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Taking KIBOR out of the Islamic equation in Pakistan.

In a Circular to banks dated 8 September 2016, the State Bank of Pakistan revealed that it had decided that financing provided on the basis of participatory (Musharakah and Mudarabah) and Wakalah (Agency) modes by the country's Islamic banking institutions shall be exempted from the requirement of using KIBOR (Karachi Interbank Offered Rate) as a benchmark rate.

The move takes interest rate benchmarks out of the equation for Islamic banks in Pakistan provided that they 'take adequate measures', particularly to mitigate equity investment risk in participatory mode based products and ensure compliance with stipulated minimum Shari'ah requirements.

Islamic banks must submit to the Central Bank the details of Mudarabah, Musharakah and Wakalah based products for delinking with the KIBOR benchmark, including:

detailed mechanism for pricing under these modes with proper policies for risk mitigation;

amendments in agreements and related documents;

approval of the product by the bank's Shari'ah Board;

criteria for selection of firms/companies with whom IBIs can execute Musharakah or Mudarabah contract.

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Publication:CPI Financial
Date:Sep 12, 2016
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