SBP Revises Rules For Islamic Branch Conversion

The State Bank of Pakistan (SBP) has introduced revised regulatory requirements governing the conversion of conventional banking branches into Islamic banking branches, streamlining procedural timelines as Pakistan advances towards the complete elimination of interest-based financial practices by January 1, 2028.

Under the updated framework, banking institutions will now be required to provide advance notice of a proposed branch conversion to customers and the general public at least two months prior to implementation. This replaces the previous requirement that mandated notification approximately three and a half months before conversion.

The central bank has also shortened the interval between two mandatory notices issued in cases where current accounts are converted on the basis of deemed customer consent. The period between such notices has been reduced from 30 days to 15 days in order to facilitate a more efficient conversion process.

Pakistan’s transition towards a fully Islamic financial system is being undertaken in compliance with directives arising from the Federal Shariat Court ruling on riba and the constitutional framework established through the 26th Constitutional Amendment, which requires the elimination of interest-based banking by January 1, 2028.

The SBP stated that all conventional banks currently operating Islamic banking windows, as well as institutions intending to commence Islamic banking operations, may apply for approval to convert conventional branches into Islamic banking branches.

The revised guidelines further provide that no licensing fee will be charged for branch conversions carried out under the approved framework.

Banks intending to undertake such conversions will be required to submit an annual branch conversion plan that aligns with their broader institutional conversion strategy. The plan must be accompanied by a request seeking in-principle approval from the central bank.

Applications are required to be submitted to the Banking Policy & Regulations Department, with a copy simultaneously provided to the Islamic Finance Policy Department, no later than October 31 of the calendar year preceding the proposed conversion.

The SBP has also reinforced customer protection requirements by directing banks to obtain customer consent prior to converting conventional accounts into Islamic accounts. Customers may be contacted through various communication channels, including letters, electronic mail, text messages, telephone calls, and other digital platforms, and must be granted a minimum of 30 days to communicate their acceptance or refusal.

Banks are additionally required to provide clear information regarding any changes to account terms and conditions, applicable charges, service fees, or other account-related arrangements arising from the conversion process.

Customers must also be furnished with comprehensive details regarding available Islamic banking products, including their features, operational structure, and expected profit rates applicable to remunerative Islamic deposit accounts.

Where customers expressly consent, their accounts will be converted to Islamic banking arrangements. Customers who decline the conversion may either transfer their accounts to another conventional branch or elect to close their accounts.

In cases where customers do not respond, banks may convert current accounts on the basis of deemed consent after completing all prescribed notification procedures.

However, savings accounts and fixed-deposit accounts for which no customer response is received may not be automatically converted. Such accounts must instead be transferred to a virtual conventional cost centre or moved to the nearest conventional branch after customers have been appropriately informed.

The revised framework also permits banks, subject to approval from their respective Shariah boards, to establish temporary virtual conventional cost centres for deposits and asset portfolios that cannot immediately be transitioned to Islamic banking following branch conversion.

The SBP clarified that these updated regulatory requirements will apply equally to microfinance banks undertaking the conversion of conventional branches into Islamic banking branches, thereby ensuring consistency across the financial sector as Pakistan progresses towards its Islamic banking transition objectives.