Apr 9 - 15, 20

Islamic finance has seen exponential growth over the years. Presently, more than 1100 institutions offering Islamic financial services operate across the globe. The large international players such as HSBC, Citigroup, Deutsche, Standard Chartered, and BNP Paribas are also entering into the Islamic banking market. There are promising signs that Islamic finance trends are sustainable. Spread across 70 countries, Islamic finance has grown to almost a trillion dollar industry.

It has expanded at a compound annual growth rate of 20 per cent over the past three years, compared to nine per cent for conventional finance. Despite its growth, given its current size and composition, it is still a niche market in the overall global financial industry.

The market of Islamic bonds, or sukuk, is believed to stand at about $50 billion, roughly one per cent of global bond issuance. Malaysia has the world's largest market in Islamic bonds, known as "sukuk", but it is facing rising competition from Singapore and European banking centers.

A variety of Islamic banking instruments and transactions are available in different markets. These may be classified as equity, debt or fee based services/ products. Equity based products are musharaka and mudaraba; debt products include salam, istisna, istijrar, qard, murabaha, ijara, bai-bithaman-ajil, bai-al-einah, bai-al-dayn, and tawarruq; and fee based services are wakala and kafala.

Moving from traditional Islamic products, now the industry is offering consumer financing for residential purposes and structuring financing vehicles for supporting infrastructure and housing finance projects etc.

Major Islamic finance products include car Ijarah, diminishing musharakah as mortgage financing, murabaha as short term financing, and Ijara as long term financing.

Besides, Islamic investment banks are now focusing on Shariah compliant investment opportunities in infrastructure and real estate. Simultaneously, there is a growing emergence of Islamic insurance and reinsurance (Takaful/re-Takaful), Islamic syndicated lending, and investment in Islamic collective investment schemes and other wealth and asset management products.

Some Islamic banking institutions (IBIs) have introduced Haj and Umrah financing known as "Labaik" and Laptop Financing. In Haj and Umrah financing, banks provide an upfront package as well as installments but the price or rate of both the packages remains the same, so it is a type of Qarz-e-Hasna.

Islamic microfinance products are also being introduced now. Islamic microfinance is not only developing within Pakistan but Bangladesh, Lebanon, Syria, Malaysia, Indonesia South Africa and other countries are also benefiting from the products of Islamic microfinance. It is a step forward for poverty alleviation and uplifting the economy of the country.

To assemble international Islamic microfinance organizations under one platform, Islamic Microfinance Network (IMFN) has been established in Pakistan. The initial member countries of Islamic microfinance network are Iraq, Jordan, Yemen, Ghana, Mauritius, and Kazakhstan. The core objective of this network is to provide best methodologies of Islamic microfinance, Shariah guidelines, and lasting relations and manpower to the industry.

The growing government appetite for bank borrowings continues to keep most conventional banks engaged in larger investments in government securities. But, IBIs have capitalized on this opportunity and increased their net financing in textiles, chemicals, fertilizers, pharmaceuticals, energy sector, housing and car financing.

The introduction of a standard agreement to be used as a set of guidelines for agricultural financing by Islamic banks and establishment of branches of Islamic banks in semi-urban and rural areas have begun to boost their financing to growers' community.


The first challenge for Islamic financial institutions is to come out with products that reflect the spirit and form of Islamic finance and this is also a challenge for governments to have the right laws and systems in place. While replication of conventional products to make them Shariah compliant does pass Shariah permissibility test, it is insufficient to achieve larger objectives of Islamic financial system. On the validity of some of these transactions and instruments, there is a difference of opinion among Muslim scholars. There are scholars who oppose certain practices because they find hidden elements of riba and gharar in them. They claim that some products appear Islamic only in form, not substance. Tawarruq, bai-al-dayn, and bai-al-inah are among transactions either disallowed or, at best, deemed controversial by some of the prominent scholars.

Other obstacles to Islamic finance have existed since the industry was born in its modern form in the 1970s, and will not disappear any time soon. Tax and regulatory environments are less favorable in many countries than they are for conventional finance.

Another shortcoming confronting Islamic banking is the shortage of qualified professionals at all levels. There are not many people who are equally skilled in conventional banking and Islamic law. A person well acquainted with conventional banking can easily understand any Islamic product. However, one cannot successfully develop or market such a product without knowing the rules and institutions unique to Islam.

Pakistan's Islamic finance industry is evolving and gaining a better understanding of its optimal goals and objectives. In Pakistan, 67 per cent of Islamic banks financing is concentrated in corporate sector through Murabaha, Ijarah, Diminishing Musharaka.

With most of corporate having banking relationships with conventional banks, Islamic banks have to offer significant price discounts to attract corporate clients. There is a dire need of healthy competition between Islamic finance institutions and conventional banks with a view to rationalize the interest rate and offer competitive pricing to both depositors and borrowers. There is a need to encourage companies to raise more and more funding through Islamic Mutual Funds, Islamic TFCs and Sukuks.