Fitch sees Islamic banking getting major boost in Pakistan

Fitch Ratings, a US-based credit ratings agency, has said Islamic finance industry in Pakistan is expected to continue its growth trajectory over the medium term, driven by strong government push and steadily rising public demand for Islamic products.

It, however, pointed out that Islamic banking faces key challenges that could slow its growth such as the still-developing Islamic finance regulatory framework.

In April, the Federal Shariat Court (FSC) declared that the prohibition of Riba is complete and absolute in all its forms and manifestations according to the injunctions of Islam; therefore, asked the government to implement its decision by December 31, 2027.

Fitch believes that if the court orders are implemented effectively, the Islamic finance industry could receive a big boost in the medium term.

“However, uncertainties loom over policy implementation as court judgements on this subject were issued previously but with limited effect on the banking sector,” it said.

The report highlighted that the Islamic finance industry in Pakistan faces multiple challenges as well.

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“This includes still-developing Islamic finance regulatory framework, limited supply of Sharia-compliant products and gaps in the distributional channels, with limited outreach in the populous rural areas. The financial sector in general also remains under-developed, with a challenging business environment,” it said.

The agency shared that the size of the Pakistani Islamic finance industry is estimated to have crossed $42 billion at the end of 1Q22.

“Islamic banks are the largest contributor to the Islamic finance industry at 67% (total assets), followed by Sukuk at 26% (outstanding amount), Islamic funds at 6% (total assets) and Takaful at 1% (total contributions),” revealed Fitch.

Fitch expects sovereign Sukuk issuance to rise on the back of high gross financing needs.

“Pakistan’s Sukuk market is developing with outstanding volumes of USD 11 billion at end-1Q22, with 82% in local currency. Also, guidelines on issuing green Sukuk and bonds were issued in 2021 by the Securities and Exchange Commission of Pakistan,” said Fitch.

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At end of 2021, Islamic banking's share reached 18.6% of banking sector assets (end-2017: 12.4%) and 19.4% of deposits (end-2017: 14.5%), added the report.

In 2021, Islamic banks’ total assets experienced a sharp growth of 30.6% yoy to Rs5,577 billion (USD32 billion). Islamic branches of conventional banks contributed significantly to the banking system, with a 45.7% share of overall Islamic banking assets by end-2021.

The domestic market share of Takaful reached 12% at end-2020. The Islamic funds sector had a global market share of 1.9% at end-2020.