- Targeted policy interventions can effectively unleash the true growth potential of Islamic finance in Pakistan, promoting financial inclusion and ethical financial practices across the nation
Interview with Mohammad Shoaib, CFA, Chief Executive Officer – Al Meezan Investment Management Limited
Profile:
Mohammad Shoaib has been the founding CEO of Al Meezan Investment Management Ltd, which is the largest Asset Management Company in Pakistan. His journey spans from setting up Pakistan’s First Shariah Compliant Asset Management Company in Pakistan about 29 years ago in 1995 to making it the largest AMC in the industry with funds under management of over PKR 460 billion (USD 1.6 billion) and with investor base of over 280,000 investors.
He completed his MBA from IBA in 1988 and got his CFA charter from CFA Institute, USA in 1999. Further he is a Harvard Business School Alumnus as completed Advanced Management Programme (AMP) from Harvard Business School in 2022 alongside global business leaders and CEOs, which reflects his commitment to lifelong learning.
He has to his credit the setting up CFA Society Pakistan in 2002 and serving as its founding President from 2002-2008.
He has received many accolades for his contribution to promoting Shariah-compliant investing as well as CFA programme as a tool to improve the skillset of Pakistani investment professionals. He was recognised as the “Most Influential CFA Charter Holder” by CFA Institute Magazine, in 2006, and was awarded another accolade of “Volunteer of the Year: Lifetime Achievement Award” in 2019 by CFA Institute.
He has been an active volunteer in many areas in the financial sector and some of his volunteer roles include Nominee director of SECP on Board of Directors of Pakistan Stock Exchange, Board member of Institute of Financial Capital Markets in Pakistan, Chairman, Mutual Funds Association of Pakistan, Board member Pakistan Institute of Corporate Governance etc.
In December 2021, he was recognised by Asia Asset Management as “One of the Top 25 Leaders in Asset Management” in Asia and, in the year 2022, he was recognised as “CEO of the Year” by 16th Consumers Choice Awards.
During 2008 to 2012, he was elected by 16 CFA societies in Asia Pacific region to represent over 16,000 charter holders on the Presidents’ Council of CFA Institute. During his career, he has either served or is currently serving in many volunteer capacities including:
- Member of CFA Institute Asia Pacific Advocacy Committee
- Member of CFA Institute Global Task Force on Corporate Governance
- Member Executive Committee Global Investment Performance Standards
- Member Asset Manager Code Advisory Committee of CFA Institute
- Board member Pakistan Institute of Corporate Governance (2011- 2014)
- Member of the Academic Board of Institute of Business Administration, Pakistan
- Member of the Central Bank’s Committee on Islamic Capital Markets
- Member of Annual Conference Advisory Committee of CFA Institute
He has also served as member of the Islamic Capital Markets committees for State Bank and Securities & Exchange Commission of Pakistan.
He is board member of CFA Society Pakistan and holds the portfolios of Advocacy and GIPS Chair. He has served as Chairman and director on the board of Mutual Funds Association of Pakistan.
He has participated in various seminars, conferences and workshops across the globe during his career in managing investments spanning over more than 30 years. During the last 21 years of his career, he has focused exclusively on managing Shariah-compliant or Islamic portfolios. He has been speaker/panelist at various conferences on the subject of Islamic Asset Management in Middle Eastern and Far Eastern countries. He has also been featured in CFA Magazine with reference to his contribution to Islamic asset management, corporate governance and volunteer leadership roles.
PAGE: What is your perspective about the fast-growing Islamic financial services in Pakistan?
Mohammad Shoaib:
- The products and services in the Islamic Financial System are not much different from the traditional financial system. A key differential between the Islamic Financial System and its conventional counterpart stems from the fact that products in Islamic finance/capital markets are designed based on Shariah law and principles.
- One of the primary differences between the Conventional Financial System and the Islamic Financial System is that the Islamic Financial System prohibits usury (Interest/Riba) and speculation. Some people think that the Islamic Financial System is simply “interest-free”. Although true, this fact does not provide a holistic picture of the Islamic Financial System and tends to create confusion. Shariah strictly prohibits any form of speculation or gambling, which is referred to as Maysar. Shariah also prohibits taking interest on loans. In addition, any investments involving items or substances that are prohibited in the Holy Quran — including alcohol, gambling, and pork — are also prohibited. Yes, prohibiting the receipt and payment of interest is the nucleus of the system but it is supported by other principles of Islamic teachings advocating individuals’ rights and duties, property rights, equitable distribution of wealth, risk-sharing, fulfillment of obligations, the sanctity of contracts, etc.
- The Islamic Financial System is not limited to banking but also covers insurance, wealth management, capital markets, and all types of financial intermediation similar to those available in a conventional financial system. Islamic Finance as we further explain below is not simply an “Islamic Wrapper” over conventional products, but Islamic products backed by sound basis derived from the sources of Islamic law (principally the Holy Quran and Ahadis).
- Islamic Financial System operates according to Islamic law (which is called Shariah law) and is based on two primary sources of law which are the Quran and Sunnah. Entities in the Islamic Financial System are governed both by Islamic law and the finance industry rules and regulations that apply to their conventional counterparts. Thus, this combination allows for a system that effectively filters financial systems, instruments, processes, etc against Islamic principles as they apply to such areas of finance.
- To earn money without charging interest, Islamic financial institutions normally use equity participation systems. Equity participation means, for example, if a bank loans money to a business, the business will pay back the loan without interest and instead give the bank a share in its profits. If the business defaults or does not earn a profit, then the bank also does not benefit.
- The main players in the Islamic Financial industry include Shariah-conscious retail and institutional investors, financial intermediaries (Islamic banks, Islamic mutual funds, Islamic pension funds, and takaful companies), and financial markets (stock exchange, interbank, Sukuk market, Islamic money market, and forex). Other players in the Islamic Capital market are the regulator (SECP) and Shariah Advisors of respective organisations, who govern this system. The Shariah Advisor’s in particular holds an esteemed and very important position in any Islamic financial system because it is these scholars who interpret and adjudicate on matters of Shariah as they relate to financial concepts. The Shariah Advisor’s essentially pre-approve all activities of the Islamic instrument or the Islamic entity, as the case may be and ensure that operations conform to the dictates of Islamic jurisprudence.
- The modern Islamic finance industry is young, its timeline begins only a few decades ago, but as we discuss below, Islamic finance and Islamic funds have come a long way since.
- Islamic finance is evolving rapidly and continues to expand to serve a growing population of not only Muslims but others as well. For example, non-Muslims also tend to utilise Islamic financial services based on their affinity towards ethical finance, since Islamic finance is synonymous with ethical finance and its concepts.
PAGE: How much contribution have the Islamic mutual funds made in the Islamic financial services?
Mohammad Shoaib:
- Primarily Islamic Financial Services are dominated by Islamic Banks. The Islamic banking deposits surpassed the six trillion market in the third quarter of 2023. It stood at Rs6.74 trillion compared to Rs26.32 trillion (total bank deposits) which translates into approximately 23% market share.
- While, almost every Asset Management Company has launched Islamic Funds, which now stand at 142 Islamic funds launched by the end of February 2024, the Islamic Mutual Funds AUMs stood at Rs1.02 trillion in Dec 2024 and now stand at Rs1.16 trillion compared to Rs2.38 trillion total industry AUMs as of Feb 2024. This translates into a market share of over 48%.
- The market share of Islamic Mutual Funds as compared to Islamic banking deposits stood at almost 15% by the end of December 2023. This is a decent growth from 9% at the end of December 2018.
- When we compare the growth of Islamic funds against conventional funds, we observe that the 10-year CAGR for Islamic Mutual Fund AUMs is 30.7%, which is twice the growth rate of Conventional AUMs (15%). The 5-Year CAGR for Islamic Funds stood at 46.3% as opposed to conventional Funds, which was at 32.1%.
- The comparison between the growth of Islamic mutual funds and Islamic banks reveals an interesting dynamic where AUM growth in Islamic mutual funds outpaces deposit growth in banks. This suggests that within the Islamic finance sector, there is a strong and growing appetite for investment products over traditional deposit accounts, potentially reflecting a shift in how investors prefer to allocate their resources within Shariah-compliant options.
- Islamic Funds and Conventional Funds segments have shown upward growth trajectories, with the Islamic funds experiencing a notably sharp increase in assets under management, suggesting a growing investor appetite for Shariah-compliant investment options.
- The Islamic Mutual Fund Industry’s growth rate appears more pronounced in the latter years, which may reflect a combination of factors including greater consumer awareness, preference for Shariah-compliant financial products, and possibly superior performance or perceived ethical alignment with investor values.
PAGE: How would you comment on the elimination of Riba?
Mohammad Shoaib:
- In view of the clear and unequivocal commandments of the Holy Quran on the subject, the elimination of riba is the duty of an Islamic State.
- The Constitution of Pakistan 1973, in its article 227 provides that all existing laws shall be brought in conformity with the injunctions of Islam as laid down in the Holy Quran and Sunnah.
- Article 31 states that steps should be taken to enable the Muslims of Pakistan, individually and collectively, to order their lives in accordance with the fundamental principles and basic concepts of Islam.
- Furthermore, Article 37 dealing with Principles of Policy enjoins upon the State to eliminate riba as early as possible. There is complete unanimity among all schools of religious thought that the term riba covers interest in all its manifestations.
- It is said in the Quran in Surah Al Baqarah, “Those who take ribā (usury or interest) will not stand but as stands the one whom the demon has driven crazy by his touch. That is because they have said: “Sale is but like ribā. ”, while Almighty has permitted sale, and prohibited ribā”
- After the matter remained pending for 20 years, the Federal Shariat Court (FSC) in April 2022 finally declared that the prohibition of Riba was absolute in all its forms and manifestations according to the injunctions of Islam and in accordance with the Holy Quran and Sunnah. Therefore, it should be eliminated from the country in five years.
- The success of Meezan Bank Limited and Al Meezan Investment Management Limited, along with the successful conversion of Faysal Bank Limited to a full-fledged Islamic Bank, exemplifies that the future lies in Islamic Finance.
- Both these organisations along with takaful operators provide an example to the entire financial sector of how can each entity convert itself towards Shariah compliance in letter and spirit.
- The role of Shariah advisor will be pivotal since they will be guiding companies in this process.
- Essentially elimination of Riba, as is evident from our discussion above, is the responsibility of every Muslim. However, within the context of Islamic Finance, the growth and popularity depend primarily on two things. First; the availability of Islamic products akin to conventional counterparts (alternatives to conventional finance) and second; the competitiveness of either lending or borrowing structure, for example, an investment made in Islamic avenues should yield returns competitive with conventional ones, or if one is seeking financing, then for example Ijarah rent paid on a motor vehicle in case of Islamic financing should be competitive when the client has an equally attractive quote from a conventional counterpart.
- In Pakistan, there is a sound Islamic banking system, which functions as a cornerstone for ancillary Islamic financial services, such as Islamic investments, Islamic stock market investments, Islamic financing, Islamic insurance (takaful) and so on. Therefore, an enabling Islamic financial environment and ecosystem is essential for the continuous growth and development of Islamic finance and ultimately elimination of Riba and other impermissible activities found in conventional systems.
PAGE: What must the incumbent government do to spur Islamic mutual funds services in Pakistan?
Mohammad Shoaib:
- As we discussed earlier in this paper, the Federal Shariat Court (FSC) in April 2022 finally declared that the prohibition of Riba was absolute in all its forms and manifestations according to the injunctions of Islam and in accordance with the Holy Quran and Sunnah. It mandated that Riba should be eliminated from the country in five years. This indeed is a very powerful judgement and should form the basis for renewed optimism and hope for Islamic finance in the country.
- Adding to the judgement of the FSC, it is important that implementation of the said judgement also takes place in letter and spirit and the said decision is not lost to governmental bureaucracy and implementation delays. However, we note that the Riba-based system is prevalent in Pakistan and adequate time and a thorough plan will be needed to convert conventional banking or mutual fund system to an Islamic one in its full form.
- Specifically, for Islamic Funds, the government can help set up more Centre for Excellence in Islamic Finance similar to IBA CEIF, which serves as an important platform for researchers, academicians, practitioners as well as the regulators in the field to come together and address the evolving challenges faces by Islamic mutual funds.
- The government can introduce more short-term (1 month, 3-month and 6-month) GoP Ijarah/Sukuk (alternate to T-Bills) to absorb the liquidity available with Islamic funds. There is usually a lack of short-term avenues to place funds with and, as a result, the returns of Islamic mutual funds are adversely affected. However, just to add, recently launches of shorter tenure Ijarahs has picked up and soon we expect this segment of the Islamic markets to grow in number and strength
- The government can make it mandatory for listed companies to provide disclosures related to Shariah screening. Companies provide adequate information & disclosures in annual accounts which makes it easier to filter companies according to prescribed Shariah Screening Criteria. However, adequate disclosures are usually not present in the interim accounts. As a result, a Company’s actual position on interim financials is often disguised and, in most cases, results in Non-Compliance of key portfolio companies as Shariah Compliant amounts are not accounted for. In certain situations, an alternative practice is to seek clarity from the company w.r.t disclosure-based information. Therefore, a better recommendation is to include all the necessary disclosures important for screening purposes in the financial reporting framework
- A very important point that the government or the FBR should re-consider is to reinstate the benefit of tax rebates for the entire mutual fund industry in general and, at least for, Islamic mutual funds in specific. We note that globally to spur investments and to inculcate a habit of savings, the most popular tool used by governments is to provide tax incentives.
- Other steps can be to make a dedicated Shariah-counter in PSX and facilitate AMCs in innovative investment products like Hajj Saving Schemes, Islamic Ballot Committee funds, etc, which are popular with the general public.
- A lot can be done collectively by industry players and regulators, which will be a win-win for Islamic AMCs, investors, as well as the government. It will also lead to the development of capital markets in Pakistan if a focused, inclusive, and collective approach is adopted by all the stakeholders.
- As discussed in this paper there is tremendous potential for further growth in Islamic Capital Markets/Islamic Finance in Pakistan. However, this rapid growth is still hampered to some extent due to supply-side constraint, which lags behind the demand-side where there is still a lot of appetite for Islamic products, especially on the Fixed Income side. Thus, this has the effect of restricting the real growth potential of Islamic Funds in the country, which can be effectively addressed through policy measures by the government.