SECP enforces new regulations for Islamic financing

ISLAMABAD: The Securities and Exchange Commission of Pakistan (SECP) on Friday put into effect a new regulatory framework, called Shariah Governance Regulations 2018, to encourage shariah-compliant financing of government debts, capital market investments and corporate loans.

“In line with the spirit of the article 38 (f) of the Constitution of Pakistan, the SECP has enforced the Shariah Governance Regulations 2018,” the SECP said in a statement. “The enforcement of a comprehensive framework for shariah-compliant business is a major breakthrough to lay the foundation for a true Islamic financial and economic system.”

The regulations are in furtherance to a senate’s resolution moved by Senator Shibli Faraz and unanimously passed in July whereby the house recommended that the government should take necessary steps to abolish riba at the earliest and at least 30 percent of the new government debts should be replaced with shariah-compliant modes of financing.

The jurisdiction of the regulations is the shariah-compliant corporate sector, capital markets, securities and financial institutions.

The SECP said the issuance of the first-of-their-kind regulations is a leap forward towards development of a long-term, sustainable Islamic financial market, corporate sector and capital market.

“The regulations will help deepen shariah-compliant businesses and financing and will set the momentum for an all-embracing use of shariah-compliant securities for shariah-compliant investments and financings as the regulations provide opportunity to every business irrespective of its size or line of business to become shariah-compliant or to issue shariah-compliant security listed or unlisted.”

The commission termed trust deficit and lack of confidence as some of the reasons behind “the abysmal growth of Islamic finance in the country”.

“Unfortunately, feeble efforts have been devoted to long-term oversight, and risk mitigation marked by meaningless quick fixes,” it said. “The absence of an all-encompassing framework undermined the shariah compliance and credibility of the entities under the SECP’s jurisdiction.”

The financial regulator said the new regulations encompass a number of elements to execute shariah compliance and to uphold the sanctity of shariah in business and financial dealings and operational practices that will ensure long-term sustainability for the Islamic financial system to stay on sound footings.

“The regulations will help achieve standardisation, harmonisation, and transparency in the business practices and operational aspects of shariah-compliant businesses and Islamic financial institutions, implement uniform shariah screening mechanism, and shall enforce a compliance driven governance,” it said.

“The regulations will help curb the use of word shariah or Islam by the businesses that entice investors for ulterior motives. Henceforth, no business will claim as shariah compliant or as an Islamic financial institution unless it obtains certification for shariah compliance from the SECP.” Certification will also be required for issuing a shariah compliant security. The regulations are critical for addressing the challenges such as restoring the shaken confidence of public and investors, and putting in place a viable long-term solution to avert a muddle in the guise of shariah for the future.

In March, the SECP issued the draft of regulations for public consultation. The SECP’s Islamic Finance Department reviewed frameworks of several international jurisdictions, including Malaysia, Indonesia, UAE, Bahrain, and Iran.

“The regulations are plural in their approach, structured to facilitate the smooth transformation for businesses allowing reasonable time to make adjustments, and are long-term in vision underpinning growth of Islamic finance,” it added. “The regulations depict serious efforts from the regulator to provide an enabling regulatory environment to support and strengthen the Islamic financial system.”