The State Bank of Pakistan has barred the country’s Islamic Banking Institutions from placing funds with their conventional parent banks or head offices on Qard, or interest-bearing loan, terms. The June 12 directive, carried in IFPD Circular No. 1 of 2026 from the central bank’s Islamic Finance Policy Department, also tells IBIs to pull any such placements already in place ‘with immediate effect.’ It lands three working days after SBP separately eased the path for conventional banks to open Islamic banking windows without prior approval, while pulling the same set of conventional lenders in different directions.
The SBP Circular and Its One Carve-Out
IFPD Circular No. 1 of 2026 sits in the inboxes of every president and chief executive of a conventional bank that runs Islamic banking branches. Dated June 12, 2026, and signed by IFPD Director Dr. Zahid Ur Rehman Khokher, the letter cites Section 39H of the Banking Companies Ordinance, 1962, as its authority.
Islamic Banking Institutions (IBIs) are not permitted to place any funds with their conventional parent or head office based on the contract of loan (Qard) or any other form of subsidized financing. However, any such existing placements, if already executed, should be withdrawn with immediate effect.
One carve-out narrows the rule’s bite. The circular states that the instructions do not apply to funds placed at the head office to meet any regulatory requirement, leaving statutory placements such as cash reserve and liquidity coverage balances untouched. The ‘subsidized financing’ wording is also broader than the headline Qard ban, catching any related arrangement by which an Islamic arm effectively borrows from its conventional parent on cheaper-than-market terms. The rule’s addressees, the conventional banks that run IBBs, are told to acknowledge receipt.
Why the Conventional Banks Sit in the Middle
The rule is addressed to the conventional banks that run Islamic Banking Branches, not to the dedicated Islamic banks. In Pakistan, the Islamic banking industry is dominated by conventional lenders that operate Islamic banking branches (IBBs) and Islamic banking windows (IBWs) inside their conventional footprint. SBP’s own count, as carried in the central bank’s briefing to the press, puts the network at 4,159 full-fledged Islamic banking branches, 3,473 Islamic banking windows and 166 sub-branches, running alongside 16 conventional banks.
Inside that network sits the bulk of the industry’s assets. SBP’s briefing puts IBB assets at approximately 42.8 percent of total Islamic banking industry assets, the highest share of any single channel. That concentration is why a rule aimed at ‘IBIs’ binds most heavily on conventional banks’ Islamic desks, and on the treasury and finance teams that fund them.
- 16 conventional banks in the system
- 4,159 full-fledged Islamic banking branches
- 3,473 Islamic banking windows
- 166 Islamic sub-branches
- ~42.8% of total Islamic banking industry assets held by IBBs of conventional banks
The Other Hand of the Regulator
Two days before the Qard circular, SBP pushed those same institutions further into the Islamic banking business. The June 10 revision to the Islamic Banking Windows framework lets banks and microfinance banks set up IBWs inside conventional branches approved for conversion, without first clearing the change with SBP. The windows can run from the start of the conversion process through to final conversion, and the requirement to display the IBW name on one-quarter of the branch signboard has been relaxed.
Read alongside the Qard ban, the two circulars describe a regulator widening the perimeter of who gets to run Shariah-compliant banking in Pakistan, then re-engineering the plumbing inside that perimeter so Islamic arms cannot lean on their conventional parents for short-term funding on interest-based terms. For the conventional banks sitting in the middle, the next step is to redesign internal treasury, fund-transfer pricing and liquidity buffers so the Islamic windows can stand on their own balance sheets.
What Changes in Practice for Treasury Desks
The immediate effect sits inside each Islamic branch’s treasury operations. Until now, an IBB that found itself short of a Shariah-compliant placement at the end of the day could route surplus funds up to the conventional parent’s balance sheet on a Qard basis, often at a concessional or zero rate. That channel is now closed.
Treasury teams will need to redirect those balances to other IBIs, to SBP’s own Shariah-compliant open market operations, or to commodity Murabaha and inter-bank Mudarabah facilities that keep the cash inside the Islamic system. The ‘with immediate effect’ line for existing placements means the unwind has already started, even though the circular carries no published deadline. For smaller Islamic arms of mid-tier conventional banks, where internal parent funding has been a quiet backstop, the cost of running the Islamic book is likely to rise as those balances find pricier homes.
SBP’s own framing puts the change in doctrinal terms. The central bank says the move is designed to strengthen Shariah compliance inside the financial system and to support the continued development of Pakistan’s Islamic banking industry.
The Numbers Behind the Rule
Pakistan’s Islamic banking footprint has been on a multi-year expansion. SBP’s own data point in the same briefing counts 4,159 full-fledged Islamic banking branches, a network that has more than doubled in less than a decade, alongside 3,473 Islamic banking windows that let conventional branches offer a limited Shariah-compliant product set from the same counter.
That footprint sits inside a wider push to deepen Islamic finance, an agenda that includes a Federal Government target of converting a larger share of the conventional banking sector to Shariah-compliant operations. The same SBP briefing also notes that IBBs of conventional banks now hold approximately 42.8 percent of total Islamic banking industry assets, the highest share of any single channel and the reason the Qard rule binds so many of the same names that the June 10 IBW revision is inviting to grow. For background on the technology side of that expansion, see how legacy systems are holding back Islamic bank growth across the wider industry.
Frequently Asked Questions
What is Qard in Islamic finance?
Qard is a contract of loan. It is permissible in Shariah only when the lender charges no interest and does not seek any return beyond repayment of the principal, which is why SBP’s circular flags it, and any ‘subsidized financing’ alongside it, as non-permissible when an Islamic arm places funds with a conventional parent that would normally pay interest on its borrowings.
Does the SBP Qard ban affect retail depositors?
The rule governs how Islamic banking institutions place surplus funds with their conventional parents. It does not change deposit or financing products offered to retail customers, and the carve-out for funds placed at the head office to meet regulatory requirements means statutory balances can still move on the same channel.
What is the difference between a full-fledged Islamic bank branch and an Islamic banking window?
A full-fledged Islamic banking branch offers the full suite of Shariah-compliant products. An Islamic banking window, by contrast, is a dedicated counter inside a conventional branch offering a limited set of Islamic products, and is the model SBP’s June 10 revision made easier to open without prior approval.
When did the SBP Qard ban take effect?
IFPD Circular No. 1 of 2026 is dated June 12, 2026. It tells IBIs to withdraw any existing Qard or subsidized financing placements with their conventional parents or head offices ‘with immediate effect.’
Are any other placements with the parent bank exempt?
Yes, narrowly. The circular carves out funds placed at the head office to meet any regulatory requirement. All other Qard placements and any other form of subsidized financing from an IBI to its conventional parent or head office are now barred.
Disclaimer: This article is for informational purposes only and does not constitute financial, legal, or Shariah advice. Banking rules in Pakistan are subject to change, and the applicability of the SBP Qard ban to any specific product or arrangement should be confirmed with a qualified professional or directly with the relevant institution. Figures and regulatory references are accurate as of publication on June 15, 2026.
