The State Bank of Pakistan (SBP) has adopted Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) Shariah Standard No. 30 on Monetization, commonly known as Tawarruq, introducing new requirements intended to improve consistency and strengthen Shariah compliance across Pakistan’s Islamic banking sector. Announced through IFPD Circular No. 03 of 2026 dated October 16, the measure takes immediate effect, subject to the clarifications and amendments specified by the central bank. Alongside the standard, the SBP has issued guidelines on applying the principle of Ḥajah, or need, in Tawarruq-based transactions. These instructions supplement existing regulations and directives governing Islamic financial institutions. Tawarruq is a financing arrangement involving the purchase of a commodity on deferred-payment terms and its subsequent sale to a third party for immediate cash proceeds. The structure is used in certain Islamic finance products, but its application requires appropriate transaction arrangements and Shariah oversight. By adopting the AAOIFI standard and issuing additional guidance, the SBP aims to harmonise practices among institutions and establish clearer parameters for using this financing method. The circular applies to Islamic banks, Islamic banking subsidiaries and conventional banks operating Islamic banking branches, with the accompanying guidelines extending to other Islamic financial institutions within their defined scope. The central bank has warned that failure to comply with the instructions may result in penalties under the Banking Companies Ordinance, 1962.
A central feature of the new framework is the treatment of Ḥajah, which refers to a genuine need whose non-fulfilment may cause hardship or difficulty, although not necessarily a threat to life or property. The SBP’s guidelines make clear that invoking this principle in Tawarruq transactions must be based on a specific and documented need rather than used as a routine commercial convenience. Financial institutions are expected to assess whether a genuine requirement exists and whether another practicable Shariah-compliant product can meet it. The guidelines also require institutions to document their justification and consider available alternatives. This approach is intended to prevent Tawarruq from becoming a default financing option when a more suitable Shariah-compliant structure is available. The rules state that the application of need must not conflict with the objectives of Shariah or create equal or greater harm. Institutions are also expected to disclose available Shariah-compliant alternatives to customers, including relevant cost implications, rather than presenting Tawarruq as the easiest or standard choice. These requirements place greater emphasis on the reasoning behind a transaction, the suitability of the selected financing structure and the quality of supporting documentation. For banks, this means product design and transaction processing will need to account for the new requirements wherever Tawarruq is used. For customers, clearer disclosure of alternatives may help them better understand why a particular Islamic financing structure is being offered and what other options may be available.
The framework also sets conditions relating to the underlying commodity and the use of financing proceeds. The commodity must exist and be owned and possessed by the Islamic financial institution before it is sold to the customer. The rules also prohibit the commodity from being returned to the original seller or to the financial institution at any stage of the transaction. These requirements are intended to preserve the integrity of the underlying sale rather than allow the transaction to function merely as a cash exchange structured around nominal commodity trades. The guidelines further state that Tawarruq should not be used to extend financing tenure in exchange for additional profit, roll over existing facilities through prohibited arrangements or direct funds into interest-bearing instruments or activities. They also restrict its use as a permanent liquidity-management solution and make clear that the principle of need cannot be invoked to compensate for weak governance or to meet profitability targets. Institutions must assess transactions against the applicable conditions and maintain appropriate Shariah oversight. The guidelines also address the conversion of conventional loans and advances into Islamic financing through Tawarruq, allowing such conversion on a one-time basis where the institution’s Shariah board or adviser certifies that no viable Shariah-compliant alternative exists for the specific case. These provisions are significant because they address both the structure of individual transactions and the wider business practices through which financing products are designed and administered.
The new requirements are expected to place additional emphasis on governance, documentation, disclosure and monitoring across Islamic financial institutions. Banks and other covered institutions will need to review their Tawarruq-based products and operational procedures to ensure they align with the adopted AAOIFI standard and the SBP’s clarifications. The guidelines also provide for institutional oversight, including written justification and supporting evidence when the principle of need is invoked, as well as review and reporting responsibilities. Institutions must consider compliance at both product and transaction levels, covering structuring, approval, execution, monitoring and post-transaction review where applicable. The SBP’s approach reflects the wider objective of maintaining confidence in Islamic finance by ensuring that products marketed as Shariah-compliant follow clearly defined requirements in practice. Implementation will require coordination among product teams, legal and compliance departments, risk managers and Shariah boards or advisers. Institutions may also need to update internal controls, staff guidance and customer disclosures to reflect the new conditions. The circular does not announce a new financing product or a change to a specific customer rate; instead, it establishes requirements governing how Tawarruq-based transactions are structured and justified. As the framework takes effect, compliance reviews and supervisory monitoring will help determine how consistently the new standards are applied across the sector. The move gives Islamic financial institutions a more defined regulatory framework for Tawarruq while reinforcing the SBP’s authority to take action where institutions fail to follow the prescribed instructions.
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