to any financial institution and/or default in payment of any taxes individual capacity or as proprietary concern or any
partnership firm or in any private unlisted and listed company.

c. Has sufficient means to discharge his/her financial obligations.

4. INTEGRITY, HONESTY AND REPUTATION

a. Has not been convicted in any criminal offence, involved in any fraud/forgery, financial crime etc.

b. Has not been subject to any adverse findings or any settlement in civil/criminal proceedings particularly with regard to investments, financial/business, misconduct,
fraud, formation or management of a corporate body etc.

c. Has not contravened any of the requirements and standards of regulatory system or the equivalent standards of requirements of other regulatory authorities.

d. Has not been involved with a company or firm or other organization that has been refused registration/licence to carry out trade, business etc.

e. Has not been involved with a company/firm whose registration/license has been revoked or cancelled or gone into liquidation.

f. Has not been debarred for giving religious rulings by any religious institution/body.

5. CONFLICT OF INTEREST

a. Is not a Shariah Advisor of any other financial institution. The term financial institution will include any bank, investment finance company, non-banking finance company,
venture capital company, housing finance company, leasing company or modaraba company.

b. The conflict of interest shall not apply if a Shariah Advisor is nominated by the SBP in its own Shariah Board.

FORM-SAP

SHARIAH ADVISORS PARTICULARS TO BE SUBMITTED BY THE BANK

PHOTO
2 x2 1/2

1. FULL NAME__________________________________________________________

2. FATHER’S NAME _____________________________________________________

3. DATE & PLACE OF BIRTH _____________________________________________

4. RELIGION _________________________
 

5. N.I.C. NUMBER ______________________ N.T.N. __________________________

6. EDUCATION ________________________________

7. PRESENT JOB/STATUS AND OFFICAL ADDRESS_____________________________

8. TELEPHONE NUMBERS ___________________________

9. IF SHARIAH ADVISOR HAS CHANGED HIS NAME, STATE PREVIOUS NAME AND REASONS FOR THE CHANGE_________________________________________

10. APPOINTMENTS HELD DURING THE LAST FIVE YEARS (WITH DATES) ____________

11. NAME(S) & DESIGNATION(S) OF THE DIRECT SUPERVISOR (ONE GRADE UP) UNDER WHOM SHARIAH ADVISOR HAS SERVED DURING THE LAST FIVE YEARS ______________________________________________________________________________

12. DATE WHEN THE SHARIAH ADVISOR LAST FILLED IN A SECURITY VETTING FORM AND THE NAME OF THE DEPARTMENT FOR WHOM FILLED.
______________________________________________________________________________

13. PRESENT RESIDENTIAL ADDRESS IN FULL ______________________________________

14. PERMANENT RESIDENTIAL ADDRESS IN FULL __________________________________

15. NAMES & ADDRESSES OF THREE RESPECTABLE PERSONS (NOT RELATIVES) WHO HAVE BEEN CLOSELY ACQUAINTED WITH THE SHARIAH ADVISOR DURING THE LAST FIVE YEARS.

__________________________
Signature of concerned official

_________________________________________________________________________________

* Use additional sheet if required