National and Global Islamic Financial Architecture:
Problems and Possible Solutions for the OIC Member Countries
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Taxation policy for Islamic finance
Certain tax laws were amended in Pakistan to facilitate Islamic banking and to provide a level
playing field. Instructions were issued to give equal status to Islamic financing documents in
terms of stamp duties. These include Stamp Duty (Exemption) Order 1996; the Stamp Duty
(Remission) (No 4) Order 1996; the Stamp Duty (Exemption) (No 6) Order 2003; the Stamp
Duty (Exemption) (No 2) Order 2004; the Stamp Duty (Exemption) (No 3) Order 2004; and the
Stamp Duty (Remission) Order 2004. Rule (3) of the 7th Schedule of the Income Tax
Ordinance 2001(ITO 2001) (Finance Bill, 2009) provides an umbrella clause that discards any
special treatment for ’Shariah Compliant Banking Company’ approved by the SBP in terms of
any reduction or addition to income and tax liability for the banks. Islamic banks are required
to attach a certified statement to the return of income to disclose the comparative position of
transaction as per the Islamic mode of financing and as per normal accounting principles (FBR
2011).
There are, however, still areas that require resolution for tax neutrality for the users of Islamic
finance. Whereas tax facilitation has been done for murabah, issues related to other modes
such as salam, istisna and ijarah are not dealt with. Going forward, the SBP plans to coordinate
with the Federal Boards of Revenue (FBR) for the removal of tax anomalies, inconsistencies
and achieving tax neutrality for Islamic banking institutions and also for users/customers of
Islamic banking services. It also has a plan to coordinate with Federal and Provincial
Governments/FBR for the exemption of property tax, stamp duties, etc related to Islamic
modes of finance. Overall, the SBP has demonstrated resolve for developing the industry on a
sound footing through enabling legal and regulatory regimes and partnering with the industry
for addressing perception and taxation issues (SBP 2014).
Dispute Settlement/Conflict Resolution Framework
Except for the Federal Shariat Court (FSC) with the jurisdiction of a High Court, and the Shariat
Appellate Bench (SAB) in the Supreme Court of Pakistan, there are no separate courts in
Pakistan for Islamic banking and finance. The civil courts deal with Islamic banks and finance
disputes. With regard to any conflict of opinion on any Shariah issue, the decisions of the SBP’s
Shariah Board are final for validity or otherwise of any transaction or proceedings in any
courts.
As regards to the disputes relating to defaulted finance, banks—Islamic or conventional, and
other financial institutions can sue the defaulters on the basis of the Financial Institutions
(Recovery of Finances) Ordinance (FIO) 2001 that provides strong support to the banking
companies to recover their financing/lending. An important provision of the FIO 2001 [Section
2 Clause (c)] is that the surety/guarantor falls under the definition of the customer, meaning
that the creditors have the option to file suit against any of the principal debtors or the surety.
This is in line with the AAOIFI’s standard on Guaranties (3/3). Furthermore, Section 128 of
‘The Contract Act, 1872’ provides, “The liability of the surety is co-extensive with that of
principal debtor, unless it is otherwise provided by the contract”. Hence, the financial
institutions are entitled to sue the Surety along with the principal debtor and the courts have
been observing this provision of the law [2005 CLD 95 P.99 B; 2001 YLR 625].
As per the FIO 2001, the court can grant to banks the ‘Cost of Funds’ which is determined
under Section 3 of this Ordinance. As per a ruling of the Division Bench of the Sind High