Musharika, Modaraba and Wakalah: three modes of Islamic financing given exemption from Kibor

RIZWAN BHATTI

KARACHI: The State Bank of Pakistan (SBP) Thursday announced exemption from KIBOR as benchmark rate for Participatory (Musharika & Modaraba) and Wakalah-based products. There is no KIBOR condition for financing to SMEs for any product while corporate sector's financing was linked with KIBOR. Now, Islamic Banking Institutions can provide financing under Musharika, Modaraba and Wakalah without using KIBOR as benchmark for corporate sector.

In 2004, all banks were advised to use KIBOR as benchmark rate. However, certain exemptions had been given from this requirement. It has now been decided that financing provided on the basis of participatory (Musharika & Modaraba) and Wakalah (Agency) modes by Islamic Banking Institutions (IBIs) will be exempted from the requirement of KIBOR as benchmark rate, said SBP circular issued on Thursday.

However, IBIs desirous of availing this exemption will be required to ensure some conditions, it added. IBIs will take adequate measures as per risk management guidelines for Islamic Banking Institutions, particularly to mitigate equity investment risk in participatory mode based products. In addition, for Modaraba and Musharika based products, IBIs will ensure compliance with minimum Shariah requirements and AAOIFI Shariah Standard No 12 and No 13 as adopted by the SBP. For Wakalah-based products, IBIs will be required to use Arabic version of AAOIFI Shariah Standard No 23 on Agency as guideline in consultation with their Shariah Board.