State Bank shortens process for converting conventional branches to Islamic banking

The State Bank of Pakistan (SBP) has revised the criteria for converting conventional bank branches into Islamic banking branches, shortening several procedural timelines as the country moves towards eliminating interest from its financial system by January 1, 2028.

Under the revised framework, banks will now be required to inform the public and account holders about a proposed branch conversion two months in advance, compared with the previous requirement of three and a half months.

The interval between two notices issued for converting current accounts based on deemed acceptance has also been reduced from 30 days to 15 days.

Pakistan is required to eliminate riba, or interest, from its financial system by January 1, 2028, under a Federal Shariat Court ruling and the 26th Constitutional Amendment.

The central bank said all conventional banks operating Islamic banking windows, as well as banks planning to begin Islamic operations, could apply to convert their conventional branches into Islamic banking branches.

No licensing fee will be charged for such conversions under the updated guidelines.

Banks seeking approval will be required to submit an annual branch conversion plan aligned with their overall conversion strategy, along with a request for in-principle approval.

Applications must be submitted to the Banking Policy & Regulations Department, with a copy sent to the Islamic Finance Policy Department, by October 31 of the preceding calendar year.

Banks will also be required to obtain consent from customers before converting their accounts. Account holders may be contacted through letters, emails, text messages, telephone calls or other digital channels and must be given at least 30 days to communicate their consent or refusal.

The SBP directed banks to inform customers about any changes in terms and conditions, fees or paid services resulting from the conversion of their conventional accounts into Islamic accounts.

Customers must also be provided with details of alternative Islamic banking products, their features and the expected profit rates applicable to each category of remunerative Islamic deposits.

Accounts of customers who agree to the conversion will be shifted to Islamic banking. Customers who refuse may choose to transfer their accounts to another conventional branch or close them.

Where no response is received, banks may convert current accounts based on deemed consent after completing the required notification process.

However, savings and fixed-deposit accounts for which customers do not respond must either be placed in a virtual conventional cost centre or transferred to the nearest conventional branch after the customer has been informed.

Banks may establish temporary virtual conventional cost centres, subject to approval from their Shariah boards, to hold deposits and asset portfolios that cannot immediately be converted after a branch shifts to Islamic banking.

The SBP said the revised requirements would also apply to microfinance banks converting conventional branches into Islamic banking branches.