ISLAMABAD: Pakistani finance minister Ishaq Dar said on Monday assets of the country’s Islamic banking industry had posted year-on-year growth of 29 percent in fiscal year 2022, as he addressed the inaugural Islamic Capital Markets (ICM) Conference in Islamabad.
The forum is being jointly hosted by the Securities and Exchange Commission of Pakistan (SECP) and the Accounting & Auditing Organization for Islamic Financial Institutions (AAOIFI), a leading Bahrain-based international not-for-profit organization responsible for the development and issuance of standards for the global Islamic finance industry. It has issued a total of 100 standards in the areas of Shariah, accounting, auditing, ethics and governance for international Islamic finance.
The SECP and AAOIFI also signed a Memorandum of Understanding (MoU) at the conference for joint cooperation in areas of “common interest” that would support the development of the Islamic banking and finance industry.
In 2021, the government set a target of increasing the share of Shariah-compliant instruments in government securities to at least 10 percent by the end of 2022-2023. There are 22 Islamic banking institutions currently operating across the country.
“The size of the Islamic finance industry in Pakistan is estimated to have surpassed $42 billion in 2022, and assets and deposits stand at 7.2 trillion rupees and 5.2 trillion rupees respectively,” Dar said, addressing the conference, adding that Islamic banking industry assets posted year-on-year growth of 29 percent in FY22.
Islamic banks are the largest contributor to the Islamic finance industry at 67 percent (total assets), followed by sukuk at 26 percent (outstanding amount), Islamic funds at 6 percent (total assets) and takaful at 1 percent (total contributions).
Pakistan has the second-largest Muslim population in the world with very low banking penetration. The government seeks to increase financial inclusion through promoting Islamic finance, as part of the National Financial Inclusion Strategy. Only 21 percent of the adult population had a bank account in 2017, with 13 percent of adults citing religious reasons for not having them, according to the World Bank.
“Islamic finance has the potential to address the challenges to ending extreme poverty and boosting shared prosperity,” Dar said. “Islamic finance is equity based, asset-backed, ethical, sustainable and environmentally and socially responsible finance.”
“Pakistan has a strategic plan in place to grow Islamic finance … We have a financial inclusion strategy that covers all the components needed to create Islamic financing.”
Pakistan’s sukuk market is developing with outstanding volumes of $11 billion at the end of the first quarter of 2022, with 82 percent in local currency. Also, guidelines on issuing green sukuk and bonds were issued in 2021 by the Securities and Exchange Commission of Pakistan.
“Even though the size held by the Islamic capital market is smaller than held by the Islamic banks, its effect could be far reaching and significant,” Chairman of the AAOIFI Board of Trustees, Sheikh Ebrahim-bin-Khalifa Al Khalifa, said, addressing the event. “Islamic capital market exhibits stronger commitment to transparency, disclosure compared to Islamic banking.”
He termed Sukuk the most important product of Islamic finance: “Sukuk offers a compelling solution to everyone, especially Muslim governments seeking to meet their borrowing needs while adhering to Sharia principles and rules.”
“Financial technology can be utilized in the Islamic capital market in a variety of ways including by crowdfunding and peer to peer lending which will connect individuals and businesses seeking financing without potential investors,” Sheikh Ebrahim added.
State Bank Governor Jameel Ahmed said Pakistan was committed to transforming the financial sector into a Shariah-compliant system and working closely with other government institutions to achieve this goal.
“The development and deepening of Islamic capital markets is imperative to support economic growth, mobilize savings, improve resource allocation, and provide diverse funding resources to economic agents,” he said.
The Islamic finance industry faces multiple challenges in Pakistan, including still-developing Islamic finance regulatory framework, limited supply of Shariah-compliant products and gaps in the distributional channels, with limited outreach in the populous rural areas where 63 percent of the total Pakistani population resided in 2020, according to World Bank. The financial sector in general also remains under-developed, with a challenging business environment.
Ahmed said the main impediments to the growth of Islamic capital markets included gaps in institutional, legal, and regulatory frameworks:
“A lack of efficient ways for price formation and discovery; and a lack of diversity in Islamic capital markets instruments and investors.”
