Growing market potential with increased public interest is forcing the banking industry to fast expand its Islamic banking network in the country.

The potential is evident from the setting up of Islamic banking networks by all major banks with the provision of certain conventional banking facilities to customers. But the conversion of a commercial bank completely into an Islamic facility is the first of its kind switch, not just in Pakistan but the entire world. And it is also the world’s largest conversion of conventional banking into a completely Islamic system, which Faysal Bank completed in the country in recent months.

“There are almost 55 million accounts in the country — many of them are of transaction or the micro-finance nature, according to a report of the State Bank of Pakistan (SBP). The report also says that up to 70 per cent of those not owing an account are not ready to get one opened in the commercial banks just because of the interest factor in conventional banking,” President/CEO of Faysal Bank, Yousaf Hussain, says in an interview to Dawn.

“This created a huge room for Islamic banking to grow, following which the central bank sought all commercial banks to offer Islamic banking whether through establishing subsidiaries under the same name or a separate organisation with a different name,” he explained.

Initially, Faysal Bank’s management reached a consensus that it was necessary to be Shariah-compliant since its parent company provided financial services on Islamic models hence could not have its subsidiary work as a conventional bank

The bank was incorporated in 1994 to help people and businesses grow financially. It emerged in the banking industry with the backing of its parent company, Ithmaar Bank — a Bahrain-based Islamic retail bank (a subsidiary of Dar Al-Maal Al-Islami — DMI Trust) that provides retail, commercial, treasury, financial and other banking services.

The bank president says that almost seven years ago, the management and board of the bank decided to take the seemingly unimaginable decision to convert from a large conventional bank to an Islamic one. Initially, according to him, the thought process was that the conversion would be completed in 18-24 months. “However, when the team went a bit deeper into it and looked around, it had no model to follow or any idea how to transform a large running conventional bank to a full Islamic bank.”

According to him, during the journey of transformation, the most difficult part was the conversion of the mindset of the bank’s 7,000 employees in several branches — most of whom were conventional bankers but required to be the change agents across the bank and for customers as well.

“We made them understand the Islamic banking concept, its differences and how it matched Riba. Based on this understanding and firm belief, the bank’s motivational staff appeared able to successfully convert the bank’s customer base of over a million,” he explained.

Explaining the logic behind converting the bank into a complete Islamic network in seven to eight years, Mr Hussain said in the first 18 months, the management had reached a consensus that it was necessary to do so since the bank’s parent group (DMI trust) was of the view that since it is providing financial services on Islamic models, its subsidiary (Faysal Bank) can’t work as a conventional bank.

“Following the instructions and policies, we started working on converting the bank. Another major reason was the increasing market demand and potential for Islamic banking in Pakistan as there were only five Islamic banks,” the president said.

“During the whole journey, we can say that none of our customers objected to the transformation of the bank as the staff succeeded in educating and convincing them that Islamic banking is the right way of business. It is usually asset-backed and involves trading and renting assets and participation on profit and loss basis. On the other hand, conventional banking treats money as a commodity and lends it against interest as its compensation,” Mr Hussain concluded.

Published in Dawn, The Business and Finance Weekly, March 20th, 2023