National and Global Islamic Financial Architecture:
Prolems and Possible Solutions for the OIC Member Countries
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Court, awarding the cost of funds from the date of commission of default by the
borrower/customer in fulfillment of obligation under subsection (2) of section 3 is
mandatory [2009 CLD 312 (DB) P. 315 A]. However, the ‘Cost of Funds’ may be considered
riba if not calculated on the basis of actual costs incurred by the Financial
institution. Furthermore, the FIO 2001 does not differentiate between willful and non-willful
defaulters meaning that every default is considered a willful default.
Bankruptcy and Resolution of Banks
As indicated, the Banking Companies Ordinance 1962 (BCO 1962) applies to both conventional
and Islamic banks with the Banking and Financial Services (Amendment of Laws) Ordinance,
1984 (BFSO 1984) amending part of BCO 1962 to accommodate Islamic banking practices. Part
III of the BCO 1962 deals with “Suspension of Business and winding up of Banking Companies”
and Part IV covers “Special Provisions for Speedy Disposal of Winding up Proceedings”. As the
amendments in BFSO 1984 do not deal with these sections, the bankruptcy and resolutions
procedures and processes of Islamic banks and conventional banks are similar.
4.7.2. Financial System Regulation and Supervision Framework
The regulations of the financial system in Pakistan are divided into two streams, one for the
banks and the other for non-banking financial institutions (NBFIs) including investment or
asset management companies. While all Islamic banking institutions (IBIs) operate under
licenses from the SBP and are regulated/supervised by it, the takaful companies, mutual funds,
investment banks, Modarabas, and Leasing Companies are regulated by the Securities and
Exchange Commission, Pakistan (SECP). Both regulators have taken some steps not only to
ensure stability of the system and Shariah compliance but to also safeguard the interests of the
stakeholders.
The Islamic Banking Department was established in SBP in 2002 and is responsible for making
and implementing policies for Islamic banking in the country in collaboration with other
regulation and surveillance departments of the central bank. SBP issued the Banking Control
Department (BCD) Circular No. 13 of 20th June 1984 that outlined 12 modes of Islamic banking
which are still operative. SBP has also issued Guidelines Islamic Banking Windows in the
conventional branches (IBD Circular No. 6, 2007). In addition to measures taken earlier since
2002, SBP issued detailed guidelines for Shariah compliance by the IBIs through IBD Circular
No: 02 of 2008. These included, inter alia, Shariah Essentials of major modes, appointment and
duties of Shariah advisors, conflict resolution in pronouncements, uses of charity funds, etc.
A fully-fledged Islamic Finance Department (IFD) was established in the Securities and
Exchange Commission, Pakistan in December 2015. The Islamic Finnace Department of the
SECP is responsible for creating a Shari’ah regulatory environment and ensuring compliance
by companies committed to undertaking their businesses and activities according to the
principles of the Shari’ah. It is also mandated to issue, amend and enforce a Shari’ah compliant
regulatory regime for the capital market including the non-banking finance companies
(NBFCs), takaful, modarabas as well as non-financial companies. The focus areas of the IFD
include developing a way forward for the Islamic Capital Market to ensure sustainable
development and growth of Islamic finance in the country, developing a Shari’ah compliant
index to promote investment culture in the Shari’ah compliant companies, and taking steps to
ensure implementations of Islamic financial accounting standards and guidelines issued by the