in understanding the islamic financial transactions. another importance aspect is the person ’ s qualifications and experience in issuing fatwas relating to financial transactions. the fit and proper criterion determined by sbp allows for inclusion of all school of thoughts and also includes scholars that have experience and qualification of international level. these shariah scholars are chosen by the banks, approved by sbp and appointed by the banks to over see their islamic banking operations. therefore they serve as sbp ’ s eyes and ears at the operational level of islamic banking operations in the country. the second element is shariah compliance inspection. the inspection manual, which is very comprehensive, was compiled by ernst & young out of bahrain in collaboration with their affiliate in pakistan. the shariah compliance inspection is needed to ensure that specific terms of islamic contracts, fatwa on the transaction, as well as the sequence of execution of the agreement are accounting and auditing organization for islamic financial institutions, headquartered in bahrain. its shariah board consists of 14 shariah scholars across the world. table is attached as annexure conducted according to shariah principles. we are in the initial stages of rolling out islamic accounting based on aaoifi standards and the inspection is geared towards auditing the transactions according to these standards. next year in addition to the normal sbp inspection, all banks conducting islamic banking will also have to undergo the shariah compliance inspection. the third element of our shariah compliance supervision is the all important shariah board. we have instituted a shariah board 4 at sbp. one of the unique features of the shariah board is the composition of its membership ; because the board includes not only shariah scholars, but also a chartered accountant, lawyer, and central banker. we believe that shariah is the pivot around which islamic banking revolves but in addition there are other disciplines that are critical to the success of executing the shariah standards. as such we believe that all such critical disciplines must be represented within the shariah board so that the rulings emerging out of the shariah board are not only 100 % shariah compliant but these are also compatible with the legal and financial infrastructure available to the islamic banks. the board is responsible to give ruling on any conflicts arising out of the shariah compliance inspection. it is responsible to provide guidelines to sbp for shariah aspects of regulations. it helps in product development and provides support for approving any new products developed

of the banks have been lowered from 58 percent to 41 percent and 35 percent in the next two years and excess labor has been eased out through golden handshake schemes in the three major banks – npb, hbl and ubl. cost – income ratios have therefore fallen from 74 percent to less than 60 percent and administrative costs range between 2. 1 to 3. 2 percent. the stable earning stream from core banking business allows the banks to build up reserves for facing unforeseen contingencies and strengthens their balance sheets. fourth, the accesses to banking services have been broadened to a much wider customer base particularly the middle and lower middle income groups. no country can aspire for sustainable and equitable growth in absence of a strong and healthy middle class. in pakistan, the banking system was intermediating the savings of millions of depositors primarily to fund the fiscal deficit and the losses of the public sector, to meet the working capital of 200 top named companies and to engage in letters of credit for business and international trade. the number of active borrowers was limited to less than half a million at best. by allowing the banking system to offer new products and services such as agriculture credit, sme financing, mortgage loans, automobile leasing, personal loans etc. a new vista has opened up. commercial banks that were always hesitant to channel credit to agriculture sector are now the single most source of agriculture financing. this year almost 1 million households will receive about rs. 100 billion of loans for agriculture. similarly, the khushhali bank, ppaf and other microfinance institutions will reach out to half a million households providing them small unsecured loans ranging between rs. 5, 000 to rs. 25, 000. the beneficiaries of these loans are mainly the landless, the women and other poor classes who never had access to bank financing. salaried classes have also begun to leverage their incomes by receiving personal loans the installments of which are deducted from their monthly pay checks. at least another half a million families have availed of these loans. this broadening of access not only eases the credit constraint faced by a dynamic segment of the population and transfers purchasing power in their hands but also diversifies the risk for the banks and allows them to earn a decent return on their loan products. this enhanced purchasing power in the hands of a large number of families stimulates aggregate demand in the economy, helps in the expansion of production of manufactured goods