SBP adopts two AAOIFI standards for Islamic banks

KARACHI: The State Bank of Pakistan has adopted two standards issued by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), in an attempt to unify Sharia practices in the Islamic banking industry, a circular said on Tuesday.

The SBP said that “in order to standardise and harmonise” Sharia practices in Islamic banking institutions (IBIs) in the country, it has adopted AAOIFI Shariah Standards No36, ‘Impact of Contingent Incidents on Commitments’, and No 37, ‘Credit Agreement’.

These Sharia standards are applicable with certain clarifications and amendments.

Contingent incidents in standard no 36 refer to those incidents that occur suddenly and cause influence on transactions or commitments arising from those transactions after their valid occurrence, the circular said.

Therefore, contingent incidents are different from defects of will, which exist since the time of signing the contract, although their impact occurs later on, it added.

Contingent incidents are also different from termination of commitments on mutual consent of the two parties or as per the desire of any of them, when a party is entitled to such right under the nature of the contract or due to the condition stipulated in the contract.

As per the types of contingent incidents, from the standpoint of its influence, a contingent incident can be either of the type that necessitates amendments in the commitments, or the type which constitutes an external reason for termination of the contract.

According to Standard No 37, the term credit refers to the financial transaction according to which one of the two or more parties becomes indebted to the other. Indebtedness in such transactions can arise at the beginning of the transaction, and this is known as direct cash credit such as loans and discounting of commercial papers by conventional financial institutions. Instead, indebtedness could be probable at the end of the transaction, and that is incidental credit, such as bank suretyship, letters of guarantee, bills of acceptance and letters of documentary credit.

The term ‘credit facilities’ is used to denote credit in both of its types ie, cash and incidental credit. The concepts of credit and credit facilities are more comprehensive than the concept of financing which relates to the case of actual deferment of one of the two transacted objects, the SBP said.