Daily Times

KARACHI: In order to facilitate such investors/financiers who are interested to extend financing through Islamic modes, Pakistan Stock Exchange has planned to launch Islamic Financing System (IFS).

In this regard, National Clearing Company of Pakistan Limited (NCPL) has issued a draft concept paper to introduce Islamic Financing for shares in securities market for the consultation of market participants.

IFS – a proposal to introduce Islamic financing for shares in securities market through

Murabaha is envisaged under the guidance and support of renowned Shariah Scholars namely Mufti Hassaan Kaleem from Dubai Islamic Bank, Mufti Irshad Ahmed Ijaz from Bank Islami Pakistan Limited, Mufti Najeeb Khan from Summit Bank and Mufti Bilal Qazi from Meezan Bank.

There are two regulated share purchase financing products i.e Margin Financing System (MFS) which is a counter-party risk based product where financier may extend financing against purchase of almost all the listed shares under an agreement with the financee and take counter-party risk and Margin Trading System (MTS), a financier may extend financing for purchase of only eligible securities (only highly liquid securities) to an unknown financee and take risk on the shares it financed. Operational model of both these products is based on conventional financing principles whereby financier charges interest on money.

In absence of any Shariah compliant mechanism for financing share purchases, investors interested to transact in securities market in a Shariah compliant manner, are being deprived and are unable to purchase shares on credit, NCCPL stated.

Therefore, NCCPL is introducing Shariah compliant mechanism for financing share purchases product which will be called IFS and will work parallel to MFS and MTS, if approved.

According to the proposed IFS, financing may be provided by a securities broker to its customer using its own funds or by an Islamic Financing Institution (IFI) to a securities broker and its customers. For extending financing, a broker may use its own funds or funds arranged from a financial institution.

“The financing will be based on Murabaha contract entered into by the contracting parties hence securities broker or IFI will be taking counter-party risk and will be responsible for credit risk assessment of the respective financee”, a concept paper added.

Financiers which may trade in IFS include all Broker Clearing Members of stock exchange, a banking company, a company,/corporation or institution, an investment company, a closed-end scheme registered with the Commission under the NBFC Rules and an open-ended scheme of any kind constituted under the NBFC Rules and any other person whose financial standing is approved by the SECP.

In proposed IFS, NCCPL will provide a system to facilitate IFS participants for recording and settlement of IFS transactions based on counterparty risk through its National Clearing & Settlement System (NCSS) in the capacity of an Authorized Intermediately.

For this purpose, appropriate amendments will be made in the Rules and the regulations of NCCPL. Reversal of IFS transactions will also be recorded on such IFS system. Facilitation without any obligation will be extended for risk management purposes i.e. management of securities held as collateral. Collection of marked-to-market losses, profit and corporate entitlements will be managed by the IFS Participants privately outside the system.

In IFS, financing may only be extended against ready market purchases. A securities broker may extend financing to its customers or an IFI being clearing member of NCCPL may extend financing to a securities broker against its proprietary or customer purchase position. Prior to entering into a transaction in IFS, a financier and financing have to enter into MMA and record the same on IFS system. Financing in IFS can be obtained by an investor by securities brokers to its customers, financing by IFI to a securities broker or financing by IFI to a customer of securities broker.