SS 6: Conversion of a Conventional Bank to an Islamic Bank

What this standard is about

The standard covers the full conversion of a conventional bank into a Shariah-compliant bank. It applies after a decision for immediate, comprehensive conversion within an announced period. The decision can come from inside the bank or from outside parties. The standard covers the timeframe, how deposits are solicited and invested after conversion, how to treat receivables and liabilities from before conversion, and how to dispose of prohibited assets.

Why it exists

A bank cannot switch overnight. Its existing interest-based deals cannot all be unwound at once. The standard allows gradual clearance out of necessity. At the same time, it requires the bank to dispose of impermissible transactions as far as it is able. The goal is a real conversion, not a change of labels.

The key rules, simply put

• The conversion must be announced with a clear timeframe.
• Non-permissible transactions from before conversion are cleared gradually. Immediate clearance is not required where it is not feasible.
• The bank must still dispose of the effects of impermissible transactions wherever it is able to do so.
• Receivables and liabilities from before conversion are handled under the standard's rules, including purification of impermissible amounts.
• Prohibited assets held before conversion must be disposed of in Shariah-acceptable ways.
• After conversion, deposits must be solicited and invested under Shariah contracts.
• The bank's governing documents are amended, and a Shariah board is appointed to oversee compliance.

An everyday example

A conventional bank announces it will become Islamic within two years. It amends its articles of association, appoints a Shariah board, and stops new interest-based lending. Its old loan book is worked through under the standard's rules until the impermissible positions are cleared.

Words to know

• Riba — interest; any guaranteed extra on a loan. Not allowed in Islamic finance.
• Shariah board — scholars appointed to check that a bank's products and operations follow Islamic rules.
• Purification — removing impermissible income, for example by giving it to charity.

Source

• AAOIFI Shariah Standard No. 6 — https://islamicmarkets.com/standards/aaoifi-shariah-standards/conversion-of-a-conventional-bank-to-an-islamic-bank/scope-shariah-ruling-3