- Islamic finance promotes fairness, transparency, and risk-sharing, fostering economic growth and financial inclusion in Pakistan.
- Pakistan’s Islamic banking sector, valued at Rs 6.3 trillion, is expanding with regulatory frameworks and government initiatives
Islamic finance is a financial system that operates in accordance with Shariah principles, emphasizing fairness, transparency, and ethical financial practices. The principles of Islamic finance are based on Shariah compliance, risk sharing, fairness, and transparency. It prohibits interest-based transactions collection and payment of interest (riba), and instead promotes risk-sharing mechanisms such as profit-and-loss sharing agreements. The sector has seen significant global growth, driven by increasing demand for Shariah-compliant financial solutions and technological advancements in Islamic fintech.
In Pakistan, Islamic finance has gained momentum, according to a report by the State Bank of Pakistan, the sector has grown from Rs103 billion in 2002 to over Rs3 trillion in 2020. The importance of Islamic finance in Pakistan lies in its potential to promote financial inclusion, reduce poverty, and promote economic growth.
With total assets in the Islamic banking sector reaching Rs. 6.3 trillion by 2024. The industry includes Islamic banks, insurance companies, and mutual funds, regulated by the State Bank of Pakistan (SBP) and the Securities and Exchange Commission of Pakistan (SECP). Recent government initiatives, such as the Pakistan Islamic Finance Initiative and new regulatory frameworks, aim to expand the sector further, targeting a 20% market share in the banking industry by 2025.
The system of Islamic finance can help Pakistan overcome income discrepancies, and it also has the capability to fix structural faults that have impeded Pakistan from achieving its true economic potential.
The Islamic finance industry in Pakistan has undergone significant growth and development since its inception in the 1970s. According to a report by the State Bank of Pakistan, “the Islamic banking sector in Pakistan has shown a remarkable growth of 17.4% in 2024, with total assets reaching Rs. 6.3 trillion” (“Islamic Banking Bulletin”, State Bank of Pakistan, 2024).
Standings
Currently, there are about 22 Islamic banks, 5 Islamic insurance companies, and 23 Islamic mutual funds operating in Pakistan. The regulatory framework for Islamic finance in Pakistan is overseen by the State Bank of Pakistan and the Securities and Exchange Commission of Pakistan. A report by the Securities and Exchange Commission of Pakistan notes that “the commission has taken several initiatives to promote Islamic finance in Pakistan, including the introduction of new regulations and guidelines” (Islamic Finance Review, Securities and Exchange Commission of Pakistan, 2025).
Recent initiatives taken by the Government of Pakistan to promote Islamic finance include the launch of the “Pakistan Islamic Finance Initiative” in 2022, which aims to increase the share of Islamic banking assets to 20% of the total banking sector assets by 2025. Additionally, the government has also introduced a new Islamic finance policy in 2023, which aims to promote the development of Islamic finance in Pakistan. Islamic banking products, such as mudarabah, musharakah, murabaha, and ijara, offer a range of financing, investment, and deposit options that comply with Shariah principles.
In Pakistan, Islamic banking practices include financing for various purposes, such as housing, agriculture, and small businesses, as well as investment products like sukuk and Islamic mutual funds. Deposit products, including current and savings accounts, and term deposits, are also offered.
According to Dr. Muhammad Imran Ashraf Usmani’s book, “Islamic Banking and Finance” (2018), Islamic banking can play a vital role in promoting economic growth and stability in Pakistan. By adopting Islamic banking methods, Pakistan can address its structural faults, such as promoting entrepreneurship and small businesses through mudarabah, encouraging partnerships and joint ventures through musharakah, providing financing for housing and agriculture through murabaha, and promoting leasing and rental financing through ijara. This can help reduce poverty, improve financial inclusion, and promote economic growth.
Furthermore, zakat and charity are fundamental components of Islamic finance, emphasising the importance of giving and social responsibility. Zakat, one of the five pillars of Islam, is a mandatory charitable contribution, while charity (sadaqah) is a voluntary act of giving.
Islamic banking products, including mudarabah (profit-sharing investments), musharakah (joint ventures), murabaha (cost-plus financing), and ijara (leasing), cater to a wide range of financial needs. These solutions support sectors such as housing, agriculture, and small businesses, fostering economic growth and financial inclusion. However, Pakistan has lagged in developing fully digital Islamic banking, despite high demand, with over 77% of banking customers preferring Shariah-compliant products.
Collection system
In Pakistan, zakat and charity are collected, distributed, and utilized through various channels, including mosques, NGOs, and government institutions. According to a report by the Pakistan Centre for Philanthropy, “the total amount of zakat collected in Pakistan is estimated to be around Rs. 120 billion annually” (Pakistan Philanthropy Report, Pakistan Centre for Philanthropy, 2020).
The charity landscape in Pakistan is diverse, with various types of organizations, including NGOs, trusts, and foundations. However, the sector faces challenges, such as inadequate funding, lack of regulation, and transparency concerns.
According to a report by the Aga Khan Development Network, “the charity sector in Pakistan has the potential to play a significant role in addressing social and economic challenges, but it requires greater transparency, accountability, and coordination,” (Pakistan’s Philanthropic Landscape, Aga Khan Development Network, 2022).
Global reach
The global Islamic finance industry, valued at approximately $4 trillion, continues to expand, with Islamic banking assets reaching $2.37 trillion and the sukuk (Islamic bonds) market projected to hit $170 billion in issuance by 2024. While several countries have successfully integrated digital Islamic banking, Pakistan’s progress remains slow due to regulatory delays and a lack of a clear roadmap.
To address challenges, a structured approach, such as the Islamic Finance and Charity Framework (IFCF), has been proposed. This framework emphasises Shariah compliance, risk-sharing, accountability, and integration between Islamic finance and philanthropy to maximise social impact. By ensuring standardisation, transparency, and regulatory consistency, such an approach could enhance the effectiveness of Islamic finance in Pakistan and globally.
The IFCF framework also encourages risk sharing between financial institutions, charitable organisations, and beneficiaries, which can help to mitigate risks and promote sustainability. Furthermore, the framework emphasizes the importance of fairness, transparency, and accountability in all financial transactions and charitable activities, which can help to build trust and confidence in the Islamic finance and charity sector.
Islamic finance holds great potential to drive economic stability, promote ethical financial practices, and foster financial inclusion. However, addressing regulatory challenges, improving digital banking infrastructure, and enhancing transparency in charitable contributions are crucial steps toward realising its full impact.
By adopting the IFCF framework, Islamic financial institutions and charitable organisations can promote greater efficiency, transparency, and accountability, ultimately leading to increased social impact and sustainable development.