The Islamic finance service industry of Pakistan has performed well in 2021. Being the second-largest Muslim population in the world after Indonesia provided huge opportunities for the industry. The Islamic finance service industry has now become an important component of the industry by experiencing remarkable growth over the last two decades. The use of Islamic banking products by users such as consumers, the corporate sector and the government is on the rise which is widening the share of Shariah compliant products and services at large within the unserved and underserved sectors. Islamic banking throughout has remained an important segment for the State Bank of Pakistan (SBP). This is reflected though the SBP’s dedication, commitment and continuous engagement for the sustainable growth of the Islamic finance service industry in Pakistan.

Review of 2021
In Pakistan, the Islamic banking industry has a large share within the overall segment of the Islamic finance service industry. Islamic banking continues to gain popularity in Pakistan as it has an impressive growth rate in the past few years as compared with the growth rate of conventional banking both in assets and deposits.

According to the Islamic Banking Bulletin of the SBP dated the 30th June 2021, the Islamic banking industry has maintained its growth momentum. Assets and deposits increased by 32% and 29.7% respectively on a year-on-year basis. The market share of the Islamic banking industry’s assets and deposits in the overall banking industry were recorded at 17% and 18.7% respectively by the end of June 2021. The number of branches also increased by 9% to 3,583 from 3,274 in the previous year.

Despite a difficult operating environment, the results from the banking sector are very encouraging. Meezan Bank had a remarkable growth in its asset size and profitability and holds the leading position within the Islamic banking sector.

Faysal Bank (FBL) made a successful transformation from a conventional bank to an Islamic bank and emerged as one of the major players in Pakistan’s banking industry. The conversion of FBL is recognized as the largest and most successful Islamic conversion globally.

During the year, the SBP unveiled a third five-year strategic plan for the Islamic banking industry. The strategic plan has set headline targets to be achieved by 2025. The said plan aims to set a strategic direction for the industry to strengthen the progressive momentum and lead the industry to the next level of growth through specified targets by focusing on six strategic pillars elaborated in the said plan.

Under the supervision of the Securities and Exchange Commission of Pakistan, the non-banking Islamic sector consisting of Takaful, Islamic mutual funds, REITs, non-bank finance companies and Modarabas also performed well.

Within the mutual fund segment, Islamic funds made remarkable progress and attained a sizeable growth. Al-Meezan Fund holds the leading position by having the highest fund size within the said sector. The Takaful sector is also enhancing its share within the Pakistan market through innovating products and services.

Salam Takaful, one of the fully-fledged Takaful companies, is progressing well and enjoying prominent positions within the said segment and also featured in the coveted list of InsurTech100 for 2021.

Within non-banking Islamic finance, the Modaraba sector also did well and increased its asset size in the 2021 financial year. However, during the year, the tax authority withdrew the income tax exemption for the Modaraba sector which has weakened the confidence of investors in the said segment.

In order to support the construction and real estate sectors, the Islamic banking industry has played a leading role in mortgage financing and secured a share of more than 55% of the overall housing finance market in Pakistan. The Islamic debt market also witnessed a good number of Sukuk issuances within the financial market. The Pakistan Stock Exchange also performed well and witnessed a sharp rise of around 74% since hitting its low during March 2020 on account of COVID-19.

Preview of 2022
The overall financial sector is broadening across all segments of banking and non-banking. Pakistan’s entire financial sector continued to perform well during the challenging times of the COVID-19 pandemic.

Digital banking, introduced during the pre-pandemic times, got market penetration and played a key role in keeping the financial system intact. Within the Islamic finance service industry of Pakistan, Islamic banking dominates and holds a large share within the sector.

The SBP’s strategic plan for the growth of Islamic banking would lead the direction in achieving the specified targets by focusing on six strategic pillars. The plan will emphasize on the Islamic banking industry developing innovative Shariah compliant products to cater to the needs of underserved sectors particularly SMEs and agriculture which are critical for the growth of the country’s economy.

Achieving high COVID-19 vaccination numbers and the expansion of social protection programs will also help in moving toward inclusive and sustainable growth. The headline targets of the said plan is a 30% share in assets and deposits of the overall banking industry and a 35% share in the branch network of the overall banking industry.

The said target seems quite logical and achievable keeping in view the past performance of the Islamic banking industry in the last few years. The non-banking segments including the Islamic debt and equity markets are also expanding which will ultimately support the growth of Islamic finance in Pakistan’s markets.

Conclusion
Islamic finance, particularly Islamic banking, has achieved impressive growth in the past few years. However, the huge market is still untapped particularly the SME sector of Pakistan. For sensible and targeted growth of the said industry within the masses, there needs to be higher digitalization and fintech collaboration. This could help in strengthening their resilience even in volatile environments and open new avenues for further growth. The Islamic finance service industry has now become an important component of the overall financial sector of Pakistan.

However, the majority of the said industry’s network are concentrated in urban areas and they need to expand their outreach to the unserved/underserved sectors in the country.

Muhammad Shoaib Ibrahim is CEO of First Habib Modaraba. He can be contacted at [email protected]