Pakistan tightens rules on Islamic banking windows

KARACHI: Pakistan's central bank has issued new rules for the operation of Islamic banking windows, aiming to strengthen their role in the world's second-most populous Muslim nation.

The new requirements come at a time when Pakistan is stepping up efforts to develop Islamic finance, prompting several banks to expand their operations in the sector.

Banks will have to obtain written approval from the State Bank of Pakistan before opening each Islamic window, as well as providing the regulator with additional details on staffing, training and marketing arrangements.

Islamic windows allow conventional lenders to offer Islamic financial services, provided client money is segregated from the rest of the bank.

As of December, Pakistan's full-fledged Islamic banks had a combined network of 767 branches while conventional banks had 441 Islamic branches and 96 sub-branches, the central bank said.

Different approaches to the Islamic window format have emerged over the years: In Oman windows are allowed only through standalone branches, while in 2011 Qatar banned Islamic windows outright.

The rules could help consumers better distinguish Islamic financial products from conventional ones, improving the industry's perception and overall uptake.

Regulators in Pakistan hope to expand the industry's branch network and bring Islamic banking's market share to 15 per cent of the system by 2018.

As of December, Islamic banks held assets worth 1 trillion rupees ($10 billion), a 21.1 per cent increase from a year earlier and representing 11.2 per cent of total banking assets.

Some conventional lenders are also opting to convert their operations into full-fledged Islamic banks.

Last week, the majority shareholder of Karachi-based Faysal Bank said it would convert the bank into a full-fledged Islamic unit in the next two to three years.

Last year, Summit Bank said it would convert itself into a full-fledged Islamic bank over a three- to five-year period. It opened its first Islamic banking branch earlier this month.

($1 = 97.8850 Pakistani rupees)