March 25 (Reuters) – Karachi-based Faysal Bank (FBL)
will convert itself into a full-fledged Islamic lender
as its majority shareholder, Bahrain’s Ithmaar Bank,
looks to consolidate its business lines.

Islamic retail bank Ithmaar, with a 67 percent stake in FBL,
wants to extract up to $35 million in savings from a turnaround
plan after posting a net loss of 29.9 million dinars ($79.3
million) last year, against a loss of 10.1 million dinars in
2012.

As of December, FBL had Pakistan’s second-largest Islamic
banking window with 53 stand-alone branches. Its conversion
would make its remaining 216 branches Islamic, subject to
shareholder and regulatory approvals.

“FBL is in discussion with the State Bank of Pakistan on the
conversion of the entire operations of FBL to sharia-compliant
banking,” Ithmaar’s chief executive Ahmed Abdul Rahim told
Reuters.

“At this stage, the exact timeline for the conversion cannot
be ascertained, but it is expected to take between two to three
years.”

Ithmaar will increase its control of FBL by adding two more
members to its board, reaching a total of five members out of
eight, including its president and chief executive. Ithmaar’s
shareholding in FBL will remain unchanged, Rahim added.

Last year, Ithmaar completed a merger with affiliate First
Leasing Bank through a share swap agreement. In 2010, Ithmaar
integrated its subsidiary Shamil Bank, while FBL acquired the
Pakistani operations of Royal Bank of Scotland.

ACTIONS

FBL’s conversion is the latest in a string of corporate
actions that may boost the Islamic banking sector in Pakistan,
the world’s second most populous Muslim nation.

Regulators hope the branch network of Islamic banks, which
now comprises about 1,200 branches, will double while the
industry’s market share will rise to 15 percent of the banking
system by 2018 from roughly 10 percent now.

FBL would help the industry hit those targets: it held total
deposits of 271.1 billion rupees ($2.8 billion) as of December,
9.8 percent of which where Islamic deposits.

That compares to 868 billion rupees in deposits held by
Pakistan’s Islamic banks as of December, representing 12.1
percent of the entire banking sector, central bank data showed.

Last year, Pakistan’s Summit Bank said it would convert
itself into a full-fledged Islamic bank over a three- to
five-year period.

Ithmaar now holds a legacy portfolio of seven conventional
assets after it underwent a conversion of its own in 2010, from
a conventional investment bank into a retail Islamic bank.

Since 2010, it has resolved issues pertaining to 14
conventional assets, with its sharia board granting it a grace
period to divest holdings or make them sharia-compliant.

Ithmaar’s other holdings include a 25 percent stake in
Bahraini commercial lender BBK and a 20 percent stake
in Hong Kong-based CITIC International Assets Management, a unit
of China’s state-owned CITIC Group.

(Editing by Andrew Torchia)