The size of the Islamic finance services industry in Pakistan is estimated to have crossed $42 billion by the end of 1Q22, driven by steadily rising public demand for Islamic financial products, according to a report issued by Security and Exchange Commission of Pakistan (SECP).
The Islamic finance sector falls under the purview of the SECP’s regulatory framework and consists of Islamic institutions like Modarabas, Takaful operators, Islamic NBFIs, Shariah-compliant businesses, and Shariah advisors. It also consists of Islamic instruments like Shariah-compliant securities, Sukuk, Islamic commercial papers, Islamic mutual funds, Islamic Exchange Traded Funds (ETFs), Shariah-compliant real estate investment trusts (REITs).
According to the report titled ‘A Diagnostic Review of Islamic Finance in the Non-Bank Financial Sector of Pakistan’, the assets of Islamic finance industry in Pakistan have crossed the six-trillion mark to reach Rs. 6,781 billion by the end of June 2022. The market share of Islamic banking assets and deposits in the overall banking industry was 19.5 percent and 20.5 percent, respectively, by the end of June 2022. While the overall banking industry’s market share of financing by Islamic banking institutions increased to 27.2 percent by the end of June 2022 from 24 percent in June 2021, the study added.
In the case of Islamic capital markets, as of June 30, 2022, there are 258 (49 percent) Shariah-compliant securities out of total of 530 listed securities at the Pakistan Stock Exchange (PSX), with a market capitalization of Rs. 4,643 billion (67 percent) out of a total market capitalization of Rs. 6,957 billion.
Assets valuing Rs. 448.13 billion (35 percent) under management of mutual funds schemes, and Rs. 26.93 billion (64.7) percent under management of pension fund schemes are Shariah-compliant as of June 30, 2022.
Although, Sukuk market in Pakistan is relatively underdeveloped, but is getting considerable attention by the government and corporate sectors alike for raising funds. Issuance and listing of Pakistan Energy Sukuk-II (PES-II) of Rs. 200 billion in 2020 by Power Holding Limited (PHL) through book-building process which helped the Government in addressing the challenges for resolving circular debt in the country’s power sector.
The SECP regulated REIT sector, which had been largely inactive since 2015, has reinvigorated and shown very encouraging growth. As of June 30, 2022, the size of REITs was Rs. 98.344 billion, marking a growth of 81 percent over the previous year’s growth.
The Takaful sector in Pakistan is marking its ground in line with the increasing demand for the Shariah-compliant solutions for risk management. Takaful sector of Pakistan consists of 35 Takaful operators. This includes 6 dedicated Takaful operators and 29 window Takaful operators. The asset size of the takaful sector (dedicated and window) is Rs. 88.731 billion as of June 30, 2022. In terms of insurance premium, takaful market share is 13 percent of the total size of the insurance market as of December 31, 2021, as compared to 12 percent as of December 31, 2020.
In the recent as well as earlier judgements of the Federal Shariat Court of Pakistan (FSC), it has been concluded that “Riba or interest is prohibited in Islam, including relating to banking transactions.” Accordingly, the mounting breadth and depth of the Islamic finance services industry and new market developments necessitate a holistic approach to prudently tackle main challenges faced by the industry in order to realize its full potential in light of the judgement.
In this regard, SECP set up the dedicated Islamic Finance Department for the promotion of the Islamic capital market and enablement of the Takaful business through the Takaful Rules, 2012.
The SECP has issued 39 certificates of Shariah-compliant securities to multiple issuers (Islamic commercial papers and Sukuks) worth Rs. 406.94 billion till June 30, 2022, under the Shariah Governance Regulations, 2018 since its promulgation. There has been an increasing trend to issue short-term Sukuk for Shariah-compliant resource mobilization by corporations to fund working capital requirements.
There are 49 Islamic mutual funds operating similarly to conventional funds, with the exception that they exclusively invest in investments that adhere to Shariah principles and rules. As of June 30, 2022, 110 mutual funds managing assets valued at Rs. 448.13 billion are classified as Shariah-compliant, and they constitute 35 percent and 38 percent of the total mutual fund industry of Pakistan, in terms of size and number, respectively.
As of June 30, 2022, the equity of the Modaraba sector stood at Rs. 25.38 billion, whereas the total assets of the Modaraba sector amounted to Rs. 61.46 billion. Out of total twenty-two (22) profit making Modarabas, eleven (11) Modarabas declared a cash dividend for the financial year 2022. As of date, the registered Modaraba companies are thirty-one (31) while twenty-eight (28) Modarabas are currently operating and are listed at PSX.
