The nation celebrated its 75th Independence Day with great fervour and while this is indeed an occasion to cherish and feel proud of but also calls for looking at what we have delivered so far on the promises we made at the time of creation of the first and only state on pure Islamic ideology.

The Islamic banking and financial system has gone through a transformational journey globally from the inception of the first Islamic bank Mit-Ghamr in Egypt in 1963 to the development of the first Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) in 1990 in Algiers to the issuance of first tradable Sukuk in Malaysia in 2002.

In Pakistan, BankIslami Pakistan Limited was the first bank to receive a licence to establish an Islamic commercial bank in 2005. Now, assets of Islamic banking institutions have crossed the Rs4 trillion mark as per the Islamic banking bulletin released in December 2020 by the State Bank of Pakistan.

The share of Islamic banks in the overall banking system has also increased to 17% on the assets side and 18.7% on the deposits side.

Despite the stellar performance by Islamic banking globally and locally, the general approach has always been not to revolutionise but to adopt existing practices of the conventional banking system and provide a similar experience to attract customers of conventional banking with the promise of services based on Shariah-compliant principles.

However, if we look at the balance sheet of Islamic banks, a majority of the assets have been built on lending to the government of Pakistan for deficit financing like the way peer conventional banks have been operating for years.

This comfort lending and risk avoidance practices by the banking system – both conventional and Islamic – has made them highly inaccessible for a very crucial sector of the economy – small and medium enterprises (SMEs).

Additionally, for Islamic banks, the chronic excess liquidity issue is a major bottleneck and thanks to the recent issuance of Rs500 billion worth of Sukuk for budget deficit financing and Energy Sukuk of Rs200 billion for reducing the circular debt by the government of Pakistan, which have provided some breathing space.

The other main avenue for raising finance by businesses, which are close to the Islamic principle of profit and loss sharing, ie the stock market, remains largely underutilised.

Surprisingly, 187 of the non-financial companies included in Shariah-compliant equity indices have opted for interest-bearing debt rather than raising capital through the stock market where they are listed.

The inclusion of such interest-bearing companies in the PSX-KMI All Share Islamic Index mainly depends on the relaxation in the Shariah-screening criteria, which allows companies to carry interest-bearing debt up to 37% of their assets.

A majority of the companies listed in the stock market and with good reputation can easily raise extra capital through the issuance of right shares but they still choose to leverage their balance sheets with debt just to avoid diluting their equity position.

Other relatively uncommon Shariah-compliant avenues for meeting financial needs are publicly listed modaraba schemes, which have not shown any promise so far and their performance have remained lacklustre.

The performance of some privately run modaraba schemes has even been marred by scandals in the past. A few of them are being investigated by the National Accountability Bureau for swindling billions in the name of Islamic financing schemes.

With a growing investor base and increasing awareness through social media platforms and other information sources, the demand to establish a true Islamic financial system is gaining traction globally with more and more investors and businesses flocking to explore the available avenues to fulfil their banking and financial needs within the ambit of Islamic jurisprudence.

It’s just a matter of time before they will question the sanctity of each and every claim made by the existing banking and financial institutions and will demand the demonstration of a true spirit for the Islamic banking and financial system to deliver results that are in line with their religious aspirations.

The writer is a financial market enthusiast and is attached to Pakistan’s stocks, commodities and emerging technology



Published in The Express Tribune, August 23rd, 2021.

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