Banks in Pakistan are forcibly converting traditional savings accounts to Islamic accounts in order to avoid paying depositors high interest rates.
Branch managers who once persuaded customers to sign up for things like advance payments on mutual fund investments are now forcing savings accounts to be converted to Islamic accounts. Some banks have gone so far as to threaten account closure if the account holder does not take action within 30 days.
He claims that Islamic savings can be robbed and that there is no minimum payout. As a result, most banks are attempting to push for it.
Business seekers are looking for a safety net and possibly a few extra dollars after paying for inputs on bank settlements and expect proper treatment in exchange for their cash flow. Banks, on the other hand, want to take a shortcut by forcing account holders to convert and de-risk credit payments for domestic and international buyers. They are doing everything possible to avoid paying high interest rates to depositors.
Banks like Habib Bank Limited (HBL) did it first. The most recent entrant is Standard Chartered (SC).
Standard Chartered has begun informing savings account holders that they can convert to Islamic Banking Savings Accounts. Its Saadiq Savings account follows the Mudaraba principle, with funds invested in Shariah-compliant assets.
But there is a catch and a pretty ugly one. Standard Chartered says the offer is valid for just 30 days (from the date of issuance of these instructions) and the bank says, “we may not be able to continue your relationship including but not limited to [the] closure of your account with the Bank”.
On the one hand, the State Bank of Pakistan (SBP) talks about increasing financial inclusion and providing services to the unbanked, but as a result of its complicated policies, banks that are making record profits by lending to the government of Pakistan are now attempting to swindle customers by forcing them to convert to Islamic accounts or close their accounts, especially when inflation is high and consumers need every bit of interest income in this highly inflationary environment.
The bank’s record profits show that paying interest to depositors has no negative impact on the bank’s bottom line, but they don’t want customers/investors to believe that on the surface.
There is hope that any collateral in the senior age groups will be avoided, but some have speculated that the forced conversion could easily deceive unsuspecting widows or pensioners. “Bancassurance 3.0, this could get ugly for some,” said a former SBP executive earlier today.
Money Crunch Forcing Banks to Play it Dirty
From the looks of it, our banks first wanted to get rid of savings deposits by raising interest and tax rates when the money crunch first started in 2022. We can anticipate additional stringent policies for the minimum deposit rate (MDR), as well as even higher tax rates on the Advances to Deposit Ratio (ADR) at SBP.
While it goes against the banking industry’s spirit, disproportionate taxes on income from government securities and a low ADR ratio may force banks like SC to convert to Islamic banking. That’s actually quite reasonable given that taxation is irrational and the central policy on Islamic banking payouts is insane/nonexistent.
Banks are punished for lending to the government when it is most in need of funds; taxes are one way, and the unwanted spotlight is the other. This forces banks to liquidate deposits rather than mobilise them, which may be why large banks are forcing their savings account holders to switch.
Overall, banks’ tough stance is nothing more than a marketing ploy to increase profits. Branch managers may advocate for the switch, but it is not required. It’s best to ignore them and stay put.