Introduction

The article discusses Islamic banking in Pakistan, highlighting its emergence in response to
religious and economic needs. The government launched an initiative to re-introduce Islamic
banking gradually, allowing full-fledged Islamic banks in the private sector, conventional banks
to open standalone Islamic banking branches, and conventional banks to set up Islamic banking
subsidiaries. The regulatory framework for Islamic banking should be similar to the conventional
banking system with amendments according to Shariah principles. All of the five big banks in
Pakistan are providing Islamic banking services, with a total asset value of over Rs. 313 billion
as of June 2009, accounting for 5.1% of the total banking industry assets. The Islamic banking
industry in Pakistan has performed well over the years, offering a wide array of products that
cater to the needs of various sectors of the economy. The industry has a good financial
performance, and foreign investment is contributing to its unique development. The State Bank
of Pakistan (SBP) has developed a regulatory framework that emphasizes Shariah compliance
and aligns with international best practices. Pakistan has adopted a unique three-tiered Shariah
compliance mechanism to ensure continuous supervision. The data for the quarter that ended
June 2009 shows that Islamic banks' asset financing activities have revived, with higher assets
and deposit growth and improved profitability indicators.
At the end of June 2009, Islamic banks had a market share of 5.1% in total assets, 4.2% in
financing and investment, and 5.2% in deposits. The Islamic banking industry in Pakistan is
growing rapidly, with a target to achieve a 12 percent share by 2012. The last quarter saw a 15.5
percent increase in deposits, with a deposit base of Rs 238 billion at the end of June 2009. Total
liabilities of Islamic banks increased by 13.3 percent to Rs 274 billion, while net assets and
equity increased by around 7 percent each. Reserves increased by 6 percent to one billion rupees
and appropriated profits increased by 79 percent to Rs 900 million in the last quarter.
Islamic banking in Pakistan is showing signs of improvement after experiencing a slowdown due
to recent financial stress. The financing portfolio has increased by 3% while investment has
increased by 9.3%. The increased financing may be reflecting the improving economic outlook
of the country. Net mark-up income increased from Rs 7.8 billion to Rs 15.4 billion, a healthy
94.0% growth. Non-mark-up income also increased by a hefty 213.2% from Rs 0.5 billion in
March 2009 to Rs 1.6 billion in June 2009.

Islamic Banking In Pakistan

Growth
Pakistan's efforts to introduce an Islamic banking system began in the 1970s and gained
momentum in the early 1980s. The country amended its relevant laws to facilitate the
introduction of interest-free banking and provided a specific timeline for the industry to convert
to the Islamic banking system. The State Bank of Pakistan introduced products that the industry
could use without exception. However, in 1991, the Federal Shariat Court declared the banking
system based on a 'mark-up' technique with or without a 'buy-back arrangement' un-Islamic.
 Growth of Islamic Banking in Pakistan

Despite this setback, Pakistan's efforts to Islamize the economy at the national level are
considered pioneering work in the Muslim world and have become an important reference
material for other countries that undertook the path towards the introduction and establishment of
an Islamic banking system.
Shariah Compliance Developments
The State Bank of Pakistan has re-launched Islamic banking based on lessons learned from past
experiences and other countries. The current policies for Islamic banking view it as a change
management issue, rather than a religious or legal one. The approach adopted is gradual and
market-driven, with a focus on building a broad-based financial system accessible to all
segments of the population.
The talks about the requirement for Islamic Banking Institutions (IBIs) to work under the
guidance of a Shariah advisor. To make this process more objective and responsive to market
conditions, the SBP Shariah Board has approved the Fit and proper Criteria for Shariah advisors
of IBIs. The criteria include minimum required Shariah and contemporary educational
qualifications.
Current Industry Review
Islamic banking in Pakistan has seen a shift towards change management, allowing for increased
flexibility for Islamic banks. There are 6 full-fledged licensed Islamic banks and 12 conventional
banks operating Islamic banking branches. The Islamic banking industry has total assets of over
Rs. 313 billion and a market share of 5.1% of total banking industry assets. The State Bank of
Pakistan has developed a Regulatory and Supervisory Framework that focuses on Shariah
Compliance to align the country's banking industry with international best practices. Pakistan has
a unique three-tiered Shariah Compliance Mechanism and processes to ensure a deeper and more
extensive Shariah compliance supervision on an ongoing basis.

Problems and Issues

Taxation Issues
The State Bank of Pakistan has established a committee at ICAP to determine the accounting
treatment of Islamic transaction modes. Changes are made to the tax rules to provide the same
effective taxation treatment to Islamic transactions as that provided to conventional transactions.
SBP proposed amendments in the taxation laws, in consultation with market players, to provide a
level playing field to the Islamic banking industry. An amendment was made in the Sales Tax
Act in the budget for the year 2004-2005, ensuring that goods delivered under a Murabaha
financing arrangement to or by a bank or a financial institution approved by the SBP or the
SECP were not to be treated as Supply.
Islamic Export Refinancing Scheme
The State Bank of Pakistan (SBP) introduced a Musharaka-based Islamic export refinance
scheme (IERS) in 2002 for Islamic banks and stand-alone Islamic branches operating in the
country. The IERS is based on the concept of Profit and loss Sharing, and the SBP shares the

1|Page
 Growth of Islamic Banking in Pakistan

actual profit of the Musharakah pool of the Islamic Bank. The excess profit is credited to the
Takaful fund, a reserve fund maintained by SBP under Islamic modes, for risk mitigation. Until
2005, only Meezan Bank Limited availed this facility, while in FY 2007-08, four full-fledged
Islamic banks and two conventional banks having IBBs availed the said facility.
Lack of Expertise
The Islamic finance industry faces a major challenge in capacity building. Practitioners need a
proper understanding of Islamic banking services and their equal treatment with conventional
products. It is therefore important to have people with the right skills and commitment to run
Islamic financial institutions. The State Bank of Pakistan (SBP) is putting special emphasis on
ensuring that adequately trained human resources are employed by Islamic Banking Institutions.
Banks are asked to provide appropriate training to their staff before getting a license from SBP.
To give relevant exposure to employees of the Islamic Banking Department and other
departments of SBP dealing with the Islamic banking industry, appropriate training opportunities
are provided. Additionally, the Islamic Banking Department of SBP conducts an internal
Awareness/Training Program on Islamic Banking to educate its staff on Islamic Banking and
Finance concepts and issues.
Lack of Awareness
The text discusses the concept of Islamic banking and finance, which is a relatively new and
misunderstood concept. In Pakistan, the failure to implement the Islamic banking system in its
true spirit in the 1980s contributes to the high level of skepticism expressed by many
commentators. To address this issue, State Bank conducted a successful awareness program for
providers and users of Islamic banking services. The strategy includes targeting decision-makers
and making regular presentations in the civil services academy and national defense and staff
colleges.

2|Page