Qudsia Bano

Pakistan's Islamic finance sector, renowned for its unique blend of ethical principles and financial services, is at a critical juncture, especially in the areas of treasury and investment products. While traditional structures like Sukuk continue to dominate, there is a growing focus on innovation to support sustainability initiatives and uplift marginalized communities. However, experts assert that embracing technology and fostering collaboration are crucial for the sector's continued growth and success, reports WealthPK. The Islamic finance industry in Pakistan is part of a global market operating in over 80 countries, projected to reach a value of $4.94 trillion by 2025. However, sustaining a robust growth in Pakistan hinges on addressing the key issues, particularly liquidity management. The Islamic banks in Pakistan, like their global counterparts, face restrictions on interest-earning (riba) instruments, which limit their Shariah-compliant options for managing liquidity.

 “Improving access to liquidity is essential for the growth of Islamic finance in Pakistan,” said Dr. Asim Naveed, a leading economist at the Pakistan Institute of Development Economics (PIDE). “The sector needs to move from a 'lone wolf' approach to a more collaborative environment. By offering Shariah-compliant instruments to the banks with surpluses, we can support liquidity requirements and stabilize the ecosystem.” The market for Islamic derivatives in Pakistan remains cautious, with many Shariah scholars viewing them with skepticism. Despite this, innovative Islamic derivative structures, such as profit-rate swaps and forward foreign exchange contracts, are being explored to ensure compliance with principles like risk-sharing and underlying asset ownership. “There's potential for growth in the Islamic derivatives market in Pakistan,” noted Fatima Siddiqui, a financial analyst specializing in Islamic finance. “As the market matures, more investors will likely seek ethical and risk-hedging instruments that align with the Islamic values,” she said.

“Collaboration across financial institutions is crucial for developing new Sharia-compliant finance instruments designed for liquidity management. By pooling capital and fostering innovation, the Islamic finance sector in Pakistan can create financing structures with shorter maturities and higher trading volumes. Technologies like APIs and Straight Through Processing (STP) can facilitate this collaboration by connecting the banks needing liquidity with those holding excess funds in real-time,” said Fatima. Fatima further said digitalization and automation were vital for streamlining treasury operations and ensuring Sharia compliance. However, lack of standardization across regulations and product structures could impede effective technology implementation. “Harmonizing Islamic financial laws and standards is essential to leveraging digitalization's benefits fully. This harmonization will enable smoother interbank transactions and cross-border capital flows, expanding the reach of Islamic finance to underserved regions in Pakistan,” Fatima said.

Credit: INP-WealthPk