Future looks bright for Islamic banking in Pakistan.

Byline: Arooj Asghar

Islamic banking, like any other banking system, is an evolving system worldwide. Since the inception of conventional banking system; work on the concept of Shariah compliant Islamic banking system was also started. A number of financial instruments are available in the market now while work is still going on inventing new solutions. We see exceptional progress in Islamic finance industry, exhibiting annual average growth of about 20 percent in recent years. The growth is not only because of rising demand but also because of increased number of banks offering Shariah-complaint products not only in the Muslim countries but even European countries are also working on the Islamic mode of financing. In an estimate; there is currently more than 2 trillion dollar worth of deposits and investments lodged in Islamic banks, mutual funds, insurance schemes (known as Takaful), and Islamic branches of conventional banks. It is expected that the value of Islamic banking assets and assets under management will reach USD 5 trillion by 2030 while Islamic banks growing more rapidly than the average banking sector in most of the countries.

Fundamental principle of Islamic finance is to promote economic activities in a way that would enhance the social welfare. The key feature of Shariah financing is asset-based contracts therefore, it prohibits trading of debt contracts to earn a profit (Riba), profit-taking without an underlying economic activity, and activities that are not considered halal (i.e. Shariah-compliant). The contractual relationship between lenders and borrowers is governed by the shared business risk and returns from investment i.e. profit and loss sharing.

State Bank of Pakistan (SBP) has been encouraging the initiatives of banks for proposing Shariah based financing solutions. SBP is voted as the 'Best Central Bank in promoting Islamic finance' for the fourth time by a poll conducted by Islamic Finance News (IFN), REDmoney Group Malaysia. This is the second international award bestowed upon SBP for Islamic banking during FY2021. Earlier, the Global Islamic Finance Awards (GIFA) had also declared SBP as the 'Best Central Bank' of the year in September 2020.

There is a view that the Islamic banking is still relatively in its infancy stage as compared to the more established commercial banking sector in Pakistan. A number of conventional banks have now set up their Islamic banking windows in parallel to the commercial...