Karachi, October 1, 2024 – In a significant development aimed at promoting Islamic banking, the State Bank of Pakistan (SBP) has announced a comprehensive overhaul of the criteria for converting conventional banking branches into Islamic banking branches.
The revamped criteria, unveiled on Tuesday, is intended to streamline the conversion process and provide enhanced flexibility for banks transitioning from conventional to Sharia-compliant operations.
The latest update comes 14 years after the SBP first issued its guidelines under IBD Circular No. 2 of 2010, which outlined the process for conventional banks to convert their branches into Islamic banking units. The revamped framework, according to the SBP, seeks to ease the transition for banks while ensuring a seamless and transparent process for both institutions and their customers.
Among the key areas covered in the revised criteria are new disclosures and digital measures that banks must implement when converting customer accounts from conventional to Islamic banking. The SBP emphasized the need for transparency, particularly in seeking consent from customers for the conversion of their accounts. To further facilitate the process, banks will now be permitted to utilize digital channels and means for obtaining customer consent, reflecting the increasing digitization of the banking sector.
In a major shift, the SBP has also introduced provisions for the automatic conversion of current accounts from conventional to Islamic banking after all reasonable efforts have been made to seek customer consent. This adjustment is expected to expedite the conversion process while ensuring compliance with Islamic banking principles.
Moreover, the revised criteria offer greater flexibility in the conversion process by allowing banks to establish virtual conventional cost centers. This provision will enable banks to maintain operational efficiency during the conversion phase without the need for physical restructuring, reducing both time and costs associated with the transition.
Additionally, the SBP has addressed concerns regarding the safekeeping of securities and collaterals during the phase-out of conventional portfolios. Banks will now have more leeway in managing these assets while ensuring their alignment with Islamic banking principles.
To further support the transition, the SBP has provided facilitation in the reporting lines, allowing for smoother integration between conventional and Islamic banking operations within financial institutions.
This strategic move by the SBP underscores the growing importance of Islamic finance in Pakistan’s banking landscape. By revamping the conversion criteria, the SBP aims to foster the expansion of Islamic banking, promoting financial inclusivity while ensuring compliance with Shariah law. This will likely encourage more banks to adopt Islamic banking practices and expand their reach in a rapidly evolving financial ecosystem.
