For the development and growth of Islamic finance, the government of Pakistan is one of the frontline countries playing an active and effective role. In the country the State Bank of Pakistan (SBP) established a dedicated Islamic banking department and Shariah board to approve and monitor the principles for Islamic banks.
International studies recorded that the significance of banking system in the economic growth of a country can be done by productive investment in country. It is said that Islamic banking assists in overcoming short falling and gives an optimistic boost to economy to upward and increase a society to self-sufficiency economy by equal income distribution. Furthermore, Islamic banking has an optimistic impact on economic development as it leads toward progress. Islamic banking also offers income distribution equally and provide cash to the poorest class of society by social justice, and in Islamic banking system there is no assurance of profit. Islamic banking operations are directly affected through the success or failure of customer’s operation. The association between customer and bank is that of partnership, and return will be shared between both depositor and banker. Loss also shared by both parties. This sharing principle is completely dissimilar from conventional banking system. It launches the idea of sharing and offer an incentive for depositor to utilize the finance in a better way and get maximum return on its investment.
The emergence of Islamic finance across worldwide markets has gained the attention of various international financial institutions such as the World Bank, International Monetary Fund (IMF) and Asian Development Bank (ADB). They now acknowledge Islamic finance for its sustainable and ethically responsible nature. These organizations no doubt, have realised that Islamic finance has the potential to assist in problems like poverty elimination and boosting prosperity in developing states. The global Islamic finance industry identified resilience during the pandemic.
According to the Islamic Corporation for the Development of Private Sector (ICD) of the Islamic Development Bank Group Refinitive Islamic finance development report 2022, the total Islamic finance assets boosted to $4 trillion with a 17 percent annual growth rate. The global Islamic banking sector grew by 17 percent to $$2.8 trillion. S&P Global Ratings expects stronger economic growth in core Islamic finance countries and will boost industry assets about 10 percent during 2022–2023. However, worldwide headwinds could change the scenario, with the US Federal Reserve and other major central banks further tightening their monetary policies.
Pakistan has the opportunity to explore options that can help convert the country’s external debt to Shariah-compliant products. As per SBP, Islamic banking aims to expand up to 35 percent within the next two years. Our country is working on its own Islamic banking model. Presently 20 percent of commercial banks have adopted Islamic banking and one private bank has completely been converted into an Islamic bank.
The Government of Pakistan is committed to promote Islamic finance and eliminate interest based system in Pakistan. SBP established two sectors in its Islamic banking structure – Islamic finance and Islamic development. People’s interest in Islamic banking is growing and this facility is being enlarged to enhance their quality of life. While the task of converting from conventional banking to Islamic banking is a challenging one, as SBP is offering its full cooperation and will come up with a revised plan. Through Islamic banking, more people will be able to avail the facility of financing.
According to SBP during the period July-September 2022, assets of Islamic Banking Industry (IBI) grew by Rs 121 billion and reached at Rs 6,902 billion as against to Rs 6,781 billion in the last quarter. Market share of IBI’s assets in overall banking assets also grew to 20 percent by end September, 2022 as against to 19.5 percent in the last quarter. It was recorded that the expansion in asset was mainly backed by investments (net) that exhibited a quarterly upsurge of Rs 149 billion. Likewise, financing (net) of IBI experienced an escalation of Rs 24 billion during the period under review. The share of investments (net) and financing (net) in the total assets of IBI was registered at 40.9 percent and 43.3 percent, respectively by end September, 2022. During the period under review, assets of IBs observed a surge of Rs 23 billion and reached Rs 3,760 billion by end September, 2022. Besides, assets of IBBs grew by Rs 98 billion and were registered at Rs 3,142 billion by end September, 2022. The share of Islamic Banks (IBs) and Islamic Banking Branches (IBBs) in overall assets of IBI was recorded at 54.5 percent and 45.5 percent, respectively by end September, 2022.
Furthermore, IMF, World Bank and ADB have accepted Islamic finance as a viable financial system and promote it as a tool for shared prosperity. This also presents an opportunity for Pakistan to explore options with the IMF, World Bank and ADB to offer financing on Shariah-compliant modes that can assist our country convert the country’s external debt to Islamic financing modes. It is also important to mention here, the Islamic finance industry in Pakistan is expected to continue its growth trajectory over the medium term, driven by strong government push and steadily rising public demand for Islamic products.
However, the industry faces major issues that could slow its growth such as the still-developing Islamic finance regulatory framework.