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Business Recorder
4 days ago
- Business
- Business Recorder
Interview with Dr Mufti Irshad Ahmad Aijaz, Chairman, Shariah Advisory Committee
'Pakistan has a legacy of leadership in Islamic finance' Dr. Mufti Irshad Ahmad Aijaz is the Chairman of the Shariah Advisory Committee at the Securities and Exchange Commission of Pakistan (SECP) and Chairperson of the Shariah Board at BankIslami. He previously served as Chairman of the State Bank of Pakistan's Shariah Advisory Committee for seven years. He is also a member of the Steering Committee guiding the implementation of the Federal Shariat Court's judgment on Riba and serves on the Governance and Ethics Board of AAOIFI, Bahrain. Renowned for his expertise in Islamic finance, Dr. Mufti Irshad advises regulatory bodies and financial institutions on Shariah-compliant policy and regulation. He also lectures regularly on Islamic economics and finance at leading institutions including the National Institute of Banking and Finance (SBP) and the Centre for Islamic Economics, Jamia Darul Uloom Karachi. He holds a PhD in Islamic Studies with a focus on Islamic Finance from the University of Karachi, an MBA from a leading private university, and advanced Islamic qualifications including Shahadat-ul-Alimiyyah and Takhassus fil-Iftaa. Following are the edited excerpts of a recent conversation BR Research had with him: BR Research: How do you interpret the constitutional amendment to Article 38(f) that mandates the complete elimination of Riba by January 2028? Dr. Mufti Irshad Ahmad Aijaz: The constitutional amendment to Article 38(f) reinforces Pakistan's long-standing commitment—rooted in the 1973 Constitution—to eliminate Riba (interest) from its economic and financial system. This amendment, together with the 2022 Federal Shariat Court ruling, provides a binding legal and constitutional framework for transitioning towards a fully Shariah-compliant system. The Court's ruling, which came three decades after the original petition, has finally brought clarity to a debate that persisted for years. It is a commendable move and has been broadly appreciated, signalling the state's alignment with both constitutional imperatives and Islamic jurisprudence. BRR: What are the immediate regulatory and institutional priorities for Pakistan to meet this constitutional deadline? IAA: The first and most urgent priority is conducting a thorough gap analysis to understand where the system currently stands versus where it needs to be. This includes assessing institutional readiness, legal frameworks, product offerings, and stakeholder alignment. Equally important is identifying 'champions' within key institutions—such as the State Bank, SECP, judiciary, and financial services sector—who can lead and drive this transformation. While certain institutions like the State Bank and SECP have begun this process internally, broader inter-ministerial and governmental engagement remains lacking. Without a fully integrated strategy supported by enabling laws and clear regulatory pathways, meaningful progress will be slow and fragmented. BRR: Do you believe the banking sector is aligned—technically and ideologically—with this transition? What is more needed? IAA: Ideologically, there is growing consensus within the banking sector in favour of this transition. The Shariat Court's decision and the global evolution of Islamic finance have significantly reduced opposition to the idea of eliminating interest. Most banks, including those previously skeptical, now accept the theoretical and moral basis for a Riba-free system. However, the technical and operational alignment still lags. Pakistan lacks the comprehensive legal infrastructure, standardization, and global partnerships necessary for seamless implementation. Many professionals in the sector are concerned about how to practically run operations without conventional tools. Thus, the focus must now shift to creating enabling environments—legal, institutional, and financial—that allow this consensus to materialize in practice. BRR: What role is the State Bank of Pakistan playing in operationalizing this shift to a Riba-free financial system? IAA: The State Bank of Pakistan (SBP) is playing a central and proactive role. After the 2022 ruling by the Federal Shariat Court, the Government of Pakistan established a Steering Committee chaired by the finance minister and convened by the Governor of SBP. This high-level committee formed six working groups, each focusing on a critical area such as legal reform, regulatory supervision, public awareness, implementation roadmaps, fast-track changes, and institutional conversion. These groups brought together stakeholders from across the banking sector, academia, legal profession, and Shariah boards. Over 150 meetings have already taken place, and more than 500 man-hours have been spent drafting technical recommendations. The SBP has also issued updated regulatory guidelines, governance frameworks, and operational rules to support Islamic banking institutions. This signals a serious institutional commitment to the transition. BRR: Canyou elaborate on the work of the SECP and the Shariah Advisory Committees in facilitating this transition across the capital markets and financial services? IAA: The Securities and Exchange Commission of Pakistan (SECP) is playing a parallel role in transforming the non-banking financial sector. It has constituted its own Shariah Advisory Committee and established dedicated departments to ensure Shariah compliance in capital markets and insurance. These bodies are working on developing products such as Islamic mutual funds, sukuk structures, and Takaful models that align with Islamic principles. However, their authority is still bound by current laws, and there is a recognized need for further legislative support. Both SECP and SBP have the expertise and intent, but to go beyond procedural compliance and achieve full-scale transformation, they require more robust legal empowerment and high-level government backing. BRR: Are there any specific models or international benchmarks—like Malaysia or Bahrain—that Pakistan can draw lessons from? IAA: While no major country has fully transitioned to a 100% Shariah-compliant financial system, several have made significant strides. Malaysia and Indonesia have developed world-leading Islamic banking ecosystems with strong regulatory backing, educational infrastructure, and liquidity management instruments. Gulf countries like the UAE and Saudi Arabia have integrated Islamic finance within conventional systems, offering dual windows and supporting innovation. Interestingly, even non-Muslim countries such as the UK, Singapore, Germany, and France have legislated space for Islamic finance based on demand and financial inclusivity. These countries demonstrate that Islamic finance is not only religiously viable but also economically competitive. For Pakistan, these models offer valuable lessons in terms of legislation, central bank tools, education, taxation, and dispute resolution mechanisms. BRR: What are the biggest structural and operational challenges in eliminating Riba from Pakistan's economy? IAA: There are several. Structurally, the absence of a unified legal framework and the lack of coordination between ministries, regulators, and the judiciary are major bottlenecks. Operationally, liquidity management remains a challenge, particularly in the absence of Shariah-compliant monetary policy tools. Taxation policies are not yet aligned with Islamic contracts, and the arbitration infrastructure is underdeveloped. Moreover, as Islamic banking grows—currently making up around 22–23% of the banking sector—so do legal risks and compliance challenges. Larger size leads to more litigation, which requires mature legal defences and regulatory protections. Without systemic reform, these gaps could undermine the momentum toward full Riba elimination. BRR: How do you see Pakistan positioning itself within the global Islamic finance ecosystem by 2028? Can it become a leader in Islamic finance innovation? IAA: Pakistan already has a legacy of leadership in Islamic finance. In the late 1970s and early 1980s, Pakistan was among the first to introduce Islamic banking frameworks and Modaraba-based non-banking financial institutions. The 1982 report by the Islamic Ideology Council is still considered a global reference document for the elimination of interest. Scholars from countries like Malaysia have acknowledged that their early models were inspired by studies conducted in Pakistan. However, Pakistan's inability to institutionalize these innovations and political instability have kept it from maintaining that leadership. If Pakistan can address its internal governance challenges and revive regional collaboration through platforms like the OIC—with support from countries like Türkiye and Malaysia—it can reclaim a leadership role in shaping the future of global Islamic finance. BRR: How do you see the issue of liquidity management evolving under a fully Islamic financial system? IAA: Liquidity management is indeed a cornerstone of a stable Islamic financial system. The challenge lies in ensuring access to Shariah-compliant instruments that provide the same flexibility and control as conventional tools. Globally, this issue has been addressed through instruments like sukuk, commodity Murabaha, and Islamic repos. In Pakistan, sukuk is available, but reforms are needed to make them more usable—particularly around asset-light structures. We need legal clarity, standardized documentation, and a supportive asset registry. The example of the Roshan Digital Account shows that with government backing, innovation can succeed. Going forward, Pakistan must institutionalize Islamic liquidity tools, establish strategic asset companies, and enact structural reforms to fill the gaps. Without this, monetary operations under a fully Islamic system will remain suboptimal.
Express Tribune
03-06-2025
- Business
- Express Tribune
Understanding Takaful from the Islamic perspective
Photo: Renowned Shariah scholars from the Islamic finance industry discuss the principles and benefits of Takaful, an Islamic insurance model based on the principles of mutual cooperation, solidarity and brotherhood. Listen to article Shariah perspectives on Takaful Renowned Shariah scholars from the Islamic finance industry discuss the principles and benefits of Takaful, an Islamic insurance model based on the principles of mutual cooperation, solidarity and brotherhood. Karachi (Faisal Arshad) In the second episode of the Tribune Podcast on Takaful, host Adeel Azhar engaged in a comprehensive discussion with Mufti Irshad Ahmad Aijaz, Chairman, Shariah Advisory Committee, State Bank of Pakistan, and Mufti Muhammad Ibrahim Essa, Shariah Advisor, EFU Hemayah Takaful. The conversation centered around Shariah perspectives on Islamic insurance, identifying the fundamental differences between conventional insurance and Takaful. Takaful Versus Conventional Insurance Mufti Irshad said that people are often skeptical about the appropriateness of Takaful from a Shariah perspective, arguing that any form of insurance negates the concept of Tawakkul. However, he maintains that Takaful operates on the principle of mutual protection, which is encouraged as a principle in Islam. In the case of Takaful, he says, a collective pool of funds is established by the participants to provide protection against losses to individuals against unforeseen events. In contrast to conventional insurance, Takaful does not involve selling risk; the fund remains intact even if there are no claims. Conventional insurance follows a commercial model where the insurer keeps any unclaimed funds as profit, whereas Takaful operates on a cooperative model where participants share in any surplus. This approach ensures that the system is free from betting, where the service provider claims entitlement to the fund even if no loss is incurred. Surplus distribution in Takaful The key difference between conventional insurance and Takaful is about the treatment of the fund in the event that the pool of funds exceeds the payment made on account of compensation, as explained by Mufti Ibrahim. In Takaful: The contribution made by each participant in a Takaful plan is divided into three parts: Investment – allocated for savings or investment purposes. Wakala Fee – a fixed fee paid to the Takaful operator for managing the funds. Tabarru (Donation) – a portion voluntarily donated to the Participant Takaful Fund (PTF), used to provide financial support to participants in need. At the end of the financial period, if there is any surplus remaining in the PTF (after claims and expenses), it is handled in two ways: A portion may be distributed among eligible participants as a surplus sharing, based on predefined criteria. The remaining surplus is retained in the fund to ensure future stability and sustainability of the Takaful pool. This approach is based on a Hadith of the Holy Prophet Muhammad PBUH, which presents the concept of mutual protection and distribution of surplus among participants. Almost Rs. 800 million of surplus has been distributed amongst EFU Hemayah Takaful participants over the past years, in accordance with Shariah principles. How Takaful operators make money Mufti Ibrahim addressed the question of how Takaful operators make money when they distribute the leftover pool of premiums among contributors. He cited Mufti Irshad's explanation that Takaful operators are considered as managers of the fund. To perform the arduous task of management, they are entitled to a management fee, known as the Wakala fee. This fee is similar to the salary drawn by employees of Awqaf and is approved by the Shariah advisor. The Takaful operator's role is to manage the pool, collect funds, make investments, and process claims, all while ensuring Shariah compliance. The Wakala fee is a key component of the Takaful system, as it allows the operator to cover its costs and management expenditures. However, the fee must be reasonable and approved by the Shariah advisor to ensure that it is in line with Shariah principles. Islamic reference for Takaful Host Adeel Azhar asked about the Islamic reference for Takaful, and Mufti Irshad explained that while there may not be a direct reference to modern-day Takaful in Islamic history, the concept of mutual protection and harmony among a group of people facing similar challenges is encouraged in Islam. He referenced a historical example praised by Prophet Muhammad (PBUH), where a tribe (Asharijin) collectively pooled dates to survive a famine, highlighting Islam's encouragement of mutual support. By working together and pooling resources, individuals can protect each other against risks and challenges. Investment approaches in Takaful Mufti Ibrahim also noted the differences in investment approaches between Takaful and conventional insurance. In Takaful, investments must be Shariah-compliant, including the collection and parking of funds. Complying with the Shariah guidelines EFU Hemayah Takaful ensures that participants' contribution is invested in Islamic banks and other Islamic investment avenues, ensuring that the system remains true to its Islamic roots. Growth of the Takaful industry Mufti Irshad discussed the growth of the Takaful industry, noting that while it is regulated by SECP, the State Bank of Pakistan is also working to increase financial penetration among the general public. Ulemas are playing a crucial role in promoting Shariah-compliant options and convincing people to avoid fraudulent investment schemes. He urged the need for financial literacy so that people may benefit from legitimate and Shariah-compliant financial services. Mufti Ibrahim added that, like Islamic banking, Takaful services are also growing. The companies are now opting for conversion to Shariah-compliant business models rather than maintaining parallel windows of both Islamic and conventional banking or insurance. He acknowledged that all stakeholders and regulators, as well as Ulema, are playing a role in this regard, with Ulemas providing inputs in product development, investment rules, and Shariah audit. With the growing demand for Islamic financial services, Takaful is poised to play a significant role in the financial landscape of Pakistan, helping individuals and businesses protect themselves against risks while adhering to Islamic principles. With scholars, regulators, and companies working together, the industry is well-positioned to redefine financial protection in Pakistan.
