Pakistan’s central bank has set a three-year time frame for the country’s lenders that wish to achieve full-fledged Shariah compliance status.
Eligible applicants must have existing Islamic finance operations and the conversion process must start within six months of approval, the State Bank of Pakistan (SBP) said in a circular.
After the conversion of conventional branches, the applicant lender can then apply for a full-fledged Islamic banking license. Reverting to conventional banking operations will be disallowed, the circular said.
The Islamic banking industry in Pakistan, the second most populous Muslim-majority country next to Indonesia, includes five full-fledged Islamic banks and 16 conventional banks offering Islamic financial products.
As of March, they have assets worth 1.9 trillion rupees (SR67.27 billion), a 16 percent increase from a year earlier and 11.7 percent of total banking assets.
However, their capitalization and profitability ratios remain below the industry average in Pakistan.
Only 13 percent of Pakistan’s mostly-Muslim adult populace – more than half of the country’s population – holds a bank account, and that presents a huge growth opportunity for Shariah-compliant banks.
Islamic banks adhere to religious principles in their business, such as bans on interest and pure monetary speculation, and shun the use of interest-based financial instruments such as bonds and treasury bills.
International Monetary Fund (IMF) earlier advised the Pakistani central bank to ensure “to ensure a level playing field “to Islamic banking versus the already strong conventional banking”.
The country’s Shariah-compliant banking sector is still in infancy compared with a well-entrenched conventional banking segment and holds influence in the government and private sectors.
“The government of Pakistan is advised to ensure a level playing field to Islamic banks in order to maintain Pakistan’s fast pace growth, a country with 96 percent of Muslim population,” the Washington-based fund said.
The SBP has been proactive in developing and promoting Islamic banking in the country has issued various policy and regulatory initiatives to boost the sector.
In 2004, the central bank issued minimum Shariah regulatory standards, covering instructions for establishment of full-fledged Islamic bank, Islamic banking subsidiary and setting up of standalone Islamic banking branches by existing conventional banks.
In 2010, it issued detailed criteria for conversion of existing conventional branches into Islamic banking branches.

Source: Arab News