Pakistan has seen a notable rise in the popularity of Islamic banking, a financial model based on moral and Sharia-compliant principles, in a critical shift towards promoting inclusive and strong economic systems. Islamic banking has become a major force in creating a financial environment that is consistent with Islamic principles as the nation works toward sustained and fair economic growth. “Pakistan is converting from Islamic banking to an Islamic economy and Islamising the insurance industry through the use of Islamic financial models e.g., Takaful, particularly in light of the April 2022 ruling by the Federal Shariat Court (FSC),” said Dr Syed M Abdul Rehman, Shriah Adviser to the Securities and Exchange Commission of Pakistan (SECP). “Nevertheless, despite popular desire and constitutional backing, this conversion is proceeding slowly. It would be simple to meet the FSC deadline to convert the entire economy to an Islamic one by 2027 if we were to secure the political will of the parties forming the government after the February 2024 election,” he said.

“Political will aside, we have all the necessary tools and resources to transition from Islamic banking to Islamic economy,” said Abdul Rehman. He said to reach its full potential, the Islamic banking sector must, however, take a comprehensive approach to wisely address the major issues it faces due to the industry's growing depth and breadth as well as recent market developments. “This covers a wide range of issues, such as strengthening regulatory control, balancing tax treatment, encouraging standardisation, guaranteeing efficient liquidity management and putting in place sensible risk management procedures.” The SECP Sharia adviser said effective information transmission was also necessary to support the progress of standardisation and harmonisation in the Islamic banking sector. He said utilising technology to disseminate information might be a useful strategy for increasing market transparency and industry insights.

Muhammad Khan, who deals with Islamic banking at a Bank of Khyber branch, said demand for financial products that adhere to Sharia law had increased in Pakistan. “The country's growing Islamic banking industry reflects the public's demand for financial services that respect their religious convictions. In addition to changing the banking industry, this change is fostering stability and expansion in the economy as a whole.” Moreover, he said foreign investment had been drawn to Pakistan thanks in part to Islamic banking. “Pakistan's adoption of Islamic banking rules makes it a desirable location for investors wishing to match their investments with ethical considerations, as more and more foreign investors seek ethical and sustainable options. The State Bank of Pakistan has taken the initiative to provide a regulatory framework that is favourable to Islamic banking establishments. The regulatory system preserves consumer protection and financial stability while guaranteeing adherence to Sharia standards,” the Bank of Khyber official explained.

Credit: Independent News Pakistan (INP)