* Central bank wants level playing field for Islamic banks
* To amend capital requirements for Islamic branches,
* Will develop Islamic interbank money market, placement
* To adopt IFSB standards on capital adequacy, supervisory
By Bernardo Vizcaino
April 30 Pakistan's central bank will phase in
new rules on capital adequacy for Islamic banking and intends to
develop a sharia-compliant interbank money market later this
The initiatives are part of an ambitious five-year plan by
the regulator to promote Islamic finance through an array of
proposed legislative changes, product incentives and
instructions to market participants.
They are designed to ensure a level playing field for
Islamic banks in the majority-Muslim nation, Saleem Ullah,
director of the central bank's Islamic banking department, said
in a conference call hosted by Thomson Reuters.
The plans call for lowering minimum capital requirements
(MCR) for Islamic subsidiaries, while increasing them for
Islamic branches operated by conventional banks, said Ullah.
Current capital requirements are the same for full-fledged
Islamic banks and Islamic subsidiaries, while conventional banks
can set up Islamic branches with only nominal capital
"A road map will be developed in the next six months, that
would set out gradual changes in MCR for Islamic banking
branches over a five-year period."
The move could encourage conversion of Islamic branches into
Islamic subsidiaries. But it would still give conventional
lenders the option to operate Islamic branches - a format that
has been limited by regulators in Oman and banned outright in
Last month, Pakistan's central bank issued new rules for the
operation of Islamic banking windows, which allow conventional
lenders to offer Islamic financial services provided client
money is segregated from the rest of the bank.
As of December, Pakistan had five full-fledged Islamic banks
and 14 others offering Islamic finance services; they held a 9.6
percent share of total banking assets in the country, according
to the latest official data. That compares with around 25
percent in the Gulf Arab region.
Banks are already moving to segregate their Islamic units:
Karachi-based MCB Bank will set up a wholly owned
Islamic banking subsidiary after dropping plans last week to
take a stake in Islamic lender Burj Bank.
Others look set to convert to full-fledged Islamic banks,
including Summit Bank and Faysal Bank.
The regulator is also finalising details on an Islamic
liquidity framework, consisting of an Islamic interbank money
market (IIMM) and a facility run by the central bank, to be
available in the next three to six months, said Ullah.
"This would largely address the short-term liquidity
management issue of Islamic banking institutions."
Under the framework, banks would be required to settle their
short-term liquidity needs through the IIMM, while surplus funds
would be absorbed by a mudaraba-based placement facility set up
by the central bank, Ullah said.
Mudaraba is a form of investment partnership that is common
in Islamic finance. The central bank's facility would be
remunerated based on the performance of a portfolio of assets
managed by the central bank, which would act as the investment
manager or mudarib.
The central bank plans to start the facility with an asset
base consisting of sukuk and other sharia-compliant investments
of between 200 billion and 300 billion rupees ($2.0-3.0
billion), Ullah added.
The central bank will also adopt as many as three standards
from the Malaysia-based Islamic Financial Services Board (IFSB),
a major industry body, including those on capital adequacy and
the supervisory review process, said Ullah.
"The capital adequacy standard could be in place for the
financial year 2015, and it would give more space for Islamic
banks to manage their capital. This would give a big boost for
the Islamic finance industry."
The regulator has already adopted three IFSB standards in
full on risk management, corporate governance and sharia
governance, as well as parts of others in areas such as market
(Editing by Andrew Torchia)