The State Bank of Pakistan (SBP) has updated its regulations to facilitate the conversion of conventional banking branches into Islamic banking branches, aligning with the growing demand from banks looking to transition to Islamic finance. These changes reflect the central bank’s ongoing efforts to support the Federal Sharia Court’s ruling to eliminate interest-based banking in the country and streamline the process for conventional banks planning to convert their operations.
The revamped rules were introduced in response to requests from several banks that are preparing to transition their conventional banking services to Islamic banking in the coming years. These banks had sought more straightforward and efficient guidelines to navigate the complex conversion process. The SBP has responded with a comprehensive update to the criteria for converting conventional branches, which are aimed at accelerating the Islamic banking transformation while maintaining regulatory oversight.
Key Revisions to Conversion Rules
According to the updated regulations, all conventional banks that either operate Islamic banking windows or plan to initiate Islamic banking operations are eligible to apply for the conversion of their existing branches without needing to pay a licensing fee. This is a crucial step that lowers the barriers to entry for banks considering a transition to Islamic banking.
To begin the conversion process, banks are required to submit an Annual Branch Conversion Plan (ABCP), aligned with their overall strategy for converting to Islamic banking. This plan must be submitted to the Banking Policy & Regulations Department (BPRD) and a copy to the Islamic Finance Policy Department (IFPD) of the SBP by October 31st of each year, ahead of the planned conversion.
Banks must also notify the public and account holders of the impending conversion at least three and a half months before it takes place. This notification must be made via newspapers, the bank’s website, and physical notices in all branches, ensuring transparency and giving customers ample time to make decisions regarding their accounts.
Customer Consent and Account Handling
Customer consent is central to the conversion process. If account holders agree to the switch, their conventional accounts will be converted to Islamic banking accounts. For those who do not consent, banks must offer two options: transfer their accounts to another conventional branch or close the accounts entirely. This ensures that customers maintain control over their banking preferences and are not forced into the conversion process against their will.
Non-Muslim customers will not have their accounts converted unless they explicitly consent. Moreover, accounts under litigation, accounts of deceased persons, accounts involved in disputes, and dormant or inactive accounts are exempt from the conversion process. This careful consideration of various account statuses helps ensure that the transition to Islamic banking is smooth and compliant with legal and ethical standards.
Virtual Cost Centers for Unconvertible Assets
To further expedite the branch conversion process, banks are allowed to establish temporary virtual conventional cost centers. These centers will be used to manage unconvertible deposits and asset portfolios of branches that have been converted to Islamic banking. However, these cost centers will not be allowed to undertake any new business or increase existing business, ensuring that they are used solely for managing legacy conventional assets during the transition.
Internal Shariah Compliance and Oversight
The SBP has mandated that banks develop Standard Operating Procedures (SOPs) for the conversion process, covering both pre- and post-conversion operations. These SOPs should clearly define the roles and responsibilities of staff at both the branch and head office levels. The banks’ Shariah Compliance Departments (SCD) are required to conduct regular internal Shariah reviews to ensure adherence to Shariah principles throughout the conversion process.
Upon completing the conversion process and fulfilling all the necessary requirements, banks must apply for an Islamic banking license. This application must be accompanied by a certification from the Shariah Board confirming that the conversion was carried out in full conformity with Shariah principles. Once the Islamic banking license is granted, the banks are required to surrender the licenses of their former conventional branches.
Implications for Microfinance Banks
The updated rules are not limited to commercial banks. Microfinance banks seeking to transition to Islamic banking must also follow the same guidelines. This ensures that the country’s entire banking system is aligned with the broader push toward Islamic finance, as envisioned by the Federal Sharia Court’s decision.
Conclusion
The SBP’s revised rules for converting conventional banks to Islamic banking represent a significant step toward promoting Islamic finance in Pakistan. By simplifying the conversion process, the central bank is encouraging more institutions to embrace Islamic banking, which aligns with the government’s broader objective of eliminating interest-based banking. With clear guidelines, customer protections, and a focus on Shariah compliance, these new regulations are likely to accelerate the growth of Islamic banking in the country, contributing to a more robust and inclusive financial system.