Conversion of conventional bank into an Islamic bank: SBP issues guidelines

The State Bank of Pakistan (SBP) has issued guidelines for conversion of a conventional bank into an Islamic Bank with a view to promoting Islamic banking. According to IBD Circular No. 01 of 2017 issued on Thursday, in order to promote Islamic banking and facilitate banks desirous of converting their entire banking operations from conventional to Islamic, State Bank of Pakistan (SBP) has developed detailed guidelines for conversion of a conventional bank into an Islamic bank.
The guidelines include eligibility criteria, necessary measures and the process of conversion comprising three stages including in-principle approval to start conversion process, conversion of existing conventional banking branches into Islamic banking branches and issuance of full-fledged Islamic Bank license. A bank intending to convert its operations from conventional to Islamic will be required to submit a detailed application as per guidelines to Banking Policy & Regulations Department (BPRD), SBP and a copy for information to Islamic Banking Department (IBD), SBP.
As per eligibility criteria for conversion of conventional bank into Islamic bank, all banks having Islamic banking divisions/branches can apply for conversion into full fledged Islamic bank. However, the applicant bank will 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 applicant bank will be require to develope a comprehensive conversion strategy with clear milestones and defined timelines for conversion duly approved by bank's Board of Directors (BoD).
The bank will start conversion process in line with Shariah rules and principles within six months from the grant of in-principle approval and the bank will complete the conversion process within a maximum period of three years from the date of in-principle approval. In case of delay, the bank will justify extension request with reasons and evidence, duly approved by its Shariah Board and Board of Directors.
The bank will be required to 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.
State Bank will evaluate the proposal of the bank keeping in view merits of the case and upon its satisfaction, will grant an in-principle approval to the bank to initiate the conversion process. After submission of application, the bank will be prohibited from expanding its conventional banking network from the date of grant of in-principle approval. All new branches will required to be opened as Islamic banking branches in terms of already approved and/or new Annual Branch Expansion Plan (ABEP) as per Branch Licensing Policy.
Upon completion of all requirements in light of conversion plan, in-principle approval and obtaining Islamic banking branch licenses for converted conventional banking branches, the bank will apply for issuance of full-fledged Islamic Bank license along with information.