Circulars/Notifications - Islamic Banking Department  
 IBD Circular Letter No. 01 of 2017
March 27, 2017

The Presidents / Chief Executives,
All Islamic Banks, Islamic Banking Subsidiary and
All Conventional Banks having Islamic Banking Branches

Dear Sir,

External Shari’ah Audit Report (Para 7) - Shari’ah Governance Framework for Islamic Banking Institutions (IBIs)

Please refer to para 7 of ‘Shari’ah Governance Framework (SGF) for IBIs’ regarding External Shari’ah Audit notified vide IBD Circular No. 1 of 2015 dated April 07, 2015 and Para 7 of the instructions issued vide IBD Circular No.3 of 2012.

2. Based on detailed deliberations and feedback received from various stakeholders, following instructions on the subject are being issued:

i. Shari’ah Board members of IBIs shall not be allowed to be engaged with any external audit firms.

ii. It will be the responsibility of the external Audit firms to take measures for capacity building of their staff for conducting Shari’ah audit and provide them with appropriate trainings. Moreover, external Audit firms shall prescribe a Fit and Proper Criteria (FAPC) for Shari’ah scholars to be engaged for external Shari’ah audit of IBIs. In this regard, FAPC for Shari’ah Board members as defined in SGF may be used as a guiding principle for engagement of Shari’ah auditor.

iii. External Audit shall also include review and provide opinion on bank’s pool management practices & IT based system; specially computation and distribution of profit & loss to the depositors, tagging and movement of assets and allocation of income & expenses, etc.

iv. Shari’ah Compliance Department of the IBI shall be responsible to verify distribution of profit and loss to the depositors prior to its disbursement whereas the internal Shari’ah Audit Unit of the IBI shall conduct a post disbursement audit on quarterly basis. The report of internal Shari’ah audit on profit and loss distribution shall be submitted to Shari’ah Board of the IBI. Consequently, the regulatory instructions for joint verification of the distribution of profit and loss to the depositors by Shari’ah Advisor and External Auditor issued vide IBD Circular No.3 of 2012 stands withdrawn.

v. The format of external Shari’ah audit report for submission to Board of Directors (BOD) of an IBI and to State Bank of Pakistan (SBP) is enclosed as Annexure-A.

vi. Institute of Chartered Accountants of Pakistan (ICAP) may develop comprehensive guidelines to conduct external Shari’ah Audit in consultation with external Audit firms.

vii. Considering the capacity building issues of external audit firms and scarcity of experienced Shari’ah scholars in the industry, the requirement of an external Shari’ah audit has been exempted for the calendar year 2015. However, the IBIs which had already engaged external auditor to conduct Shari’ah audit for the year ending December 31, 2015 shall complete their assessment and submit a copy of their external Shari’ah audit report to IBD-SBP.

viii. A copy of external Shari’ah audit report shall be submitted to IBD-SBP within 45 days of the date of finalization of IBIs Audited Accounts. However, keeping in view the practical issues of external Audit firms the condition has been relaxed for the year ended December 2016; the IBI’s shall submit copy of external Shari’ah audit report to IBD-SBP at the earliest but not later than June 30, 2017. The IBIs shall not publish the External Shari’ah Audit report till further instructions.

3. Other instructions on the subject shall however remain unchanged. Any failure to comply with these instructions will render the bank liable for penal action under the provisions of Banking Companies Ordinance, 1962.

4. Please acknowledge receipt.

Annexure - A

Yours faithfully,


(Ghulam Muhammad)

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