An overview of SECP’s Shariah governance regulations


Syed Imad-ud-Din Asad

The Securities and Exchange Commission of Pakistan Act, 1997, provides that SECP, among other things, is responsible ‘for regulating and facilitating the growth of Shariah compliant financial products in the financial services market except the financial products regulated by the State Bank of Pakistan.’

The Companies Act, 2017, defines a Shariah compliant company as ‘a company which is conducting its business according to the principles of Shariah.’ According to the Act, a company cannot be considered Shariah compliant unless SECP has certified it so. Similarly, a security cannot be considered Shariah compliant unless SECP has certified it so. The Act prohibits companies from appointing or engaging any person, for Shariah compliance, Shariah advisory, or Shariah audit, unless that person fulfills the specified criteria.

Penalty has been prescribed for the contravention of these provisions. Banking and other companies, which are required to observe the Shariah governance framework prescribed by SBP, are beyond the scope of these provisions.

The Act has empowered SECP to make regulations to carry out the purposes of these provisions. Exercising this power, SECP has issued the Shariah Governance Regulations, 2018. The Regulations, which are in addition to other applicable laws, are applicable to Shariah compliant companies and Shariah compliant securities.

According to the Regulations, a company has to obtain a Shariah compliance certificate from SECP in order to become a Shariah compliant company. A company desirous of obtaining the certificate applies to SECP in the specified manner. If SECP is satisfied that the applicant fulfills the minimum criteria, it grants the certificate. The certificate remains valid for a period of three years unless it is suspended or cancelled earlier by SECP or unless the company voluntarily surrenders it earlier.

A company that intends to issue a Shariah compliant security must apply to SECP for the permission to issue the same. SECP grants the certificate, subject to such terms and conditions as it deems fit to impose, if it is satisfied that the company has fulfilled the Shariah requirements.
The minimum criteria for Shariah screening of unlisted companies and listed companies has been separately prescribed. In case of an unlisted company: (1) the business must not violate any principle of the Sharia; (2) the interest bearing debt to assets ratio must be less than 30%; (3) the ratio of Shariah non-compliant investments to total assets must be less than 30%; (4) the ratio of Shariah non-compliant income to total revenue must be less than 5%; and (5) the ratio of illiquid assets to total assets must be at least 25%. In case of a listed company, in addition to fulfilling the criteria similar to the one that has been prescribed for unlisted companies, it must ensure that the market price per share should at least be equal to or greater than the net liquid assets per share.


The Regulations have made it mandatory for the Pakistan Stock Exchange, which was following a different Shariah screening criteria, to conduct the Shariah screening for listed companies in accordance with its provisions. Also, PSX must ensure, by 30 June 2019, that all listed companies comply with the Regulations.

According to the Regulations, a Shariah compliant company must appoint a Shariah advisor. Reporting to the board of directors, the Shariah advisor is responsible for: (1) introducing mechanisms for strengthening Shariah compliance; (2) ensuring that all systems, procedures, policies, transactions, investments, etc., are in line with the Shariah; (3) ensuring the non-existence of Riba, Qimar, Gharar, and other vices prohibited by the Shariah; (4) reviewing the details of financial instruments and services before their submission, for final approval, to SECP; (5) advising on any Shariah related matter referred by the chief executive or the board of directors; (6) reviewing Shariah compliant securities; and (7) preparing the annual ‘Shariah Review Report.’

In case of any confusion regarding the interpretation of Shariah, the issue must be referred to the company’s Shariah advisor. In case the company’s management disagrees with the opinion of the Shariah advisor, the issue must be referred to SECP’s Shariah Advisory Board.

The Regulations provide that every Shariah compliant company and every company issuing a Shariah compliant security must undergo external Shariah audit for each fiscal year. In addition, each such company must equip and strengthen its internal audit department in order to conduct its internal Shariah audit. Also, each such company must designate or appoint a Shariah compliance officer to work under the overall guidance and supervision of the compliance department or, if it exists, a Shariah compliance department. Coordinating with the Shariah advisor and the management, the Shariah compliance officer must periodically submit a Shariah compliance report to the management.

The Regulations make it mandatory for a Shariah compliance company or a company issuing a Shariah compliant security to prepare and maintain its accounts in accordance with all the applicable Shariah and other standards notified by SECP. Penalty has been prescribed for companies and persons who contravene or fail to comply with the Regulations.

The introduction of provisions regarding Shariah compliant companies and Shariah compliant securities in the SECP Act and the Companies Act, and the issuance of the Shariah Governance Regulations are some of the key measures that have been taken for the development of Islamic corporate sector, Islamic non-banking financial sector, and Islamic capital markets in Pakistan. SECP, which is empowered to regulate these sectors, has demonstrated its capability by issuing a comprehensive Shariah governance framework in the form of the Regulations.

Mr. Asad has an LL.M. from Harvard Law School and he is a counsel at Azam & Rai. His areas of practice include contracts, companies, LLPs, firms, joint ventures, public-private partnerships, public procurement, employment, real estate, construction, electricity, taxation, trademarks, copyrights, e-commerce, arbitration, negotiation, international trade, Shariah governance and compliance, and Islamic finance. He may be contacted at