Central bank bars Islamic banking institutions from placing funds with conventional parent entities through Qard or subsidised financing.
KARACHI: The State Bank of Pakistan (SBP) has officially restricted the placement of funds by Islamic Banking Institutions (IBIs) with their conventional parent banks or head offices. The restriction specifically targets placements based on the contract of loan (Qard) or any other form of subsidised financing.
Exercising the powers conferred under Section 39H of the Banking Companies Ordinance, 1962, the central bank issued a strict clarification to ensure compliance across the financial sector.
Immediate Withdrawal of Subsidised Funds
The SBP clarified that Islamic Banking Institutions are no longer permitted to allocate any funds to their conventional counterparts using interest-free loan structures or subsidised mechanisms. To enforce this policy swiftly, the regulatory body has ordered that any such existing financial arrangements must be undone.
“Any such existing placements, if already executed, should be withdrawn with immediate effect,” the central bank directive stated.
This sudden move is aimed at strengthening the firewalls between sharia-compliant liquidity and conventional commercial operations, preventing the cross-subsidisation of non-Islamic banking operations via Islamic deposits.
Regulatory Exemptions Apply
While the new rules place strict limits on general fund placements, the State Bank of Pakistan has included specific exemptions to maintain systemic stability and operational continuity.
Key Elements of the SBP Directive
• Strict Prohibition: No new or existing fund placements via Qard (loan) contracts with conventional parent structures.
• Immediate Compliance: Mandatory withdrawal of all current subsidised financing arrangements.
• Regulatory Exemption: The new restriction does not apply to funds placed at head offices strictly for meeting mandatory central bank regulatory requirements.
By keeping regulatory placements exempt, the SBP ensures that mandatory liquidity and reserve requirements remain unaffected whilst blocking standard commercial fund diversions.
Financial analysts suggest this regulatory intervention will protect the integrity of the Islamic banking sector. It ensures that public deposits under sharia-compliant windows are utilised strictly within permissible parameters, rather than providing cheap capital to conventional parent institutions facing liquidity strains.
