The outbreak of the global COVID-19 pandemic that started at the beginning of 2020 has brought all business activities to a standstill with an unparalleled and unforeseen impact on human lives, economies, societies and livelihoods. The pandemic resulted in one of the worst health crises across the globe and severely impacted key economic indicators. Economic shutdown has created issues like demand and supply shocks that echoed through the global economy.
The world is still dealing with the pandemic situation and many countries have slowly started to revive their economy by resuming trade and businesses. There has been an enormous loss in the past few months both in terms of the economy and human lives.
Due to the impact of the pandemic, governments and financial regulators have deployed sizeable stimulus packages and various assistance programs in order to contain the crisis and stabilize the economy. This includes addressing demand and supply disruptions, maintaining cash flows and keeping workers employed.
Like other sectors and industries, the global financial services industry also suffered from the impact of COVID-19. The industry is still facing challenges such as health, liquidity, credit risks, etc. Similarly, the Islamic financial industry is also not immune to the brutality of the pandemic. At the beginning of 2020, the industry was expected to perform well but due to the pandemic and lower oil prices, the outlook on global finance has changed.
However, the Islamic financial services industry of Pakistan has achieved a sensible and stable performance during the 2020 fiscal year which includes banking and non-banking segments. At present, the Islamic financial services industry consists of Islamic banks, microfinance banks, Islamic mutual funds, Modarabas, Takaful companies and Islamic REITs. Commercial and microfinance banks operate under the State Bank of Pakistan (SBP) while the rest of the sector are supervised by the Securities and Exchange Commission of Pakistan (SECP).
Review of 2020
The Islamic banking industry which has a major share of the Islamic financial services industry has progressed well in Pakistan. According to the Islamic banking bulletin of the SBP for the period ended the 30th June 2020, the Islamic banking industry performed well. Overall, the market share increased to 15.3% as compared with 14.2% in the same period of the previous year. Year-on-year growth was recorded at 21.4% and 22% for assets and deposits respectively. The branch network of the Islamic banking industry also increased from 2,913 branches to 3,274 branches during the 2020 fiscal year which reflected a growth of 12.4%.
Despite the difficult operating environment, the results of the banking sector was very encouraging. Meezan Bank had a 65% growth in profits according to the recently announced results of the third quarter of its current financial year. The impressive performance was due to the expansion of its operations in various fields across the country. Faisal Bank also converted a majority of its branch network into Shariah compliant banking and it emerged as a strong fully-fledged Islamic commercial bank.
During the pandemic, the SBP issued several directives and took remedial measures in order to dampen the adverse effects of COVID-19 and to enable banks and development financial institutions continue to fulfill their role in funding the real economy. The SBP has provided regulatory relief by revising the prudential regulations for corporate/commercial banking, consumer financing, agricultural financing, microfinance, SME financing and housing finance.
These initiatives included the rescheduling and deferment of borrowed facilities, reduction in the policy rate from 13.25% to 7.25%, a new concessional refinance facility for wage and salary payments and funding to hospitals and for the setting-up of new industrial units and such.
Encouraging activities in the issuance of Sukuk were seen within the financial market and a good number of Sukuk facilities were issued during the year. The most notable Sukuk issuances were the energy Sukuk and housing finance Sukuk issued by the Pakistan Mortgage Finance Company. The said Sukuk were tax-free and it was the first time that they were introduced in Pakistan. Besides, the government of Pakistan also issued sovereign Sukuk Ijarah to support Islamic banks in managing their excess liquidity.
Recently, the SBP also took the initiative to facilitate non-resident Pakistanis to open a Roshan Digital Account (RDA) for conventional and Islamic banking. The RDA provides digital banking facilities including access to online banking and domestic fund transfer including investing in government bills, the stock exchange and the real estate sector with an option of full repatriation.
Non-resident Pakistanis can also invest in three-month to five-year Shariah compliant savings certificates such as the Islamic Naya Pakistan Certificates both in foreign and local currencies. This is an innovative banking solution for millions of non-resident Pakistanis and also for the first time in Pakistan’s history.
On the other side, non-banking segments such as Takaful companies, Islamic mutual funds, Islamic REITs and Modarabas also made satisfactory progress despite the difficult operating environment due to the pandemic. The SECP also provided regulatory and other relief measures in order to reduce the impact of the pandemic on non-bank finance companies.
Preview of 2021
Pakistan, being the second-largest Muslim country in the world, has great potential for the expansion of Islamic finance. At present, the market share is around 16% and the government of Pakistan is targeting to increase it to 25% by 2023 under the National Financial Inclusion Strategy for Islamic Banking. The recent move to promote the construction industry and mortgage financing is creating opportunities for Islamic financial institutions to engage with the Islamic mortgage financing segments where there is a need for borrowers to obtain Shariah compliant financing.
The revised instruction of the SBP for Islamic banking windows to expand the scope of operations would also help to enhance the market share of the Islamic financial services industry. At present, the share of Islamic financing to the agricultural and SME sectors is very low and the SBP is very keen for the growth of the said sectors by engagement with Islamic banks through Shariah compliant financing. It is worth noting that a large portion of the country’s population is still attached to the agro-economy, but its real potential is still untapped.
Although the markets have restored their operational position amid the pandemic, expecting the same level of performance is unrealistic since the virus has not completely vanished. COVID-19 cases are still increasing and Pakistan may experience an uptick in cases once again. Social distancing is likely to be the catalyst for Islamic banks across many countries to accelerate their digital transformation strategies especially for financial inclusion, which is also a core issue for Pakistan as well.
COVID-19 has raised several challenges for the economy and businesses and these recent examples have demonstrated how it has increased awareness of the potential of Islamic finance. Digitalization can play a key role in the success of the Islamic financial services industry. The potential market for Islamic fintech services is vast in Pakistan. As such, fintech has the potential to play a major role in the Islamic finance industry primarily to improve processes and cost-effectiveness, while maintaining Shariah compliance.