The State Bank of Pakistan (SBP) has adopted Shariah Standard No. 30 on Monetization (Tawarruq), issued by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), with immediate effect. The adoption is subject to the clarifications and amendments specified in Appendix A accompanying the central bank’s instructions. The decision is intended to strengthen the Shariah compliance framework and promote greater consistency in the application of Islamic finance principles across Pakistan’s Islamic banking industry. The move adds another regulatory measure to the central bank’s efforts to establish a more harmonized approach to Shariah-compliant financial transactions.
According to the SBP notice, the adoption of the standard is aimed at harmonizing Shariah practices among Islamic financial institutions operating in Pakistan. AAOIFI develops Shariah, accounting, auditing, governance and ethical standards for Islamic financial institutions. Its Shariah standards provide guidance on financial products and transactions designed to comply with Islamic principles. By adopting Standard No. 30 on Tawarruq, the SBP has brought the specified framework into the country’s Islamic banking regulatory environment, while retaining the clarifications and amendments outlined in the accompanying appendix. Islamic banks and other institutions covered by the instructions will need to consider these requirements when conducting relevant transactions.
Tawarruq, also known as monetization in Islamic finance, generally involves a series of transactions through which a customer obtains cash by purchasing a commodity on deferred payment terms and subsequently selling it to another party for immediate payment. The structure is used in certain Islamic financing arrangements to provide liquidity while following applicable Shariah requirements. Its acceptability depends on how the transactions are structured and executed, including the relevant ownership, sale and compliance conditions. The adoption of a dedicated standard provides a regulatory reference for the treatment of these arrangements and is intended to support consistent practices across the industry.
Alongside the adoption of the standard, the SBP has issued the “Guidelines on Application of Ḥajah (Need) in Tawarruq-based Transactions.” These guidelines are included in Annexure I of the central bank’s circular. The concept of Ḥajah refers to a need or circumstance that may be considered within Islamic jurisprudential reasoning. Its application in Tawarruq-based transactions is addressed through the newly issued guidance, providing additional direction for institutions operating under the relevant Shariah framework. The introduction of these guidelines alongside the AAOIFI standard indicates that the SBP is addressing both the general requirements governing Tawarruq and the specific considerations related to its application in circumstances involving need.
The central bank has clarified that the adoption of the standard and the issuance of the guidelines are additional to the existing regulations, instructions and directives issued by the SBP from time to time. This means the new requirements should be read alongside the wider regulatory framework applicable to Islamic banking in Pakistan rather than as a replacement for existing instructions. Financial institutions will need to consider the adopted standard, the amendments and clarifications in Appendix A, the guidance in Annexure I and other applicable SBP requirements when assessing their Tawarruq-based products and transactions. The relevant documentation and operational procedures will also need to reflect the applicable requirements to support compliance.
The SBP has also stated that failure to comply with the instructions may result in penal action under the relevant provisions of the Banking Companies Ordinance, 1962. This provision establishes the potential regulatory consequences for institutions that do not meet the applicable requirements. Banks will therefore need to pay attention to the implementation of the adopted standard and the accompanying guidelines, including the treatment of relevant transactions under their Shariah compliance arrangements. The notice places responsibility on regulated institutions to follow the instructions within the scope of the central bank’s regulatory authority.
For Pakistan’s Islamic banking sector, the adoption represents a further step towards aligning local practices with recognised standards developed for Islamic financial institutions while maintaining country-specific regulatory clarifications. Consistent application of Shariah standards can help establish clearer expectations for financial institutions, their Shariah advisers and compliance teams. It can also provide a more structured basis for reviewing products and transaction arrangements that rely on Tawarruq. The practical impact will depend on how institutions apply the requirements in their operations and ensure that their financing structures meet the relevant conditions.
The SBP’s latest instructions reinforce the importance of Shariah compliance in the development and delivery of Islamic financial products. By adopting AAOIFI Shariah Standard No. 30 and issuing separate guidance on the application of Ḥajah in Tawarruq-based transactions, the central bank has expanded the specific guidance available to the industry. Islamic financial institutions will need to take account of the adopted standard, the accompanying clarifications and amendments, and the additional guidelines alongside existing regulatory instructions. Compliance remains essential, as the SBP has explicitly stated that violations may lead to penal action under the Banking Companies Ordinance, 1962.
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