The State Bank of Pakistan (SBP) has announced exclusive guidelines on Shariah Non-Compliance Risk (SNCR) management, with the goal of increasing Islamic banking’s stability and soundness.
Islamic Banking’s foundation is built on adhering to Shariah’s norms and principles in all of its commercial activities and operations. SNCR is a risk that Islamic Banking Institutions (IBIs) encounter in a particular way and must be managed proactively.
The industry’s growing scale in terms of assets and deposits, as well as its diverse activities, products, and services, necessitates focused management of SNCR. Additionally, adopting consistent processes will aid in ensuring consistency across time and across IBIs.
To enhance SNCR management, SBP’s instructions require IBIs’ Boards of Directors (BoDs) and senior management to approve and oversee the implementation of SNCR as a component of their overall risk management framework, commensurate with their size and complexity.
The SNCR management framework will be built in accordance with SBP’s instructions on Shariah principles and decisions, as well as the Shariah Board of the IBI’s rulings and fatwas.
These will make it possible to identify risks and controls associated with various products, services, and company operations.
As directed by SBP, IBIs should take the required steps to ensure that relevant members of the Board of Directors and senior management have the appropriate expertise and awareness of SNCR risk management.
The SBP’s directives require IBIs to have a suitable reporting process in place, including a frequency and threshold for notifying the BoD or its subcommittee of SNCR incidents.
Additionally, IBIs will be expected to maintain a proper record of Shariah-incompliant events or transactions and to report actual losses incurred to SBP on a quarterly basis.
Issuing current instructions in conjunction with the existing comprehensive Shariah Governance Framework will assist in meeting the goal outlined in SBP’s recently released third strategy plan for Islamic banking.