State Bank of Pakistan (SBP) has been actively engaged in development and promotion of Islamic banking in the country through various policy and regulatory initiatives. In continuation of earlier efforts to augment the industry’s progress, State Bank of Pakistan has developed detailed guidelines for conversion of existing conventional banks into full-fledged Islamic banks.
The eligibility criteria for conversion of conventional bank into Islamic bank shall be as follows:
- All banks having Islamic banking division/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 have minimum CAMELS rating ‘Fair’ in the last On-site inspection and/or minimum CAMELS rating ‘Fair’ in the last Off-site report, with no major adverse findings against the bank.
- The applicant bank shall be compliant with Minimum Capital Requirements (MCR), Capital Adequacy Ratio (CAR) and all other requirements as applicable on full-fledged Islamic banks, from time to time.
- The bank shall develop a comprehensive conversion strategy with clear milestones and defined timelines for conversion duly approved by bank’s Board of Directors (BOD).
- 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. In case of delay, the bank shall justify extension request with reasons and evidence, duly approved by its Shariah Board and Board of Directors.
- The bank shall notify the plan of conversion to the public at least four weeks before the initiation of conversion process.
- The bank shall set up all necessary procedures, create the required tools, and explore alternatives to Shariah non-permissible products & services, operations & arrangements.
- The bank shall also train and develop the personnel required for proper implementation of the procedures of conversion.
- The bank shall specify a cut-off date of conversion beyond which the bank will be prohibited from conducting any Shariah non-compliant banking activities, both on asset and liability sides, except in the framework of settlement of rights and obligations of banking activities undertaken in the conventional manner.
- The bank shall not delay in clearing out non-permissible transactions unless such delay becomes a necessity and is approved by the Shariah Board. In case of delay, the bank shall submit proper justification of the same to SBP.
The Conversion process shall consist of three steps:
A. In-principle approval from SBP for initiating full-fledged conversion of the conventional bank into an Islamic Bank;
B. Conversion of conventional banking branches into Islamic banking branches; and
C. Issuance of Islamic Bank license.
In order to obtain in-principle approval from SBP for the conversion process, banks shall submit a comprehensive Conversion Plan duly approved by bank’s BoD and Shariah Board, containing essentials such as Business Plan, position and treatment of Shariah impermissible items, training and capacity building, policies and procedures, systems and controls, audit review, marketing arrangements and public notices and information on banks’ subsidiaries etc.
[box type=”note” align=”” class=”” width=””]The writer is a Karachi based freelance columnist and is a banker by profession. He could be reached on Twitter @ReluctantAhsan[/box]