KARACHI: The central bank on Monday issued instructions on Shariah Non-Compliance Risk (SNCR) management, aimed at enhancing the stability and soundness of Islamic banking, a statement said on Monday.
The foundation of Islamic banking lies in compliance with the Shariah rules and principles in all its business activities and operations, it added.
The Shariah Non-Compliance Risk is a unique risk faced by Islamic banking institutions (IBIs) and must be managed proactively. The increasing size of the industry in terms of assets and deposits, diversified operations, products, and services make focused management of SNCR a necessity.
In addition, the adoption of uniform practices will help maintain consistency over time and across IBIs, the statement issued by the State Bank of Pakistan (SBP) said.
To improve SNCR management, instructions issued by the SBP require the board of directors and senior management of IBIs to approve and ensure implementation of SNCR as a part of the overall risk management framework in line with the size and complexity of their businesses.
The Shariah Non-Compliance Risk management framework will be developed using the SBP’s instructions on the Shariah principles and decisions in conjunction with the rulings and Fatwa of the Shariah Board of the IBI as key reference points.
These will be allowed for the identification of risks and controls in different products, services, and business activities. As per the SBP’s instructions, IBIs should take the necessary steps to ensure that relevant members of the board of directors and senior management possess the requisite knowledge and understanding of the risk management of SNCR.
The State Bank’s instructions require IBIs to have an appropriate reporting mechanism, including frequency and thresholds for reporting of SNCR events to the board or its subcommittee. IBIs will also be required to maintain a proper record of the Shariah non-compliant events or transactions and furnish to the SBP, every quarter, the details of actual losses incurred.
The issuance of current instructions coupled with the existing comprehensive Shariah Governance Framework will help achieve the targets laid down in the third strategic plan for Islamic banking recently issued by the central bank.
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