Islamic finance — the uphill journey continues

The Islamic finance industry continued its impressive growth journey in Pakistan in 2021. Pakistan has been ranked 8th in the Global Islamic Economic Indicator list with the sustainable growth of Islamic institutions in the financial sector and economy.

In 2021, the Islamic finance industry of Pakistan achieved high growth, effectuated significant developments, and received global recognition. Here summarised are some major developments during 2021.

Global recognition

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.

In 2021, Governor SBP Dr Reza Baqir was appointed as the new chairman of the IFSB (Islamic Financial services board) council and general assembly for 2022.

In 2021, Islamic banking in Pakistan grew at an annual rate of 30pc, which has been the highest ever growth of the industry since 2015, with Islamic banking assets expected to reach Rs5.5 trillion by awaited financials of year-end 2021

The Islamic Financial Services Board is an international standard-setting body of regulatory and supervisory agencies that promotes the soundness and stability of the Islamic financial services industry, covering banking, capital market and insurance.

Banking

From its inception in the 2000s, Islamic banking in Pakistan has had a continuous growth journey.

There are five full-fledged Islamic banks (Al Baraka Bank Pakistan, Bank Islami Pakistan, Dubai Islamic Bank Pakistan, MCB Islamic Bank and Meezan Bank) and 17 conventional banks with stand-alone Islamic banking branches in the country. Faysal Bank is in the process of converting into a 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, Islamic banking in Pakistan grew at an annual rate of 30pc, which has been the highest ever growth of the industry since 2015, with Islamic banking assets expected to reach Rs5.5 trillion by awaited financials of year-end 2021.

In 2021, SBP issued its 3rd Strategic Plan for Islamic banking. The targets include achieving a 30pc 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, SBP has introduced Shariah Compliant Standing Ceiling Facility (financing to integrated banking information systems on an overnight basis against Shariah-compliant collateral) and Open Market Operations (injections) for Islamic Banking Institutions.

This is a historic measure, as it would result in a significant increase in liquid investments of Islamic banks, along with creating a whole new Islamic money market segment for the industry.

Capital markets

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 53pc 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 Rs736bn ($4.13bn approximately) during the year, 5pc of the governments’ domestic debt constitutes Islamic financing as compared to 3pc last year. The federal government of Pakistan 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 10pc by the end of 2022-23.

The size of the Islamic capital market in Pakistan is growing rapidly, and with this plan, the growth prospects are promising.

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 envisages investment in undeveloped land in Karachi, aiming to uplift the area and develop the real estate, including construction and sale of apartments and commercial units by the REIT Management Company for generating income for unitholders.

During the year, 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 Murabaha Share Financing System, which will help in extending Shariah-compliant stock financing facilities to stockbrokers and their customers.

Takaful

InsurTech 100 is a prestigious list that recognises the year’s most innovative and technology-driven companies that are addressing the digital transformation challenges in insurance. Over 1,400 companies were in contention under the radar of FinTech Global for 2021. Pakistani Takaful company Salaam Takaful Limited was featured in the said list.

It is the largest dedicated general takaful operator and the 1st Shariah-compliant InsurTech in Pakistan. The company has general takaful offerings backed by advanced technology and digitised processes. n

Ahmed Ali Siddiqui, Director, Centre for Excellence in Islamic Finance, IBA. Maryam Tariq, research associate

Published in Dawn, The Business and Finance Weekly,