A significant surge in Shariah-centric services

•  The country needs to overcome challenges and chart a path to sustainable growth
• Govt initiatives play a vital role in propelling the expansion of Islamic finance

 Interview with Mr. Tariq Hussain — an analyst

PAGE: Tell me something about yourself, please:

Tariq Hussain: I am a Fellow of Cost & Management Accountants. My qualification details are: FCMA. FCIS, FPFA, MA(Eco) MBA. M.Phil. (Eco) besides that I have about 29 years of experience of working with corporate sector and also knows Corporate Laws, Taxation and being an Insurance Expert.

PAGE: What is your perspective about the fast-growing Islamic financial services in Pakistan?

Tariq Hussain: Islamic finance in Pakistan has been experiencing significant growth and has become an integral part of the country’s financial system. Islamic finance has been growing rapidly in Pakistan, with dedicated Islamic banks, Islamic windows within conventional banks, and Islamic financial institutions offering a range of products and services compliant with Shariah principles. This growth reflects the increasing demand for Shariah-compliant financial products among Pakistan’s Muslim population. Here are some perspectives on the fast-growing Islamic financial services in Pakistan.

Financial inclusion: Islamic finance has played a role in promoting financial inclusion in Pakistan by catering to segments of the population that were previously underserved or excluded from the formal financial sector. This includes individuals and businesses seeking Sharia-compliant alternatives to conventional banking products.

Regulatory support: The Pakistani government and regulatory authorities have been supportive of Islamic finance, implementing regulations and frameworks to facilitate its growth and development. This includes the State Bank of Pakistan’s (SBP) initiatives to promote Islamic banking and finance and ensure compliance with Shariah principles.

Diversification of products: Islamic financial institutions in Pakistan have been diversifying their product offerings to meet the evolving needs of customers. This includes a range of Shariah-compliant banking products such as Islamic savings accounts, Murabaha financing, Musharakah, Mudarabah, and Takaful (Islamic insurance).

Infrastructure development: The growth of Islamic finance in Pakistan has also spurred investment in the necessary infrastructure, including Shariah-compliant banking systems, human capital development, and regulatory frameworks. This infrastructure is essential for sustaining the growth of Islamic finance and ensuring its stability and integrity.

Challenges and opportunities: Despite its rapid growth, Islamic finance in Pakistan faces challenges such as a lack of awareness, standardisation issues, and the need for further development of regulatory frameworks. However, these challenges also present opportunities for innovation and collaboration within the Islamic finance industry to address these issues and further expand its reach.

Overall, the fast-growing Islamic financial services sector in Pakistan reflects the country’s commitment to promoting financial inclusion and offering Shariah-compliant alternatives in its financial system. With continued support from regulators, stakeholders, and the public, Islamic finance is likely to continue its growth trajectory and contribute to the overall development of Pakistan’s economy.

PAGE: What is your standpoint about Islamic banks, Islamic mutual funds and Takaful operators?

Tariq Hussain: Islamic banks, Islamic mutual funds, and Takaful operators play important roles in the financial industry, particularly in regions with significant Muslim populations like Pakistan. Here are some key points about each:

Islamic banks: These banks operate according to Islamic principles, which prohibit the charging or paying of interest (riba) and investing in businesses that are considered haram (forbidden) such as those involved in alcohol, gambling, or pork products. Instead, Islamic banks engage in Shariah-compliant activities such as profit-sharing agreements (Mudarabah), joint ventures (Musharakah), and buying and selling assets on a deferred basis (Murabaha). Islamic banks provide a range of financial services including current accounts, savings accounts, loans, and investment products.

Islamic mutual funds: These funds invest in Shariah-compliant assets such as stocks, bonds, and real estate. They adhere to Islamic investment principles, ensuring that investments are made in companies and assets that comply with Shariah law. For example, they avoid investing in businesses involved in gambling, alcohol, or other prohibited activities. Islamic mutual funds offer investors the opportunity to participate in the financial markets while adhering to their religious beliefs.

Takaful operators: Takaful is a form of Islamic insurance based on the principles of mutual cooperation and shared responsibility. Takaful operators provide insurance coverage to policyholders in a manner that is compliant with Shariah principles. Instead of traditional insurance, where the insurer assumes all the risk, Takaful operates on the principle of mutual assistance, where policyholders contribute money into a pool system to support one another in case of loss or damage. Takaful operators offer various types of insurance including life insurance, health insurance, and general insurance.

Overall, Islamic banks, Islamic mutual funds, and Takaful operators cater to individuals and businesses seeking financial products and services that align with Islamic principles. They contribute to financial inclusion by providing alternatives for those who prefer Shariah-compliant banking and insurance solutions. Additionally, they play a role in the development of the Islamic finance industry and the broader economy in Muslim-majority countries like Pakistan.

PAGE: How would you comment on the elimination of Riba?

Tariq Hussain: The elimination of Riba (interest or usury) is a fundamental principle in Islamic finance, and it holds significant importance in Islamic economic thought. Riba is considered unethical and exploitative because it involves gaining profit from money alone, without contributing to productive economic activity. From an Islamic perspective, eliminating Riba aligns with principles of fairness, justice, and economic stability. By prohibiting the charging or receiving of interest, Islamic finance aims to promote equitable wealth distribution and discourage speculative activities that can lead to financial crises.

However, the practical implementation of Riba elimination poses challenges, particularly in a global financial system where interest-based transactions are widespread. Islamic finance institutions have developed alternative financial mechanisms such as profit-sharing arrangements, asset-backed financing, and risk-sharing partnerships to provide banking and investment services without relying on Riba.

The elimination of Riba is not only a religious mandate but also a goal pursued by many economists and policymakers who advocate for ethical and sustainable financial practices. While achieving a completely interest-free financial system may be challenging, efforts to reduce reliance on Riba and promote ethical financial practices can contribute to a more equitable and stable global economy.

PAGE: What must the incumbent government do to spur Islamic financial services in Pakistan?

Tariq Hussain: To spur Islamic financial services in Pakistan, the incumbent government can take several steps:

1. The government should continue to provide a supportive regulatory framework for Islamic finance. This includes updating and refining regulations to ensure they are conducive to the growth and stability of the Islamic finance industry.

2. Promoting awareness and understanding of Islamic finance among the public is crucial. The government can launch educational campaigns and initiatives to inform people about the principles and benefits of Islamic finance, encouraging them to consider Shariah-compliant banking and investment options.

3. Investing in the necessary infrastructure for Islamic finance, such as Shariah-compliant banking systems, training programs for professionals, and research institutions dedicated to Islamic finance, can help strengthen the industry’s foundations and support its growth.

4. The government can offer incentives and support for Islamic banks, Takaful operators, and other Islamic financial institutions to encourage their growth and expansion. This may include tax incentives, subsidies, or grants for Islamic finance initiatives and projects.

5. Ensuring that Islamic finance principles are integrated into government policies and initiatives can further promote the industry’s development. This may involve incorporating Shariah-compliant financing mechanisms into government projects and encouraging public-sector entities to utilise Islamic financial services.

6. Collaborating with international partners and organizations experienced in Islamic finance can provide valuable expertise and support for the development of the industry in Pakistan. This includes engaging with Islamic financial institutions from other countries and participating in international forums and conferences on Islamic finance.

By implementing these measures, the incumbent government can help stimulate the growth of Islamic financial services in Pakistan, contributing to financial inclusion, economic development, and the overall stability of the financial system.