Undocumented Channels Biggest Challenge Faced By Islamic Finance Industry: SECP

The Islamic capital market/finance industry in Pakistan is facing the biggest challenge of the undocumented economy and informal channels used by investors for meeting their financial needs.

The latest document of the SECP on “Islamic Finance Industry Specific Issues and Challenges” highlighted that the legal and regulatory frameworks play a pivotal role in the development of any regulated sector and the Islamic finance industry is no exception to that.

Comprehensive financial laws bring the required clarity for every stakeholder, enable the development of medium-to-long-term strategies, support business growth, expansion, and help to complete the financial ecosystem.

According to the SECP, a substantial portion of the economy is undocumented and participants of economic activities generally resort to and are dependent on informal channels for meeting financial needs.

In order to identify and document key issues and challenges in the non-bank financial sector, the published reports and documents, in-house reviews, and feedback received by the IFD of SECP through a series of meetings and interactions with key industry players, have been reviewed.

The SECP has constituted a Committee for the promotion of Islamic finance in the non-bank financial sector. The said committee has been primarily mandated to conduct a gap analysis to identify potential bottlenecks and opportunities for the development of Islamic finance in the capital market, other non-bank financial sectors, and the insurance industry.

On the recommendation of the committee, feedback from the industry was also solicited through letters, and feedback received also be incorporated.

The industry-wide macro issues, equally impacting the overall financial system and capital markets, also have a material impact on the non-bank Islamic financial sector of Pakistan.

The report said that a substantial portion of the economy is undocumented and participants in economic activities generally resort to and are dependent on informal channels for meeting financial needs.

There is a very small number of investors in the Pakistani capital market i.e. 220,000 as compared to the investor base linked with the CDNS i.e. around 3 million. Whereas, the number of bank accounts in Pakistan is 66.13 million as of March 2022, according to data by the SBP. The low investor base is leading to other problems like low volumes and consequently, impair investor confidence.

Similarly, the institutional investor base in form of mutual funds, pension funds, insurance companies, retirement schemes, etc. is also limited. Due to the fewer formalized and lucrative investment options, a large chunk of the public opts the informal investment schemes, including the traditional “committee system”, SECP added.

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