Islamic banking subsidiary: Rs six billion initial paid-up capital required: SBP

In order to encourage Islamic banking, State Bank of Pakistan (SBP) Monday eased Minimum paid-up Capital Requirement (MCR) for setting up new Islamic banking subsidiary. As per the SBP announcement, a new Islamic banking subsidiary can be established with initial paid-up capital of Rs 6 billion, instead of Rs 10 billion previously.
However, the SBP has imposed a condition that no cash dividend will be paid till such time the subsidiary meets the MCR of Rs 10 billion and prescribed CAR requirements. According to SBP BPRD Circular No 10 of 2014, earlier in April 2009 minimum paid-up capital (net of losses) requirement of Rs 10 billion and Capital Adequacy Ratio (CAR) of 10 percent were prescribed.
"With a view to encouraging the conventional banks to upscale their Islamic banking operations by establishing Islamic banking subsidiaries, the initial paid-up capital requirement has been revised to Rs 6 billion," the circular said. However, the intending Islamic banking subsidiary will be required to raise its paid-up capital (net of losses) up to Rs 10 billion within a period of 5 years from the date of commencement of its operations.
In this regard, the bank will have to submit a capital plan/projection for meeting the MCR of Rs 10 billion duly approved by the Board of Directors of the parent company at the time of applying for banking license to SBP. Subsequently, these projections will be endorsed by the subsidiary''s board, SBP pointed out. During the transitory period of five years, the Islamic banking subsidiary will be required to maintain the variable CAR requirement depending on the MCR level prescribed by SBP.
According to SBP, first year the CAR requirement will be 16 percent with Rs 6 billion MCR, 15 percent with Rs 7 billion, 14 percent CAR with Rs 8 billion MCR and 13 percent with Rs 9 billion paid-up capital. While after five years, CAR will be applicable under Basel-III rules with Rs 10 billion MCR. "No cash dividend shall be paid till such time the subsidiary meets the MCR of Rs 10 billion and prescribed CAR requirements," the circular said. In addition, the parent bank will meet the minimum applicable CAR, on consolidated as well as on standalone basis.
The circular said that new instructions will replace the MCR and CAR requirements prescribed in Para 3 (vi) of Annexure-II to IBD Circular No 2 of April 29, 2004. All other instructions on the subject shall remain the same, it added. Bankers said that this move will encourage the conventional banks to establish new Islamic banking subsidiaries at lower paid-up capital.