Hailey College of Commerce

University of The Punjab, Lahore

Assignment
Non-Banking Financial Institutes

Submitted To
Dr. Sabeeh Iqbal

Submitted By
Muhammad Zohaib Butt (20-652)

Title:

A Diagnostic Review of ISLAMIC FINANCE in the Non-Bank Financial

Sector of Pakistan
 Chapter 1

Summary: Pakistan's Vantage Ground

Section 1.1: Overview of Pakistan

 Pakistan is a large, developing country with a population of over 220 million.
 It has experienced "boom-bust" growth cycles due to various challenges like
weak governance, frequent political changes, and external debt.
 Despite these challenges, Pakistan has potential for strong economic growth due
to its large domestic market, demographics, and ongoing development projects.
Section 1.2: Key economic indicators
 Pakistan's economy rebounded from the pandemic and showed V-shaped
recovery in 2022.
 However, there are concerns about rising inflation, fiscal deficit, and trade deficit.
 Foreign remittances and foreign direct investment increased in 2022.
Section 1.3: The financial landscape of Pakistan
 The financial system plays a crucial role in economic growth by channeling funds
to investments.
 Pakistan's financial system includes banks, non-bank financial institutions, and
financial markets.
 The State Bank of Pakistan (SBP) regulates the monetary and credit system.
 A large portion of the population remains unbanked, highlighting the need for
financial inclusion.
Section 1.4: The evolution of Islamic finance in Pakistan
 Pakistan, being an Islamic republic, aims to eliminate interest-based
transactions.
 Efforts towards Islamic banking started in the 1970s and gained momentum in
the 1980s.
 The system faced challenges and legal disputes, but Islamic banking and finance
continued to develop.
 Recent regulations aim to further promote and govern Islamic financial activities.
 Summary of Chapter 2:

Non-Bank Islamic Finance in Pakistan

An Overview of Non-Bank Islamic Finance in Pakistan" dives into the intricate tapestry
of this burgeoning sector, illuminating its current landscape and highlighting its future
potential. It paints a picture where the Securities and Exchange Commission of Pakistan
(SECP) acts as the architect, diligently laying the groundwork for a robust and
flourishing ecosystem.
A Flourishing Capital Market:
The Islamic capital market pulsates with diverse instruments like Sukuk (Islamic bonds),
Shariah-compliant mutual funds, and commercial papers. It's a crucial piece of the
puzzle, attracting government entities like Power Holding Limited and individual
investors alike through Sukuk issuance and specialized indices.
Collective Investment Vehicles Gain Traction:
Islamic mutual funds, pension funds, and Real Estate Investment Trusts (REITs) are
blossoming, offering Shariah-compliant investment avenues for various risk appetites.
This signifies a growing acceptance and understanding of Islamic finance principles.
Serving SMEs and Beyond:
Modarabas and other non-banking financial institutions (NBFIs) extend their reach
beyond conventional banking, catering to the unique needs of Small and Medium
Enterprises (SMEs) and fostering entrepreneurial ventures. This fosters financial
inclusion and empowers smaller players in the economy.
Takaful: A Shariah-Compliant Alternative:
Takaful, the Islamic equivalent of insurance, emerges as a distinct option, providing
Shariah-compliant coverage and risk mitigation. This broadens the financial safety net
and caters to the specific needs of those seeking ethical insurance solutions.
SECP's Proactive Stance:
Recognizing the immense potential, the SECP has embarked on a multi-pronged
strategy to propel the sector forward. It's actively streamlining its internal structure,
reconstituting key Shariah advisory bodies, and designating specialized personnel to
champion Islamic finance within the organization.
Engaging Stakeholders and Addressing Challenges:
Through consultative meetings and collaboration with external experts, the SECP
fosters an inclusive environment for growth. It acknowledges the need to address
existing gaps in regulations and frameworks, paving the way for a more robust and
efficient ecosystem.
Looking Ahead: Untapped Potential and Growth Horizons:
While significant strides have been made, untapped potential remains, particularly in
Islamic micro-takaful, SME financing, and innovative product development. By
addressing capacity building needs and raising awareness, the sector can unlock its full
potential, contributing significantly to financial inclusion and economic prosperity in
Pakistan.

Chapter 3:

A Deep Dive into the Global Islamic Finance Landscape

Guiding Lights: Global Islamic Finance Bodies

International organizations like the AAOIFI, IFSB, IsDB, COMCEC, and IILM act as the
cornerstones of this ecosystem. They set standards, champion development, and
facilitate seamless cross-border transactions, ensuring the soundness and stability of
Islamic financial services.
Leaders of the Pack: Islamic Finance Powerhouses
Saudi Arabia, Malaysia, and Iran reign supreme in terms of Islamic financial assets, with
the GCC region playing a significant role. Notably, interest in Islamic finance transcends
geographical boundaries, attracting attention from even non-Muslim countries.
A Flourishing Landscape: The Global Islamic Finance Market in 2021
The global Islamic finance market witnessed impressive growth in 2021, reaching a
staggering US$3.06 trillion, with projections estimating a further ascent to US$3.69
trillion by 2024. Islamic banking remains the dominant segment, holding a 68.7% share,
followed closely by the Islamic capital market at 30.5%.
Sukuk Issuance Soars, Islamic Funds Flourish
Sukuk issuance witnessed a remarkable 12.5% growth, reaching US$775.7 billion, with
Malaysia and Saudi Arabia leading the charge. Islamic funds experienced a steady 6%
increase in assets, reaching US$120 billion, while Takaful contributions rose by 4.8% to
US$24.3 billion.
Navigating the Currents: Key Trends and Challenges
Sustainability-linked Sukuk issuances are gaining traction, reflecting a growing focus on
ethical and environmentally responsible investments. Digitalization is rapidly
transforming the landscape, offering greater efficiency and accessibility. Regulatory
frameworks are being strengthened across jurisdictions, fostering stability and
confidence. However, the Takaful segment remains relatively small compared to its
counterparts, and geopolitical tensions and economic headwinds pose potential risks.
Embracing the Future: Opportunities and the Road Ahead
Despite these challenges, the future of Islamic finance appears bright. Continued
innovation, collaboration among stakeholders, and sustained efforts to raise awareness
offer vast opportunities for growth. As the world seeks ethical and inclusive financial
solutions, Islamic finance stands poised to play an increasingly significant role in
shaping a more equitable and sustainable global financial landscape.

Chapter 4:

Navigating the Labyrinth: Overcoming Roadblocks in Pakistan's Non-Bank

Islamic Finance Sector

Pakistan's Islamic finance industry has witnessed impressive growth, but the non-bank
segment remains entangled in a complex web of challenges that stifle its true potential.
While the overall financial landscape presents hurdles like informality, low savings
culture, and a shallow investor pool, the Islamic finance space faces distinct roadblocks
that demand nuanced solutions.
Systemic Constraints: A Breeding Ground for Challenges
The informal economy, a defining feature of Pakistan's economic landscape, acts as a
formidable barrier. With a significant portion of economic activity operating outside the
formal system, integrating these actors into Islamic finance becomes a near-impossible
feat. This translates to a reduced client base and limits the sector's reach, hindering its
ability to achieve financial inclusion goals.
Compounding this is the low savings culture. Compared to regional counterparts,
Pakistan grapples with a comparatively low savings rate. This restricts the pool of
available funds for investment in the Islamic finance sector, hindering product
development, market expansion, and ultimately, its ability to serve a wider population.
Furthermore, the Pakistani capital market suffers from a limited investor base and
shallowness. This manifests in few listed companies with restricted free floats,
resulting in reduced market activity and liquidity. This lack of dynamism creates an
unfertile ground for the kind of innovation and vibrancy needed for a thriving Islamic
finance ecosystem.
Islamic Finance-Specific Hurdles: Where the Thorns Lie
Navigating the regulatory maze in Pakistan's Islamic finance sector is akin to threading
a needle blindfolded. Outdated and ambiguous regulations, particularly regarding stock
screening and Shariah advisor regulations, create uncertainty and stifle innovation. This
lack of clarity discourages potential players and hinders the development of a robust
and dynamic Islamic finance landscape.
Product scarcity and a deficit in innovation further impede the sector's progress. The
non-bank Islamic finance sector lacks a well-developed retail Sukuk market, a crucial
instrument for mobilizing funds and expanding reach. Additionally, traditional business
models of Modarabas, a key player, face challenges in adapting to market realities. The
limited range of innovative Shariah-compliant products restricts accessibility and appeal
for diverse investor segments, hindering the sector's ability to cater to evolving needs.
The fragmented ecosystem presents another formidable challenge. The absence of
efficient liquidity management options and a comprehensive promotional strategy
creates operational bottlenecks and restricts outreach efforts. This lack of cohesion
undermines the sector's ability to function seamlessly and compete effectively in the
broader financial landscape.
Trust deficit and capacity constraints add another layer of complexity. Past unethical
practices in the financial sector, combined with limited transparency regarding the
application of Islamic principles in certain non-bank products, have eroded public
confidence. This, coupled with capacity constraints in terms of human resources and
infrastructure, limits the sector's ability to address these concerns and enhance
transparency, further hindering its growth potential.
Charting a Path Forward: Collaboration is Key
Unlocking the true potential of the non-bank Islamic finance sector in Pakistan demands
a collaborative and multi-pronged approach. Policymakers, regulators, industry
players, and academic institutions must join forces to address the aforementioned
challenges.
Financial literacy initiatives aimed at educating the public about Islamic finance
principles and products are crucial for building trust and expanding the client base.
Modernizing the regulatory framework by streamlining regulations, clarifying
ambiguities, and fostering innovation is essential for creating a fertile ground for the
sector's growth.
Promoting product innovation through targeted incentives and support for research
and development will not only enhance accessibility but also cater to the evolving needs
of diverse investor segments.
Building a robust ecosystem with efficient liquidity management options and a
comprehensive promotional strategy will enable seamless operations, wider outreach,
and increased competitiveness.
Finally, enhancing transparency and addressing trust concerns through stricter
governance, robust Shariah compliance mechanisms, and capacity building initiatives
are critical for regaining public confidence and unlocking the full potential of the sector.
By addressing these challenges through a collaborative and comprehensive approach,
Pakistan's non-bank Islamic finance sector can emerge as a powerful driver of financial
inclusion, economic growth, and sustainable development in the years to come.