Islamic finance has shown amazing growth over the past two decades. Strong demand for this segment has resulted in global financial assets surging. Growth in the Islamic banking sector continues to surpass that of conventional banks in several areas of banking and finance, supported by strong retail demand and positive legislation for the industry by the regulators.
Pakistan, with a large Muslim population, remains at the forefront in developing and promoting Islamic finance and is one of the active and effective players in the global Islamic finance industry. It is one of the world’s diversified countries in terms of its culture, landscape and climate. The nation has important strategic endowments and great potential for growth. Located in the heart of Asia, Pakistan is a gateway to the energy-rich central Asian states, financially liquid Gulf states and economically advanced Asian region.
The Islamic finance industry has grown rapidly in Pakistan in the last few years. Pakistan has been moving toward developing an economic system based on Islamic principles. In the last one and a half decades, Pakistan has shifted to a dual Islamic/conventional financial system which encourages businesses along with the global economy. Simultaneously, it has also progressed toward making a fully Islamic financial system by creating market demand.
The Islamic finance industry of Pakistan has diversified segments consisting of Islamic banks, microfinance banks, Islamic mutual funds, Modaraba entities, Takaful companies and Islamic REITs. Commercial and microfinance banks operate under the State Bank of Pakistan (SBP) while the rest of the entities in the sector are supervised by the Securities and Exchange Commission of Pakistan (SECP).
Review of 2016
The Islamic banking industry has a large share within the Islamic finance industry and witnessed good growth during 2016. the market share of Islamic banking stood at around 14%. The Islamic banking industry continued its double-digit growth reflected by the year-on-year growth of its assets which is higher than the growth of the overall banking industry. Islamic banks are growing fast and have already expanded significantly in the consumer finance sector, capturing half of the market share in car leasing and mortgage finance.
The SBP has played an instrumental role in providing an enabling environment for growth of the Islamic banking industry and its promotion at the grass roots level. Recently, the SBP has introduced a comprehensive legal, regulatory and Shariah compliance framework for the Islamic banking industry. As a facilitator, the SBP is not only actively engaged in capacity-building of the industry through various promotional and training programs but also in collaboration with the industry including issuing a five-year strategic plan for the Islamic banking industry which provides a direction and roadmap for the industry to sustain its growth momentum.
The SECP has also played a vital role in the promotion of Islamic finance within the country. The authority is a regulator of the Islamic capital market responsible for the regulation and supervision of
Modarabas, Islamic mutual funds, Takaful, Islamic REITs and other Islamic non-bank financial institutions as well as the issuance of Shariah compliant instruments such as Sukuk. The Islamic Finance Department (IFD) which established in 2015 has made excellent progress under the supervision of Bilal Rasul. The IFD was established for the first time at the SECP in order to provide a coordinated and holistic approach for governing and promoting Shariah compliant companies and Sukuk. Under the visionary leadership of Zafar Hijazi, the chairman of the SECP, the IFD has embarked on a mission to eliminate Riba from the financial market. Zafar has a keen interest in Islamic finance and is very enthusiastic in promoting it within Pakistan. The IFD has taken various remarkable initiatives under his supervision for the growth of Islamic finance and some of the key initiatives are as follows:
The launch of the All-Share Islamic Index.
The definition of a Shariah compliant company has been added into the proposed Companies Law 2016.
The institution of many reforms for the Takaful industry for its further development and growth.
During the year, the Center of Islamic Excellence-IBA arranged an international conference on Islamic finance which was well received. Islamic Finance news of Malaysia also did a roadshow in Lahore, Pakistan in September which also proved to be a successful event. Regarding Sukuk issuance, a consortium of 16 banks arranged a PKR100 billion (US$947.76 million) Sukuk facility for the Neelum-Jhelum Hydropower Project. This was the country’s biggest-ever fund mobilization for a public sector entity. Recently, the government also issued a US$1 billion Sukuk facility in the international market which was oversubscribed by 2.5 times. The Pakistani Sukuk market has witnessed growth over the years with both sovereign and corporate entities as issuers. Islamic REITs were also launched during this period with the first iREIT of Pakistan and Southeast Asia.
Preview of 2017
As the two apex regulators of Pakistan’s financial industry, the SECP and SBP are closely collaborating with each other on various forums for the development of Islamic finance. The SBP has introduced a comprehensive legal, regulatory and Shariah compliance framework for the Islamic banking industry. Due to a downward revision of the initial paid-up capital requirement for the establishment of Islamic banking subsidiaries, a few other conventional banks are also planning to establish an Islamic bank as its subsidiary.
The IFD of the SECP has also done a remarkable job to develop Islamic finance. Being a capital market regulator, the SECP oversees several sectors of Islamic finance such as Modarabas, Islamic mutual funds, Takaful companies, Islamic REITs, Sukuk and the Islamic capital and debt markets. The IFD is entrusted with a mandate to develop the aforementioned sectors and is actively engaged. The department is focusing on a comprehensive Shariah governance and compliance framework, new products for different players of Islamic finance, enhancing outreach through microfinancing and microTakaful and the inclusion of financially excluded segments through product innovation and effective distributive channels.
The Islamic banking industry in Pakistan, just like other jurisdictions elsewhere, faces some key challenges including the limited availability of trained employees and a lack of understanding and awareness within the public. Despite its impressive growth, there is still a huge untapped market for the Islamic finance industry. Given its strong fundamentals and increasing public acceptability, the further growth prospects of Islamic finance in Pakistan are very promising.
So far, the Islamic finance industry has not penetrated deep enough to serve the financial needs of SMEs, agriculture, microfinance and low-cost housing. Pakistan’s massive infrastructure needs, especially those under the China-Pakistan Economic Corridor, represent lucrative Islamic finance public-private partnership opportunities in the high potential sectors of energy and construction.
Islamic finance is taking root in Pakistan with support from the government, the SBP and the SECP. Besides the growth in Islamic finance assets, sustained progress is being made on a long-term basis in regulations, the legal framework and capacity-building of market players. The Islamic finance industry is has a very bright future indeed in Pakistan.