SBP Guidelines Explain How Banks Can Convert Operations to Islamic Mode

State Bank of Pakistan (SBP) has issued detailed guidelines for conversion of a conventional bank into an Islamic bank in order to promote Islamic banking and facilitate banks planning on making the switch.

There have been a few conventional banks which have been converted to Islamic banks through mergers and acquisitions by Islamic Banks such as Meezan Bank which acquired HSBC Bank and BankIslami which bought KASB Bank. At present, Faysal Bank is in the phase of conversion of its operations from conventional to Islamic and there are many more banks likely to follow the suit in the future.

Banks are willing to convert their operations to Islamic ones due to the faith factor of the society of Pakistan and the willingness of people to accept banking services backed by Sharia injunctions and well-known scholars. Besides the increasing demand of the public for Islamic banking, the business feasibility of Islamic banks is comparatively more profitable than conventional banks especially when it comes to low regime of interest rates.

Guidelines for Banks to Convert Operations to Islamic

According to the guidelines, all banks which have a Islamic banking division or branches can apply for conversion into full-fledged Islamic bank. The bank which has not yet been granted approval by SBP for Islamic banking division shall first obtain the approval for opening Islamic banking division before applying for conversion into full-fledged Islamic bank.

The bank shall start conversion process in line with Shariah rules and principles within six months from the grant of in-principle approval, failure to do so will lead to revocation of the in-principle approval. The bank shall complete the conversion process within a maximum period of three years from the date of in-principle approval.

The bank shall be prohibited from expanding its conventional banking network from the date of grant of in-principle approval. All new branches will required to be opened as Islamic banking branches in terms of already approved and/or new Annual Branch Expansion Plan (ABEP) as per Branch Licensing Policy.

The bank shall complete the conversion process within a maximum period of three years from the date of in-principle approval.

The banks shall keep separate book of accounts in respect of Islamic banking operations and ensure proper maintenance of records for all transactions for segregation of funds until the time of complete conversion. In this regard, bank shall also ensure that separate chart of accounts are being maintained for Islamic banking operations.

The bank shall arrange certification / training programs in coordination with NIBAF-SBP and/or any renowned training institutions and submit a comprehensive Islamic banking training plan (specifying contents, trainers, schedule etc.) for the bank’s staff designated at the Head Office and at the branch level.

Based on satisfactory review, the bank shall be issued a new license of an Islamic Bank while the conventional banking license shall be surrendered by the bank. After getting license from SBP as Islamic Bank, the bank shall only engage in Shariah-compliant banking operations and the conversion from Islamic to conventional side will not be permissible, the SBP guideline stated.