SBP’s Shariah Governance Framework 2024

If you have ever wondered who makes sure an Islamic bank actually follows Shariah principles, the answer is more than just a Shariah scholar reviewing products.

In Pakistan, the State Bank of Pakistan (SBP) has established a formal Shariah Governance Framework (SGF) for Islamic Banking Institutions. The framework sets out how Shariah compliance should be governed, monitored and reviewed across an Islamic banking institution.

In November 2024, SBP issued a revised Shariah Governance Framework to strengthen the existing framework, align it with international best practices and reflect developments in the Islamic banking industry. The revised framework became effective from January 1, 2025.

But what does this framework actually mean?

Let’s break it down in simple terms.

What Is the SBP Shariah Governance Framework?

The SBP Shariah Governance Framework is a regulatory framework designed to strengthen the Shariah compliance environment of Islamic Banking Institutions (IBIs) in Pakistan.

In simple terms, it establishes who is responsible for Shariah compliance, what their responsibilities are, and how compliance should be monitored and reviewed.

The framework applies to:

• Full-fledged Islamic banks
• Islamic banking subsidiaries of conventional banks
• Islamic banking divisions of conventional banks

The framework is therefore not simply a guideline for the bank’s Shariah Board. It creates a broader governance structure involving the Board of Directors, management, Shariah functions, product teams and Shariah audit functions.

Why Does Shariah Governance Matter?

An Islamic bank may offer products that are designed to comply with Shariah, but compliance cannot depend only on how a product looks on paper.

There needs to be an ongoing system to make sure that:

• Products are structured appropriately in accordance with Shariah principles.
• Contracts and processes follow the approved Shariah framework.
• Staff understand their responsibilities.
• Transactions are carried out according to approved procedures.
• Any Shariah-related issues are identified and timely addressed.

SBP describes an effective Shariah compliance framework as important for giving the public confidence in the Shariah conformity of Islamic banking products and services.

This is where Shariah governance comes in.

Who Is Responsible for Shariah Compliance?

At the national level, the State Bank of Pakistan’s Shariah Advisory Committee (SAC) provides Shariah guidance to SBP on matters relating to Islamic banking and finance to support the country’s Islamic banking framework. The committee was formerly referred to as the SBP Shariah Board. SBP’s current 9th Term comprises members from Shariah scholarship, banking and finance, accounting and law, reflecting a multidisciplinary approach to Islamic finance governance.

The current composition of the SBP Shariah Advisory Committee is:

• Dr. Muhammad Raghib Hussain — Shariah Scholar Member and Chairman
• Dr. Muhammad Qaseem — Shariah Scholar Member
• Dr. Khalil Ahmad Aazami — Shariah Scholar Member
• Mr. Riaz Riazuddin — Member from Economics / Banking & Finance
• Dr. Zeeshan Ahmed — Accountant Member
• Barrister Dr. Huma Sodher — Lawyer Member
• Mr. G. M. Abbasi — Executive Director, Islamic Finance Group, SBP and Ex-Officio Member

Dr. Zahid ur Rehman Khokher, Director of the Islamic Finance Policy Department, serves as the Ex-Officio Secretary to the Committee.

Why Is the Committee Multidisciplinary?

Islamic banking involves more than determining whether a transaction meets Shariah requirements. Financial products also involve areas such as accounting, law, banking operations and economics.

A multidisciplinary committee therefore allows Shariah considerations to be examined alongside the technical and practical aspects of modern financial services.

This is consistent with SBP’s broader approach to strengthening Shariah governance and compliance in Islamic banking in Pakistan.

 

One of the most important features of the framework is that Shariah compliance is a shared governance responsibility.

The revised framework specifically defines the roles and responsibilities of several parts of an Islamic Banking Institution. These include the:

• Board of Directors
• Executive Management
• Shariah Board
• Shariah Compliance Department
• Product Development function
• Internal Shariah Audit
• External Audit

Let’s look at what each does.

1. Board of Directors

The Board of Directors has an important oversight role.

The framework requires an effective mechanism for the Board’s oversight of the institution’s Shariah compliance environment. In other words, the responsibility for Shariah governance does not sit entirely with the Shariah Board. The institution’s overall leadership must also ensure that an appropriate compliance environment exists.

Think of the Board as having overall governance responsibility.

2. Executive Management

Management is responsible for implementing the framework within the institution.

This includes ensuring that the bank’s systems, people and processes support the requirements established under the Shariah Governance Framework.

The framework also emphasises accountability of management and staff in implementing the SGF.

In simple terms:

The Shariah Board provides guidance and oversight, but management must make sure that guidance is actually implemented.

3. Shariah Board

The Shariah Board is central to the Shariah governance structure.

The revised framework requires an independent and effective Shariah Board appointed according to the applicable Fit and Proper Criteria.

The framework also provides for a Resident Shariah Board Member (RSBM), who oversees the procedures and processes used to implement the Shariah Board’s Shariah Certificates , resolutions and guidelines and provides clarification where required.

The Shariah Board’s role can broadly include reviewing and approving Shariah-related matters such as:

• Financial products
• Contracts
• Policies
• Processes
• Shariah compliance matters
• Other Shairah related matters

The key idea is that Shariah oversight is built into the bank’s governance structure rather than being an occasional review.

4. Shariah Compliance Department

The Shariah Compliance Department (SCD) supports the Shariah Board and works under the guidance and supervision of the SB and acts as an important link between the Shariah Board and management.

SBP describes the SCD as a function that assists the Shariah Board and serves as a conduit between the Board and the management of the Islamic Banking Institution.

In practical terms, this function helps translate Shariah guidance into processes that can be implemented across the bank.

5. Product Development

Shariah compliance is also relevant when a bank develops a new product.

The revised framework specifically includes Product Development within the governance structure.

This is important because an Islamic banking product needs to be structured with its Shariah requirements in mind from the development stage, rather than being reviewed only after the product has already been created.

For customers, this means Shariah considerations are intended to be part of the product development process itself.

6. Internal Shariah Audit

Shariah governance does not end when a product is approved.

The revised framework requires an independent Internal Shariah Audit Unit, which may form part of the internal audit department or operate as a separate unit depending on the size of the institution.

Its purpose is to provide an independent assessment of whether the bank’s operations and processes are complying with the applicable Shariah requirements.

This creates an additional layer of oversight beyond product approval.

7. External Audit

The framework also provides for external Shariah audit as part of the broader governance and compliance environment.

An independent assessment can help evaluate whether an Islamic Banking Institution’s financial arrangements, contracts and transactions comply with the applicable Shariah rules and principles.

This gives customers and stakeholders an additional layer of assurance around the bank’s Shariah compliance environment.

What Happens If There Is a Shariah Compliance Issue?

The purpose of a Shariah governance framework is not to assume that issues can never happen. Instead, it establishes mechanisms through which issues can be identified, reported, reviewed and addressed.

The framework includes mechanisms for Shariah compliance review and internal and external Shariah audit. These functions help identify weaknesses or areas requiring corrective action.

The framework also requires significant unresolved matters to be appropriately escalated within the governance structure.

This creates a process of:

Review → Identify → Escalate → Correct → Monitor

Is Shariah Governance the Same as Shariah Compliance?

Not exactly.

Shariah compliance refers to whether the institution’s products, transactions and operations conform to the applicable Shariah requirements.

Shariah governance is the broader system that helps make that compliance possible.

It includes:

• Oversight
• Accountability
• Shariah advice
• Shariah Compliance functions
• Product development
• Internal review
• External Shariah audit
• Corrective mechanisms

So, you can think of Shariah compliance as the outcome and Shariah governance as the system that supports it.

What Changed in the 2024 Framework?

The 2024 revision was introduced to further strengthen the existing Shariah Governance Framework and align it with international best practices and market developments, while taking stakeholder feedback into account.

SBP has been developing Shariah compliance regulations for Islamic Banking Institutions for many years. Earlier comprehensive Shariah Governance Frameworks were introduced in 2015 and 2018 before the latest revision.

The latest framework therefore represents an evolution of Pakistan’s existing Shariah governance structure rather than an entirely new concept.

What Does the Framework Mean for Customers?

For a customer, the most important takeaway is that Shariah compliance is supported by a structured governance system.

When you use an Islamic bank, you are not simply relying on a product being labelled “Islamic.”

There are governance mechanisms intended to oversee:

• How products are structured
• How contracts are approved
• How processes are implemented
• How compliance is reviewed
• How Shariah-related issues are addressed

This framework helps strengthen confidence in Shariah-compliant banking in Pakistan.

What Does This Mean for Islamic Digital Banks?

The principles of Shariah governance are relevant to digital banking too.

A digital bank may deliver its services through an app rather than branches, but its financial products, contracts, transactions and processes still need to operate within the applicable regulatory and Shariah framework.

For an Islamic digital bank, this means technology does not replace Shariah governance. Instead, digital technology becomes another channel through which Shariah-compliant banking services are delivered.

This is particularly relevant as Islamic digital banking in Pakistan continues to develop.

How Raqami Islamic Digital Fits Into This Framework

As Pakistan’s first fully digital Shariah-compliant retail bank, Raqami Islamic Digital Bank places Shariah governance at the centre of its digital banking model.

Raqami’s Shariah governance structure is guided by an independent Shariah Board, which provides oversight on the bank’s products, services and operations and supports their alignment with applicable Shariah principles and the State Bank of Pakistan’s Shariah Governance Framework.

Raqami’s Shariah Board

Raqami’s Shariah Board comprises experienced scholars in Islamic jurisprudence and Islamic finance:

• Sheikh Dr. Mufti Muhammad Imran Ashraf Usmani — Chairperson, Shariah Board
• Mufti Muhammad Ashja Khan — Resident Shariah Board Member
• Mufti Hassaan Kaleem — Shariah Board Member
• Mufti Muhammad Muaz Ashraf — Shariah Board Member
• Mufti Azfer Iqbal — Shariah Board Member

The Shariah Board provides Shariah oversight across the bank’s products and processes, helping ensure that Shariah considerations are incorporated into the bank’s operations rather than being treated as a one-time product review.

Raqami’s Shariah governance structure is further supported by a dedicated Shariah Compliance Department, headed by Nasir Razak Mahar, Head of Shariah Compliance, which supports the implementation and monitoring of the bank’s Shariah compliance framework.

This approach reflects the broader principle of Shariah governance: compliance is supported through multiple layers of oversight, including Shariah guidance, implementation, monitoring and independent review.

For customers, this means that Raqami’s status as an Islamic digital bank is supported by a formal Shariah governance structure rather than simply by the way its products are described.

To explore Raqami’s Shariah governance structure, including the profiles of its Shariah Board members and information about Shariah compliance, visit the Raqami’s Shariah Governance page.

A Simple Way to Understand the Framework

The SBP Shariah Governance Framework can be understood as a system of checks and responsibilities:

Board oversight
↓
Management implementation
↓
Shariah Board guidance and approval
↓
Shariah Compliance monitoring
↓
Internal Shariah Audit
↓
External review

Each layer has a different role, but together they support the overall Shariah compliance environment of an Islamic Banking Institution.

Frequently Asked Questions