KARACHI: Faysal Bank Ltd will become a full-fledged Islamic lender by the end of 2022 after ring-fencing its residual conventional loan portfolio, said Chief Financial Officer Syed Majid Ali on Tuesday.

Speaking at a press briefing at the bank’s head office, Mr Ali said the commercial lender will surrender its conventional banking mandate once the regulator grants it the licence for Islamic banking. Faysal Bank will formally apply for an Islamic banking licence in September, he added.

Five Islamic banks and 17 conventional banks with Islamic banking branches currently operate in Pakistan. The share of Islamic banking assets in the overall banking industry is 18.6 per cent while the share of Sharia-compliant deposits stands at 19.4pc.

“There’s never been a conversion of a conventional bank to an Islamic bank at such a massive scale. What we’ve done here is going to be taught as a case study worldwide,” said Mr Ali.

Faysal Bank decided to convert its entire business from conventional to Sharia-compliant five years ago. It adopted the “asset-led conversion” model, which prioritised the conversion of banking assets such as investments and financings over that of liabilities like deposits.

Besides making all new branches Sharia-compliant from day one, the bank started converting its conventional business into Islamic one branch at a time. As a result, only one of the 639 branches remains conventional as of today. Even that branch will become Sharia-compliant by the end of this year, the CFO said.

The size of Faysal Bank’s balance sheet was Rs997 billion at the end of June. Its unconsolidated quarterly profit increased 17.3pc year-on-year to Rs2.25bn for the latest three-month period.

The bank currently holds treasury bills and Pakistan Investment Bonds — conventional investment avenues forbidden under Islamic banking regulations — worth roughly Rs70 billion. “We’ll soon dispose of these holdings,” said Mr Ali.

Responding to a question about the paucity of Sharia-compliant investment avenues for the deployment of liquidity, Mr Ali said the conversion wouldn’t be possible had the bank stayed overly focused on the ifs-and-buts of the process. “So what if we’ll have fewer investment avenues?” he said while emphasising the need for following the letter of the religious injunctions against interest-based banking.

Replying to a comment about the similarity of the rates of return offered by conventional and Islamic banks despite the proclaimed differences between the two types, Faysal Bank’s head of Islamic banking Muhammad Faisal Shaikh said its reason is the Karachi interbank offered rate (Kibor), a reference rate at which banks borrow overnight funds from each other in the money market.

“Kibor is a pricing benchmark. A pricing mechanism doesn’t make anything halal or haram,” he said.

Published in Dawn, August 31st, 2022