Innovation at Asia’s Crossroads


In a practical sense, Islamic Banking is the transformation of conventional money lending into transactions based on tangible assets and real services. Only 29% Pakistanis claim to have heard and understood the meaning of the term ‘Islamic Banking’ whereas an equal proportion of Pakistanis claim to have not heard about Islamic Banking at all. These were the findings of a recent survey conducted by Gallup Pakistan, which is a part of the nationwide Access to Finance Study conducted by the State Bank of Pakistan.


While 71% of the population still remains muddled over the question: is Islamic Banking really Islamic? Pakistan is headed towards developing an economic system based on Islamic principles. In the past 15 years, Pakistan has shifted to a dual Islamic/conventional financial system, which facilitates business with the global economy while making progress towards a fully Islamic financial system by building market demand for it. Policy makers and regulators in Pakistan have made positive strides to reform the legal and regulatory framework in the past decade.


With the second largest Muslim population in the world after Indonesia, Pakistan has resilient agricultural production, strong potential for hydropower generation, oil production, natural gas reserves, and large gold and copper ore deposits. These resources should be fully utilised to help accelerate the growth and development of the country, and the Islamic finance industry is a potential partner for structuring and financing such industrial projects. The share of Islamic financial market is rising since the adoption of a dual financial system policy in the early 2000s when Dr.IshratHussain former Governor SBP issued the first Islamic Banking license to Meezan Bank Limited. Currently, Islamic Banking in Pakistan holds 11.9% market share of the overall banking system by assets and it is expected to reach 15% by the end of 2018. Islamic capital market sector registered a remarkable growth at a double-digit rate in the past decade, recorded mostly by Islamic mutual funds. Takaful and Modaraba companies are also catching up, despite the relatively small size of these industries. In all Islamic finance industry segments, finance professionals and investors maintain a positive economic outlook, and all Islamic finance institutions have built strong fundamentals. Islamic economic system is not only about the prohibition of interest, but it also promotes values such as social responsibility, transparency and accountability.


In a recent report published by Islamic Research and Training Institute, Thomson Reuters and Centre of Excellence for Islamic Finance (CEIF – IBA) revealed key trends in the future growth of Islamic finance in Pakistan which includes the rise of branchless Islamic banking via mobile services, the fast growth of the KME Meezan Index (KMI-30) and Islamic All Shares stock indices, open market operations on government Sukuk to maintain the liquidity of the Islamic Banking sector, the rapid expansion of Islamic microfinance,  and manymore. During the launch of this report at the World Islamic Finance Forum held in Karachi, Mr.Ishaq Dar, Finance Minister said: “Let me assure all the stakeholders of Islamic finance industry of full support and co-operation of the federal government for the promotion of Islamic finance in the country”. Furthermore he said: “our government desires to tap on the surplus liquidity of Islamic banking industry to fund infrastructure projects. This indicates a huge potential market for Islamic banking industry especially in the infrastructure and energy sectors to supplement China-Pakistan Economic Corridor (CPEC) package worth $46 billion. I believe that a portion of these projects, in line with the availability of funds and the capacity of Islamic financial institutions, may be taken up by the Islamic finance industry”.


On the outset, this far-fetched agenda of the finance minister requires reform of regulations and integration with global Shariah and governance standards. The expansion and deepening of an Islamic finance education curriculum are very important along with marketing efforts towards rural areas. There is also a massive need to spread awareness and financial inclusion. Another key impediment towards the steady growth of Islamic finance sector is a low supply of qualified Islamic banking professionals. Islamic banks currently hire conventional bankers for their expertise, but who, by their background and training are unable to comprehend between the two. They, therefore, perpetuate the re-engineering and imitation approach in Islamic finance products. This loophole right at the top is one of the key reasons behind 71% of Pakistani’s who fail to understand Islamic Banking. Another challenge faced by the industry is the lack of Shariah scholars. The current size of Shariah scholars advising the industry is very small. They must have a unique distinction of familiarity with English language, mastery over Islamic jurisprudence and knowledge of modern banking. But their horizon is often restricted to the traditional modes of financing, such as musharakah, murabahah, mudarabah, ijarah, salam, etc. There needs to be a proper International level institute set up to produce shariah-scholars of high calibre who are well versed in modern finance, accountancy, taxation, economics and law. As long as we do not meet this challenge, we are likely to remain trapped in a low-level equilibrium, despite current impressive growth-rates.


There is no doubt that in the coming decade, Pakistan has the potential of being a key international player in the growth of the global Islamic finance industry. But we have to address these challenges beyond the pressure of big fat conventional banks and financial institutions. Perhaps the emergence of London as the global hub of Islamic Finance, and consequent pressure on the universities and research institutes in the United Kingdom, I am positive it will help us tremendously to move in this direction.