In a significant move aimed at accelerating the transition of conventional banking to Islamic banking, the State Bank of Pakistan (SBP) has revised the criteria for converting conventional banking branches into Islamic banking branches. This step aligns with the Federal Sharia Court’s directive to eliminate interest-based banking in the country and is part of the broader governmental plan to promote Islamic finance.
The newly revamped regulations come as several banks in Pakistan are preparing to shift their operations from conventional to Islamic banking in the coming years. These banks had requested the banking regulator to streamline the conversion process, and the SBP’s updated framework seeks to address the needs and concerns of the industry.
Key Highlights of the Revised Conversion Rules
- Eligibility and Application Process
All conventional banks that already have Islamic banking operations or plan to start them are eligible to apply for branch conversion. The conversion process has been simplified, with no licensing fee required for converting branches. Banks must submit their Annual Branch Conversion Plan (ABCP) to the Banking Policy & Regulations Department (BPRD) and the Islamic Finance Policy Department (IFPD) by October 31 of each year. - Public Notification and Customer Consent
Banks are required to notify the public and their account holders at least three and a half months before converting a branch to Islamic banking. This notification should be made through newspapers, the bank’s website, and in-branch notices. Account holders who consent will have their accounts transferred to Islamic banking, while those who dissent can either move their accounts to another conventional branch or close them.
Importantly, no accounts belonging to non-Muslim customers will be converted without explicit consent, and certain accounts, such as those under litigation, dormant accounts, and accounts of deceased persons, will not be converted.
- Management of Unconvertible Assets
To facilitate the transition, banks may temporarily establish virtual conventional cost centers to manage unconvertible deposits and asset portfolios. However, these centers are strictly limited to handling existing business; no new business or rollovers will be allowed. - Shariah Compliance and Internal Processes
Banks are required to develop detailed Standard Operating Procedures (SOPs) for the conversion process. This includes defining roles and responsibilities for both field and head office staff. The Shariah Compliance Department (SCD) will conduct periodic reviews during the conversion to ensure adherence to Islamic principles. A report will be submitted to the bank’s Shariah Board for further oversight. - Licensing and Final Approval
After fulfilling all the requirements outlined in the conversion plan, including the approval of the bank’s Shariah Board, banks can apply for licenses for their new Islamic banking branches. The conventional branch licenses will be surrendered following the conversion. This process applies equally to microfinance banks seeking to convert to Islamic banking.
The SBP’s revised rules are designed to streamline the conversion process, encouraging banks to shift towards Islamic banking more efficiently while ensuring that Shariah compliance is maintained throughout.
This regulatory update is a crucial step forward in the country’s ongoing efforts to transition towards a fully Islamic financial system.
