SBP Updates Shariah Governance Framework for Islamic Banking

The Islamic banking sector in Pakistan has been witnessing remarkable growth over the past few years. With a vision to create a banking system free from riba, or interest, the State Bank of Pakistan (SBP) has taken significant steps to enhance the Shariah Governance Framework (SGF) for Islamic Banking Institutions (IBIs). This revised framework aims to ensure that these institutions operate in strict compliance with Islamic principles, thereby fostering trust and integrity in the financial system.

On Friday, the SBP issued a circular announcing the updated SGF, which is set to take effect on January 1, 2025. The central bank has directed all IBIs to prepare for the implementation of this framework by that date. The SBP emphasized, “To further strengthen the SGF and align it with international best practices, market developments, and feedback from stakeholders, the SGF has been revised and issued for compliance.” This statement underscores the importance of adapting to changing market dynamics while adhering to the core tenets of Islamic finance.

The growth of the Islamic banking sector in Pakistan has been nothing short of impressive. Between March 2015 and March 2024, the assets of Islamic banking institutions have grown by an average of around 24% annually. Similarly, deposits have increased by approximately 22% during the same period. By the end of March 2024, the total assets of the industry reached a staggering Rs9.24 trillion, with deposits standing at Rs6.88 trillion. This growth has led to a significant increase in the share of Islamic banking institutions within the overall banking sector, which has nearly doubled over the past decade.

In 2015, Islamic banking assets and deposits accounted for only 10% and 12% of the total banking sector, respectively. Fast forward to 2024, and these figures have risen to almost 20% and 23%. This remarkable transformation reflects the growing acceptance and trust in Islamic banking among the Pakistani populace. Furthermore, the number of branches of Islamic banking institutions has surged to 5,101 as of March 2024, making these services more accessible to the public.

The SBP's circular also highlighted the importance of compliance with the revised framework. IBIs are required to ensure that they meet the new standards by March 31, 2025. The statement reads, “The revised SGF shall be effective from January 1, 2025. IBIs are advised to make necessary arrangements to comply with the requirements of the revised SGF and submit compliance status to the SBP by March 31, 2025.” This directive is crucial, as it sets a clear timeline for institutions to align their operations with the updated guidelines.

Moreover, the SBP has made it clear that any non-compliance with the provisions of the SGF will result in penal action under the Banking Companies Ordinance, 1962. This stern warning serves as a reminder that adherence to the framework is not optional but a mandatory requirement for all IBIs.

The revision of the Shariah Governance Framework by the SBP marks a significant milestone in the evolution of Islamic banking in Pakistan. As the sector continues to grow, it is essential for IBIs to embrace these changes and ensure compliance with the new regulations. This not only enhances the credibility of Islamic banking but also contributes to the broader goal of establishing a riba-free banking system in the country by 2027. The future of Islamic banking in Pakistan looks promising, and with the right measures in place, it can play a pivotal role in the nation’s economic development.