Islamic banking: SBP revises initial paid-up capital to Rs6 billion

Subsidiaries will now be required to raise paid-up capital up to Rs10 billion within five years

KARACHI:

In order to encourage conventional banks to upscale their Islamic banking operations by establishing Islamic banking subsidiaries, the State Bank of Pakistan (SBP) has revised the initial paid-up capital requirement to Rs6 billion.

Originally, such a subsidiary was required to have a minimum paid-up capital of Rs1 billion along with a minimum capital adequacy ratio (CAR) of 8%, to be maintained at all times, based on risk-weighted assets.

According to the latest SBP circular, the intending Islamic banking subsidiary will be required to raise its paid-up capital (net of losses) up to Rs10 billion within a period of five years from the date of commencement of its operations.

The SBP requires that the bank must submit a capital plan/projection for meeting the minimum capital requirement (MCR) of Rs10 billion duly approved by the board of directors of the parent company at the time of applying for the banking licence to the SBP. Subsequently, the circular says, these projections must be endorsed by the subsidiary’s board.



During the transitory period of five years, the Islamic banking subsidiary will maintain variable CAR depending on its MCR level. For example, at the MCR level of Rs6 billion, the CAR requirement will be 16%. For the MCR level of Rs7 billion, Rs8 billion and Rs9 billion, the CAR requirement will be 15%, 14% and 13%, respectively.

Furthermore, no cash dividend will be paid until the subsidiary meets the MCR of Rs10 billion and prescribed CAR requirements.

In addition, the parent bank is also supposed to meet the minimum applicable CAR on both consolidated and standalone bases, the circular said.

According to the SBP, any existing commercial bank that sets up an Islamic banking subsidiary must inform the central bank about the modes of finance proposed to be used for raising resources and extending financial facilities. At least 51% of the total paid-up capital must be subscribed by the banking company, the rules state.

Moreover, the banking company must not dispose of its shares in any manner whatsoever for a minimum period of three years and thereafter only with the specific written approval of the SBP.

The SBP rules also state that the proposed subsidiary should be a public limited company listed on the stock exchange, with a maximum of 49% of shares to be offered to the general public.

They also state that one person cannot be a director in more than one bank/financial institution. Not more than 25% of the directors will be from the same family, the rules state.

Published in The Express Tribune, October 19^th, 2014.

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