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Pakistan: Assets of Islamic Finance Industry reached at Rs.6.8 trln

ISLAMABAD (Eshfak Mughal):- 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 Securities and Exchange Commission of Pakistan (SECP) issued Diagnostic Report on Islamic Finance Industry in Pakistan on Wednesday.

The report shows that 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. 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.

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.

It is also pertinent to mention that the PES-II issue was 1.7 times over-subscribed and the rate of return paid by PHL was very competitive and saved the Government significant financing cost due to the dedicated eorts by the SECP. 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,

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. As per the decision, the provisions of the different laws that contained the term “interest” within the meaning of Riba were declared repugnant to the Injunctions of Islam.

Further, the FSC appreciated the initiatives undertaken by the SECP, including the establishment of the dedicated Islamic Finance Department at the SECP for the promotion of the Islamic capital market and enablement of the Takaful business through the Takaful Rules, 2012.

The SECP, with a vast regulatory mandate covering the capital market, insurance, non-banking finance companies, pension funds, and corporate sector, has several touchpoints for the Islamic finance.

These include

(a) Islamic institutions like Modarabas, takaful operators, Islamic NBFIs, Shariah-compliant businesses, and Shariah advisors,

(b) Islamic instruments like Shariah-compliant securities, Sukuk, Islamic commercial papers (ICPs), and

(c) Islamic collective investment schemes like Islamic mutual funds, Islamic exchange traded funds (ETFs), Shariah-compliant real estate investment trusts (REITs). Non-profit organizations are also being registered and governed in the area of social development in accordance with the provisions of the Companies Act, 2017.

Accordingly, the purpose of this diagnostic review is to investigate issues and challenges in the Islamic financial services industry within the regulatory domain of the SECP in order to provide a holistic approach to addressing the challenges for the organized development of Islamic finance in Pakistan. The diagnostic review establishes a plan and strategy for taking the Islamic finance services industry to the next level of growth and development.

Along with ensuring a conducive legal and regulatory environment, it focuses on the Islamic finance services industry to look for innovative products based on the Shariah principles and rules to cater to unserved and underserved sectors, which are paramount for the growth of the country’s economy.

The role of various stakeholders in eciently achieving objectives will be of pivotal importance in the
implementation of the policy recommendations.

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