FeaturedNationalVOLUME 17 ISSUE # 15

Pakistan’s Islamic finance industry making rapid progress

In the last few years, the Islamic finance industry in Pakistan has grown rapidly – a fact which has earned increasing recognition internationally. In 2021, Pakistan’s Islamic banks maintained their impressive record of growth. They grew at an annual rate of 30 percent, which has been the highest ever growth of the industry since 2015, with Islamic banking assets expected to reach Rs5.5 trillion by the year-end 2021.

As per the Global Islamic Economic Indicator list, Pakistan has been ranked 8th with the sustainable growth of Islamic institutions in the financial sector and economy as a whole. In 2021, the Islamic finance sector, in addition to achieving high growth, introduced several innovative instruments leading to a significant increase in deposits and profits.

Among the major developments during 2021, it is notable that the State Bank of Pakistan (SBP) has been voted as the best central bank in promoting Islamic finance for the fourth time by a poll conducted by Islamic Finance News, Redmoney Group Malaysia.

The rapid strides taken by Pakistan’s Islamic finance sector has been noted by many international financial monitoring organisations, including the Islamic Financial Services Board which is an international standard-setting body of regulatory and supervisory agencies that promotes the soundness and stability of the Islamic financial services industry comprising banking, capital market and insurance.

If we have a look at the record of the last two decades, we find that from its inception in the 2000s, Islamic banking in Pakistan has had a continuous growth trajectory. As of today, there are five full-fledged Islamic banks in Pakistan, including Al Baraka Bank Pakistan, Bank Islami Pakistan, Dubai Islamic Bank Pakistan, MCB Islamic Bank and Meezan Bank, and 17 conventional banks with exclusive Islamic banking branches in the country. According to a report, Faysal Bank is in the process of converting into an Islamic bank.

As of June 2021, Pakistan’s Islamic banking assets and deposits constitute 17 per cent and 18.7pc of total banking assets and deposits of the country, respectively. In 2021, the State Bank of Pakistan issued its 3rd Strategic Plan for Islamic banking. The targets include achieving a 30 percent share in both assets and deposits of overall banking by 2025.

To improve the liquidity management framework of the Islamic banking industry and recognise the importance of the Islamic banking sector in enhancing the effectiveness of monetary policy implementation, the State Bank of Pakistan has introduced Shariah Compliant Standing Ceiling Facility and Open Market Operations for Islamic Banking Institutions. The measure is designed to result in a significant increase in liquid investments of Islamic banks, along with creating a whole new Islamic money market segment for the industry.

Looking at the capital markets, we find that the size of the Islamic capital market in Pakistan is growing rapidly, and with this plan the growth prospects have become brighter. In this context, the Pakistan Stock Exchange (PSX) bagged the Best Islamic Stock Exchange Award 2021 by Global Islamic Finance Awards. The PSX has total listed capital of Shariah-compliant companies of Rs770 billion, making up 53 percent of the total listed capital (including modarabas, Islamic banks, Islamic mutual funds and electronic funds transfer).

With the issuance of fresh Ijarah Sukuks of around Rs736b ($4.13b approximately) during the year, 5 percent of the government’s domestic debt constitutes Islamic financing as compared to 3 percent last year. The government is looking to issue Sukuks under an asset-light structure as part of its target to increase the shares of Shariah-compliant instruments in government securities to 10 percent by the end of 2022-23.

It is relevant to add here that the Securities and Exchange Commission of Pakistan gave its approval for the registration of the country’s first-ever Islamic developmental Real Estate Investment Trust scheme — Silk Islamic Development REIT by Arif Habib Dolmen REIT Management — which has successfully partnered with leading business groups (Yunus Brothers Group, Fatima Group, Arif Habib Corp, Liberty Group and Arif Habib Dolmen) for the project. The Shariah-compliant REIT scheme will promote investment in undeveloped land in Karachi, aiming to uplift the area and develop real estate, including construction and sale of apartments and commercial units for generating incomes for shareholders.

An important development during the year was that Pakistan’s leading Islamic bank, Meezan Bank, collaborated with the National Clearing Company of Pakistan Limited (NCCPL) to develop new Shariah-compliant products for the country’s capital market. Through this collaboration, NCCPL and Meezan Bank introduced the Murabaha Share Financing System, which will help extend Shariah-compliant stock financing facilities to stockbrokers and their customers.

Needless to say, the heartening progress made by the Islamic finance sector is a good omen for the national economy. Since there is a growing tendency among the people to invest in Shariah-compliant banking products, the Islamic finance industry has a bright future in Pakistan.