The Islamic finance industry continued the growth momentum in Pakistan in 2021 proving its viability supported by strong public demand and focus on real economic activities. The industry which re-started the journey in Pakistan with the first Islamic banking license granted to Meezan Bank with almost a zero-based is growing day by day and expected to reach Rs 5 trillion mark in terms of assets by end of December 2021, while the market share of conventional banking sector is on a constant decline. Pakistan is ranked 8th in the Global Islamic Economic Indicator list with the sustainable growth of Islamic institutions in the financial sector and economy of the country.
During 2021, Islamic Finance Industry of Pakistan achieved applaudable growth, effectuated major significant developments, and received global recognitions.
The key developments during 2021:
Islamic Banking
From its inception in 2000s, Islamic Banking in Pakistan has had a swift and continuous growth journey. There are five full-fledged Islamic banks (Al Baraka Bank Pakistan, BankIslami 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 fully-fledged Islamic bank.
As of June-2021, Pakistan’s Islamic banking assets and deposits constitute 17.0% and 18.7% of total banking assets and deposits of the country, respectively. During 2021, Islamic banking in Pakistan grew at annual rate of 30%, which has been the highest ever growth of the industry since 2015, with Islamic Banking Assets expected to reach Rs 5.5 trillion by awaited financials of year end 2021.
During 2021, SBPÂ issued its 3rd Strategic Plan for Islamic banking. The targets envisage achieving a 30% share in both assets and deposits of overall banking by 2025. The SBP Strategic plan outlines 6 pillars for the promotion of Islamic banking sector in Pakistan.
| SBP Islamic Banking Strategic Plan 2025 – 6 main Pillars |
|---|
| (1) Strengthening Legal Landscape(2) Enhancing Conduciveness of Regulatory Framework
(3) Reinforcing Comprehensive Shariah Governance Framework (4) Improving Liquidity Management Framework (5) Expanding Outreach & Market Development (6) Bolstering Human Capital & Raising Awareness |
In order to improve the Liquidity Management Framework for Islamic Banking Industry and recognizing importance of Islamic banking sector in enhancing the effectiveness of monetary policy implementation, SBP has introduced Shariah Compliant Standing Ceiling Facility [financing to Islamic Banks on an overnight basis against Shariah compliant collateral] and Open Market Operations for Islamic Banking Institutions. This is a historic measure, as it would result in significant increase in liquid investments of Islamic Banks, along with creating a whole new Islamic money market segment for the industry.
Moreover, 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, reflecting global recognition of the blooming Islamic Finance Industry of Pakistan.
Takaful
The Takaful sector in Pakistan is also catching pace, there are four dedicated Takaful operators and 23 Takaful windows operations by Insurance companies and the sector is expected to grow rapidly with the growth of Islamic banking and consumer finance in the country.
InsurTech 100 is a prestigious list that recognizes 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.
Islamic Capital Markets
Pakistan Stock Exchange (PSX) bagged the Best Islamic Stock Exchange Award 2021 by Global Islamic Finance Awards (GIFA). PSX has total listed capital of Shariah-compliant companies of Rs770 billion, making up 53% of the total listed capital. These include Modarabas, Islamic Banks, Islamic Mutual Funds and ETF.
With Issuance of fresh GOP Ijarah Sukuks of around Rs 736 billion, US$ 4.13 billion approximately during the year, Governments’ domestic debt is 5% constituted by Islamic financing as compared to 3% 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 10% by the end of 2022-23. The size of Islamic Capital Market in Pakistan is growing rapidly, and with this plan, the growth prospects are promising.
During the year, Pakistan’s leading Islamic bank, Meezan Bank, collaborated with National Clearing Company of Pakistan Limited (NCCPL) to develop new Shariah-compliant share financing products for capital market. Through this collaboration, NCCPL and Meezan Bank introduced Morabaha Share Financing System (MSF) that will help in extending Shariah-compliant stock financing facilities to stockbrokers and their customers. This would help increase general public investment in the stock market, by providing Shariah-compliant financing arrangement.
Way Forward
The year 2021 proved to be a fruitful year for Islamic finance sector in Pakistan and despite economic challenges and COVID related slowdown the sector has not only shown the resilience but also witness a steady growth. Basic on the sound growth and strong fundamentals, the Islamic finance sector is expected to continue the uphill journey in 2022 and by the end of 2025, the industry is expected to reach Rs 10 trillion benchmark.
[box type=”note” align=”” class=”” width=””]About the authors:
Ahmed Ali Siddiqui, Director, Centre for Excellence in Islamic Finance (CEIF) – IBA Karachi; Maryam Tariq, Research Associate, IBA CEIF — IBA Karachi[/box]