Non-bank financial sector: SECP drafts strategic action plan for Islamic finance development

ISLAMABAD: The Securities and Exchange Commission of Pakistan (SECP) will introduce the concept of Tier-I and Tier-II capital for all non-bank Islamic financial institutions and an alternate dispute resolution mechanism for Islamic finance contracts, providing Shariah-compliant approach to resolving disputes.

The SECP has drafted a Strategic Action Plan (2024-26) for development of Islamic finance in non-bank financial sector.

In order to strengthen the legal and regulatory framework for Islamic finance, a dedicated primary law for Islamic financial services will be promulgated, providing a comprehensive and tailored regulatory environment. Additionally, the Modaraba Ordinance, 1980, will be updated to align with contemporary needs and best practices.

According to the plan, the envisaged target of 15 percent increase in the existing share of Islamic finance in the non-bank financial sector and capital market by the year 2025, requires capitalizing the potential of Islamic financial industry through enabling regulatory environment while ensuring its stability through sound legal and regulatory footings. Acknowledging the dire need of developing the Shariah compliant products for capital market, microfinance, microinsurance, P2P financing and liquidity management, the roadmap enumerates the recommendations to focus on development of Islamic finance in all regulated sectors by encouraging the Islamic finance industry and market players. This will enable the Islamic finance industry to achieve the target of 10-15 percent growth in the size of Islamic liquidity market, Shariah compliant digital financing and Islamic microfinance by 2025.

The SECP highlighted this strategic action plan presents a unified initial agenda and approach to elevate the industry to the next level of progress and advancement. It places significant emphasis on encouraging Islamic financial institutions to utilize innovative products incorporating Shariah-based features to serve under developed sectors, which are essential for the country’s economic growth, the efficient execution of the plan’s objectives in each area will depend heavily on the involvement of all stakeholders. The strategy for advancing Islamic finance in Pakistan prioritizes four key areas, which include enabling regulatory framework, achieving greater standardization, sustainable market development, and promotion and awareness.

In case of Islamic capital markets, as of June 30, 2023, there are 253 (48 percent) Shariah-compliant securities out of total of 524 listed securities at the Pakistan Stock Exchange (PSX), with a market capitalization of Rs. 4,149 billion (65 percent) out of a total market capitalization of Rs. 6,369 billion. Assets valuing Rs. 721.67 billion (43 percent) under management of mutual funds schemes, and Rs. 232.62 billion (65) percent under management of pension fund schemes are Shariah-compliant as of June 30, 2023.

The Takaful sector in Pakistan is marking its ground in line with the increasing demand forShariah-compliant solutions for risk management. Presently, the sector consists of 33 Takaful operators including 5 dedicated Takaful operators and 28 window Takaful operators. In terms of insurance premium, takaful market share is 11 percent of the total size of the insurance market as of December 31, 2022.

Under the roadmap, the SECP will include Islamic finance in its Innovation Office initiative in addition to promoting it through the regulatory sandbox initiative, fostering a culture of innovation and growth.

Additionally, a series of capacity-building and awareness sessions will be arranged to enhance market capacity and educate stakeholders about Islamic finance in regulated areas, enhancing understanding and adoption. A foundational framework will also be developed to ensure a structured mechanism for ongoing monitoring and compliance of Islamic financial institutions, ensuring their operations align with Shariah principles. Accordingly, the SECP aims to improve quality of Islamic financial institutions’ operations through new initiatives, the plan added.

Copyright Business Recorder, 2024