Adoption of AAOIFI Shariah Standard No. 30 on Monetization (Tawarruq) and Guidelines on Application of Hajah

IFPD Circular No. 03 — October 16, 2026

The Presidents / Chief Executives
All Islamic Banks, Islamic Banking Subsidiary and All Conventional Banks having Islamic Banking Branches

Dear Sir/Madam,
Adoption of ‘Accounting and Auditing Organization for Islamic Financial Institutions’ (AAOIFI) Shariah Standard

With a view to further strengthen Shariah compliance framework and harmonize the Shariah practices in Islamic banking industry, the AAOIFI Shariah Standard No. 30 - Monetization (Tawarruq), has been adopted with immediate effect subject to clarifications/amendments as given in the attached Appendix – A.

2.SBP has also issued “Guidelines on Application of Ḥajah (Need) in Tawarruq-based Transactions” attached as Annexure – I. The adoption of this Standard along with guidelines is in addition to applicable regulations, instructions and directives issued by SBP from time to time.

3.Failure to comply with these instructions may invoke penal action under the relevant provisions of the Banking Companies Ordinance 1962.

Please acknowledge receipt.

Enclosed:

• Appendix – A
• Annexure – I

Yours sincerely,

Dr. Zahid Ur Rehman Khokher
Director

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Appendix-A
Adoption of AAOIFI Shariah Standards No. 30 – Monetization (Tawarruq) In order to standardize and harmonize Shariah practices in Islamic Banking Institutions (IBIs), AAOIFI Shariah Standard No. 30 – Monetization (Tawarruq), has been adopted. The Shariah Standard is applicable with the following clarifications/amendments as mentioned against each clause(s) of the Standard:

1. Clause 1: The following is added as a footnote to the clause:
   This clause may be read as follows:
   “Scope of the Standard
   This Standard covers the different applications of monetization, whether the monetization beneficiary is the customer or the institution.” Further, the following footnote is added:
   “Monetization” means “Tawarruq”
2. Clause 2: The following is added as a footnote to the clause:
   The heading may be read as “Definition of Monetization and Its Distinction from Bay’ Al-’Inah Monetization refers to the process of purchasing a commodity for a deferred price determined through Musawamah or Murabahah, and selling it to a third party for a spot price so as to obtain cash. Whereas ’Inah refers to the process of purchasing the commodity for a deferred price, and selling it for a lower spot price to the same party from whom the commodity was purchased.”
3. Clause 3/1: The following is added as a footnote to the clause:
   This clause may be read as follows:
   ”The Monetization beneficiary may be a customer who purchases the commodity (subject matter of tawarruq) from the Institution and sells it to a third party to obtain liquidity. It may also be the Institution itself when it purchases the commodity (subject matter of tawarruq) from the customer or another Institution and sells it to a third party to obtain liquidity. The controls for both cases are shown in items (4) and (5) below.”
4. Clause 3/2: The following is added as a footnote to the clause:
   This clause may be read as follows:
   “The institution should not perform Monetization for the benefit of conventional banks when it is known that such banks are going to use the liquidity for interest-based lending instead of Shariah compliant operations.” Further, the following footnote to this clause is added:
   “An IFI shall not enter into a Commodity Murabaha Transaction (CMT) with the conventional bank to provide liquidity to the conventional bank unless it is established that the proceeds of the CMT shall be used for Shariah compliant transaction / business.”
5. Clause 4: The following is added as footnote to the clause:
   The heading may be read as “Parameters for the validity of the Monetization Transaction”
6. Clause 4/1: The following is added as footnote to the clause:
   This clause may be read as follows:

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“The requirements of the contract for purchasing the commodity on deferred payment bases should be fulfilled, for both Musawamah and Murabahah transactions, with due consideration to Shariah Standard No. (8) on Murabahah. There shall also be a real commodity that the seller owns before selling it. If the process is to involve a binding promise, it shall be from only one party. As regards the commodity sold, it shall not be gold or silver or any type of currency.”
7. Clause 4/2: The following is added as footnote to the clause:
This clause may be read as follows:
“The subject matter of the transaction shall be well identified in a manner that will distinguish it from the other assets of the seller. This may be done by separating the commodity from the other assets of the seller, or recording the numbers of its identifying documents such as storing certificates. [see Shariah Standard No. (20) on Sale of Commodities in Organized Markets, item 4/2/2].”
8. Clause 4/3: The following is added as a footnote to the clause:
This clause may be read as follows:
“If the commodity is not present at the time of signing the contract, the client shall be given a full description or a sample that indicates the quantity of the commodity and the place of its storage, so that his act of purchasing the commodity becomes real rather than fictitious. In this sense, using local commodities for Monetization is more preferable.”
9. Clause 4/4: The following is added as a footnote to the clause:
This clause may be read as follows:
“The commodity shall be possessed either physically by the buyer or constructively in such a manner that enables him to obtain the physical possession thereof without any further condition or procedure for its possession.”
10. Clause 4/5: The following is added as a footnote to the clause:
This clause may be read as follows:
“The commodity (subject matter of the Monetization) must be sold to a party other than the one from whom it was purchased on deferred payment basis (third party), so as to avoid ’Inah which is strictly prohibited. To achieve this, the commodity shall not return back to the seller by virtue of any prior agreement or collusion between the two parties, or according to the custom.”
11. Clause 4/6: The following is added as a footnote to the clause:
This clause may be read as follows:
“The contract for purchasing the commodity on deferred payment basis, and the contract for selling it for a spot price shall not be linked together in such a way that the client loses his right to possess the commodity, whether, such linkage is achieved through stipulation in the documents, acceptance as a custom, or incorporation in the procedures.”
12. Clause 4/7: The following is added as a footnote to the clause:
This clause may be read as follows:
“The client shall not delegate the Institution or its agent to sell, on his behalf, a commodity that he purchased from the same Institution and, similarly, the Institution shall not accept such delegation. If, however, the regulations do not permit the client to sell the commodity except through the same Institution, he may delegate the Institution to do so after he, actually or constructively, possesses the commodity.”

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13. Clause 4/8: The following is added as a footnote to the clause:
This clause may be read as follows:
“The Institution should not arrange an agency of a third party to sell, on behalf of the client, the commodity that the client purchased from the Institution.”
14. Clause 4/9: The following is added as a footnote to the clause:
This clause may be read as follows:
“The client shall ensure to sell the commodity himself or through an agent (arranged by him) other than the Institution, and shall comply with the other clauses (of this standard).”
15. Clause 4/10: The following is added as a footnote to the clause:
This clause may be read as follows:
“The Institution shall provide the client with the necessary information that he or his appointed agent may need for selling the commodity.”
16. Clause 5: The following is added as a footnote to the clause:
The heading may be read as “Specific parameters for Monetization When the Institution Is the Beneficiary”
17. Clause 5/1: The following is added as a footnote to the clause:
This clause may be read as follows:
“Monetization is not a mode of investment or financing. It is permitted to cater to a need situation subject to its terms and conditions. Therefore, the Institutions shall not use Monetization as a means of mobilizing liquidity for their operations, instead of making efforts for fund mobilization through other modes such as Mudarabah, investment agency, Sukuk, investments funds, and the like. The Institution shall resort to monetization only when it faces the danger of a liquidity shortage that could disrupt its operations and cause losses for its clients.”
18. Clause 5/2: The following is added as a footnote to the clause:
This clause may be read as follows:
“The institutions shall avoid agency in selling the Monetization commodity, even if agency is to be arranged with a third party. In other words, Institutions shall use their own channels for selling the subject matter of monetization, however using brokers for this purpose is permissible.” *

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Guidelines on Application of Ḥajah (Need) in Tawarruq￾based Transactions Islamic Finance Policy Department State Bank of Pakistan

Contents

1. Introduction ......................................................................................................................... 1
   1.1 Definition .................................................................................................................... 1
   1.2 Objectives.................................................................................................................... 1
   1.3 Scope........................................................................................................................... 1
2. Transaction-Level Requirements — Tawarruq-based Transactions......................................... 1
   2.1 General Permissibility Conditions: ................................................................................ 1
   2.2 Eligibility Assessment Requirement.............................................................................. 2
   2.3 Proper Utilization of Funds........................................................................................... 2
   2.4 IFI acting as Agent:....................................................................................................... 2
   2.5 Exposure Limits:........................................................................................................... 2
3. Governance:......................................................................................................................... 3
4. Other Conditions.................................................................................................................. 3

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1. Introduction
   In pursuance of the State Bank of Pakistan’s mandate to strengthen Shariah governance, ensure uniformity within the Islamic banking sector, and maintain conformity with internationally recognized standards and best practices, these Guidelines shall apply in conjunction with, and in addition to, the AAOIFI Shariah Standard No. 30 – Monetization (Tawarruq) and other relevant Shariah standards, as adopted by the SBP from time to time. These Guidelines stipulate regulatory and operational requirements and outline necessary parameters for the application of the principles of Ḥajah (Need) governing the Tawarruq (Monetization) based transactions, including Commodity Murabaha (hereinafter to be collectively called as “Tawarruq”) by Islamic Financial Institutions (IFIs).
   1.1 Definition
   Ḥajah (Need): It is a pressing requirement whereby its non-fulfillment will result in distress, hardship, and difficulty; however, that hardship does not lead to the loss of life or property.
   1.2 Objectives
   a) To prescribe regulatory instructions governing the Shariah principles of Ḥajah involving Tawarruq-based transactions by IFIs. b) To establish structured parameters and decision-making criteria for invoking Hajah in Tawarruq-based transactions. c) To strengthen governance, disclosure, monitoring, and supervisory review relating to Tawarruq-based transactions.
   1.3 Scope
   These guidelines shall:
   a) Apply to all IFIs, covering full-fledged Islamic banks, Islamic windows of conventional banks, Microfinance Banks (MFBs), Development Finance Institutions (DFIs) and Digital Banks offering Islamic finance products (hereinafter to be collectively referred as IFIs). b) Extend to product structuring, documentation and Shariah compliance requirements with respect to Tawarruq-based transactions. c) Apply at both product and transaction levels, and cover structuring, approval, Shariah review, monitoring and reporting. d) Include hardships faced by customers as well as IFIs. e) Encompass product approval, execution, monitoring, and post-transaction review wherever Ḥajah is invoked.
2. Transaction-Level Requirements — Tawarruq-based Transactions
   2.1 General Permissibility Conditions:
   The IFIs may allow Tawarruq-based transactionssubject to observing the following conditions:
   a) Application of Hajah shall not contradict Maqāṣid al-Shariah or create equal or greater harm. b) Application of Hajah shall be exception-based and shall not be treated as general and permanent solution. c) It should not be used to meet profitability targets, pricing preference, business convenience, or to justify concessions due to weak governance structure of IFIs.

2 | P a g e d) Tawarruq-based transactions shall be allowed only in cases of genuine documented need, where no other practicable alternative Shariah compliant product is available. e) The IFIs shall disclose to customers all available Shariah-compliant alternatives along with cost implications and refrain from marketing Tawarruq as the easiest or default financing solution. f) All necessary conditions and requirements of a valid sale transaction shall be fulfilled, which include that the commodity shall be existing, owned, and possessed by the IFI before selling. g) The commodity sold by the IFI shall not be returned to the original seller or the IFI at any stage of the transaction. h) Tawarruq shall not be used as a stratagem to earn profit in exchange for extension in financing tenure or for rollover / evergreening of existing financing facilities. i) The IFIs shall not use Tawarruq structures to channel funds—whether directly or indirectly—into interest-bearing instruments or activities. This prohibition covers, inter alia, placing funds with conventional banks or transferring liquidity from Islamic Windows to their conventional Head Offices. j) The conversion of conventional loans and advances into Islamic financing on the basis of Tawarruq shall be permitted on a one-time basis, provided that the IFI’s Shariah Board (SB)/ Shariah Advisor (SA), as applicable, certifies that no viable Shariah￾compliant alternative exists for the specific conversion.
2.2 Eligibility Assessment Requirement
Invocation of Hajah shall be supported with written justification, supporting evidence and analysis of alternatives. The IFIs shall establish a documented eligibility assessment checklist to determine whether the case meets the threshold of Ḥajah prior to granting any concession and submission of its case to its SB/SA, where applicable.
2.3 Proper Utilization of Funds
The purpose of Tawarruq-based financing shall be specified in the financing application and related agreements. The IFI shall obtain evidence of actual utilization of the financing from the customer.
2.4 IFI acting as Agent:
a) The customer shall have the choice to take possession of the commodity, sell it by himself or appoint an independent agent (other than the IFI) to sell the commodity on behalf of the customer. b) The IFI may act as the customer’s selling agent in cases of necessity, provided SB/SA approval for the same is in place. c) However, IFI agency shall remain exception-based and shall not be structured through prior arrangement that may lead to Bai ‘Inah (Buy-back). d) The arrangements for using an agency (broker) shall be transparent and documented.
2.5 Exposure Limits:
a) Tawarruq based transactions shall, at all times, remain within 5% of the IFI’s gross financing including consumer financing and treasury transactions to calculate the overall exposure limit for Tawarruq transactions executed by the IFI.

3 | P a g e b) Furthermore, the consumer financing based on Tawarruq shall not exceed 10% of total consumer financing, except any credit card product issued under Tawarruq. c) A one-time conversion of the conventional loans and advances portfolio into Islamic financing, including commodity financing, shall be exempt from the above limits.
3. Governance:
a) The IFI shall develop a policy framework duly approved by the BoD on recommendation of SB/SA outlining the structure and rationale for permitting various categories of Tawarruq-based transactions. b) The BoD shall monitor the overall exposure of the IFI in Tawarruq-based transactions. A report shall be submitted by the Management on semi-annual basis to the BoD. c) The SB/SA of the IFI shall approve and oversee the mechanism to ensure that Tawarruq-based transactions are allowed based on criteria outlined in these Guidelines, after exhausting all other Shariah compliant financing and placement avenues. d) The IFI shall develop alternative Shariah-compliant products under the guidance of the SB/SA of the IFI, especially in consumer financing, to reduce the reliance on Tawarruq-based products. e) The controls shall be devised by the IFIs to ensure Shariah compliance of the Tawarruq-based financing products at each stage, to avoid any possibility of returning the asset/commodity to the original seller (directly or indirectly) to avoid Bai-Inah (Buy-back). f) The Shariah Compliance Department of the IFI shall develop a mechanism to monitor the Tawarruq-based transactions on regular basis. The mechanism shall be implemented after approval from the SB/SA of the IFI. g) The Shariah Compliance Department shall quarterly report the transactions to the SB/SA along with the rationale for continuous use of Tawarruq-based transactions. h) The Internal Shariah Audit Unit of the IFI shall conduct Shariah audit of the Tawarruq￾based transactions / interbank placements on quarterly basis and submit a report to SB/SA of the IFI. i) The SB/SA of the IFI shall consider these reports and prescribe appropriate corrective/ enforcement action(s) in case of non-compliance.
4. Other Conditions
a) The approved policy framework, together with the record of Tawarruq-based transactions shall be kept for record and made available for SBP onsite inspection. b) The instructions earlier issued vide Para E (b) (x) of Annexure-1 of IBD Circular No. 2 of 2008 and IBD Circular Letter No. 02 of 2013 regarding introduction of new products and services shall remain applicable on the Tawarruq-based product structures. These Guidelines shall become effective immediately upon the issuance of this circular. Any prior instructions or approvals concerning Tawarruq-based transactions, issued in the form of circulars or letters, stand revoked. *