In Pakistan, Islamic finance has grown fast, but compared to international hubs like Malaysia, UAE, Saudi Arabia, and even Indonesia, there are still some clear gaps. Some of the main gaps are as under:
Market share and depth
In Pakistan, Islamic banks hold approx. 22% of total deposits and 29% of total financing. Some older SBP data put it around 14% and Islamic banking assets are around 11% of the total banking sector. Internationally, Iran and Sudan are 100% Islamic. Saudi Arabia 63%, Kuwait 40%, Malaysia 30%, UAE 20.4%. Even Malaysia is still only in the early 20s%, but its ecosystem is much deeper.
The global Islamic finance industry is estimated at over $5 trillion. Pakistan’s contribution to the global Islamic banking market is significant. The country’s Islamic finance ecosystem includes Islamic banking institutions, sukuk (Islamic bonds), and takaful (Islamic insurance). Pakistan’s Islamic banking sector is expected to continue growing, driven by government initiatives and increasing demand for Shariah-compliant financial products. Islamic banking sector is expected to reach a 30% market share by 2026, with assets growing at an average rate of 25-28% annually. This growth is driven by a predominantly Muslim population, modest financial inclusion, and government support. Islamic banking assets have reached $40.7 billion by March 2025, accounting for approximately 21.1% of the country’s total banking sector assets. This growth is driven by regulatory support, public demand, and the government’s goal to transition to a fully Shariah-compliant financial system by 2027.
Regulatory and legal framework
Pakistan only got its first formal legislative basis for Islamic banking with the Banking Companies (Amendment) Act, 2024. Before that it was mostly SBP circulars and guidelines. The new Part II-A sets only foundational principles and relies on old provisions. There are minimal statutory definitions for products like Musharakah, Murabahah, Salam, Istisna, Tawarruq. That causes legal adaptability problems, especially in recovery cases. Internationally, Malaysia, Bahrain, UAE have dedicated Islamic finance acts, Shariah governance standards, and courts with expertise. The IMF also notes Pakistan still has gaps in institutional, legal, and regulatory frameworks.
Product diversity and capital markets
There is limited supply of Shariah-compliant products. Also, there is lack of diversity in Islamic capital market instruments and investors. The price formation/discovery is also inefficient. Internationally, Sukuk markets in Malaysia, UAE, Saudi are deep and liquid. Fintech, crowdfunding, P2P lending are being used for Islamic capital markets abroad. Pakistan is still developing these channels.
Distribution and financial inclusion
Distribution channels are limited, with very little outreach in rural areas where 63% of Pakistan’s population lives. Different studies point out Islamic finance could serve micro SMEs, agriculture, low-cost housing, and infrastructure, but that’s not happening at scale yet.
Standardization, research, and Shariah governance
There is need for consistent roadmap and coordination between policymakers, scholars, and regulators. Risk-sharing contracts, sovereign sukuk, and integration with Zakat/Waqf are still nascent. Internationally, Malaysia and IIUM lead in research – 100 publications versus Pakistan’s 21. Southeast Asia is the global hub for Islamic finance research.
System-wide transformation
Pakistan still runs a dual banking system – Islamic and conventional side by side. The 2022 Federal Shariah Court judgment and 26th Constitutional Amendment set a deadline of Jan 1, 2028 to eliminate riba. So the push is there, but execution needs systemic transformation.
In short, Pakistan has momentum and policy commitment, but lags on legal specificity, product innovation, capital market depth, rural distribution, and research compared to Malaysia/UAE/Saudi Arabia. The biggest immediate blockers are regulatory gaps and lack of standardized definitions for Islamic contracts.