KARACHI, Jan 1: The State Bank has allowed existing commercial banks to set up subsidiaries for Islamic banking with a minimum paidup capital of Rs 1 billion. These subsidiaries will be public limited companies and will be listed on the stock exchange.

Earlier the SBP had allowed setting up of full-fledged Islamic bank in the private sector and one such bank (Meezan Bank) is already operating in the country.

In December 2001, the State Bank had issued a detailed criteria for setting up an Islamic bank in the private sector—and on Wednesday it has issued another set of criteria for the existing banks to set up subsidiaries for Islamic banking.

The circular detailing this criteria issued by the SBP says that the subsidiary of the commercial bank willing to do Islamic banking should have a paidup capital of Rs 1 billion and it should maintain a minimum capital adequacy ratio of 8 per cent.

It further says that at least 51 per cent of the paidup capital should be subscribed by a banking company and more than one banking companies. Such companies shall not dispose of their shares in any manner whatsoever for a minimum period of three years and thereafter only with the specific written approval of the SBP.

The proposed subsidiary would be a public limited company and would be listed on the stock exchange. A maximum of 49 per cent of shares shall be offered to the general public.

The subsidiary may be granted a licence under section 27 of the Banking Companies Ordinance 1962 to conduct banking business strictly in accordance with Sharia and would be considered a scheduled Islamic Commercial Bank.

The application for setting up the subsidiary shall indicate the modes of finance proposed to be used for raising resources and extending financial facilities.

The applicants shall also indicate expertise and other facilities available with them for ensuring compliance of their banking business with Sharia.

Application shall stand disqualified if any of the sponsors/ directors or their spouses or firms:

*have been convicted by a court of law in Pakistan or abroad for a criminal offence.

*have been associated with any illegal activity especially banking business/deposit taking/financial dealings and other businesses.

*have failed to meet his or her obligations to banks and other financial institutions.

*have defaulted in payment of taxes.

*are or have been associated as director/chief executive with the corporate bodies whose corporate and tax record including customs duties/central excise and sales tax have been unsatisfactory.

The circular says the application shall also stand disqualified if the applicant enjoys an adverse reputation regarding integrity and performance.

Every director of the subsidiary shall meet the fit and proper test prescribed by SBP and would require prior clearance from SBP.

One person cannot be a director in more than one bank/ financial institution.

Not more than 25 per cent of the directors shall be from the same family as defined in the Banking Companies Ordinance.

The chief executive would be a professional fulfilling the conditions stipulated in the fit and proper test issued by the SBP and shall require prior clearance of SBP.

The circular says that the subsidiary must commence operations within six months of the grant of permission.

The SBP has asked those interested in establishing scheduled Islamic commercial banks in the private sector, subsidiaries or stand alone branches for Islamic banking to apply to director, Banking Policy Department, State Bank of Pakistan, I.I. Chundrigar Road, Karachi.