ISLAMIC BANKING IN

PAKISTAN

Islamic Finance Group (IFG)

State Bank of Pakistan
 DISCUSSION OUTLINE

Constitutional Provision for Islamic Banking

Islamic Banking Landscape in Pakistan
 1st Phase of Islamic Banking
 2nd Phase of Islamic Banking

SBP’s Role for Promotion of Islamic Banking

 Regulatory Framework
 Shariah Compliance
 Major Initiatives for Promotion of Islamic Banking

Way Forward
ISLAMIC BANKING IN PAKISTAN

History of Islamic Banking

The history of Islamic Banking in Pakistan can be traced back to the independence of
the country in 1947 and the vision and statements of the founding father, Quaid-e-
Azam Muhammad Ali Jinnah, who emphasized the importance of IBF in his
inauguration speech at SBP in 1948:

“I shall watch the work of your organization in evolving banking practices compatible
with Islamic ideas of social and economic life. We must work our destiny in our own
way and present to the world an economic system based on true Islamic concepts of
equality of manhood and social justice.”
 ISLAMIC BANKING IN PAKISTAN

Islamic Provisions in the Constitution of Pakistan;

All the three constitutions say:
“Steps should be taken to enable the Muslims {of Pakistan}, to order their lives, in individual and collective
spheres, in accordance with the teachings and requirements of Islam as set out by Quran and Sunnah”
 Islam was declared state religion (1973 constitution)
 Steps should be taken to enable the Muslims of Pakistan, individually and collectively, to order
their lives in accordance with the fundamental principles and basic concepts of Islam {Article 31}
 Eliminate Riba completely before the first day of January 2028 {Article 38(F)}

 All existing laws shall be brought in conformity with the injunctions of Islam and no law shall be
enacted which is repugnant to these injunctions {Article 227}
ISLAMIC BANKING
LANDSCAPE IN PAKISTAN
 1ST PHASE- (STARTING FROM 1979)

During 1980’s numerous pioneering steps were taken for Islamization of whole
financial system;

 Significant amendments in the legal framework

 Framework for Profit and Loss Sharing (PLS) Deposits
 All local currency financing switched to Islamic modes
 Standardized documents for permissible Islamic modes of finance
 Establishment of Banking tribunals (special courts) with powers of civil and
criminal courts and obligation to decide the recovery suits in 90 days
 Framework for Mudaraba Companies
1ST PHASE- (STARTING FROM 1979)

These effort could not produce desired results mainly due to:

 Absence of Shariah compliance framework & oversight mechanism;

 Non-availability of Shariah compliant government securities;
 Limited ownership of banks;
 Acute capacity constraints–banks having no understanding of the
objectives and operations of Islamic banking;
 No awareness amongst the masses;
 2ND PHASE- (STARTING FROM 2001-2002)
Policy Decision : In 2001 it was decided that the shift to interest free economy would
be made in a gradual and phased manner and without causing any disruptions.
 SBP allowed three types of Islamic banking institutions to operate in the country :

Full-fledged Islamic banks

Islamic banking subsidiary of conventional banks

Standalone Islamic banking branches (IBBs) of conventional banks

 Moreover, conventional banks having IBBs are allowed to have Islamic banking
windows.
ISLAMIC BANKING – GLOBAL LANDSCAPE
SHARE IN TOTAL BANKING ASSETS BY JURISDICTION
Total Assets of IFSI:
USD 3.38 trillion

Source: IFSB Islamic Financial Services Industry Stability Report 2024

 STATUS OF ISLAMIC BANKING IN PAKISTAN

Growth of Assets and Deposits of Islamic Banking Industry during the last Few years (PKR in
trillion)
12.00

10.00 Market Share of

9.68
Islamic Banking as of June 24
8.99
8.00 7.36
6.75
7.22
6.00 5.58
5.16
4.27 4.21 22.7%
18.8%
4.00 3.28 3.39
2.65 Assets Deposits
2.00

0.00
Dec 19 Dec 20 Dec 21 Dec 22 Dec 23 June 24
Deposits Assets

Distribution Network Industry Composition

5,201 2,066 16 6
branches windows Conventional Banks having Islamic Branches Full Fledged Islamic Banks
SBP’s ROLE IN PROMOTION OF
ISLAMIC BANKING
REGULATORY FRAMEWORK FOR ISLAMIC BANKING IN PAKISTAN

 Establishment of Islamic Banking Department at SBP (Now Islamic Finance Group - IFG)
 SBP has issued detailed criteria for establishment of Islamic commercial banks in the private sector through a
three pronged strategy
 Guidelines & criteria for:
 setting up full-fledged Islamic commercial bank ,
 setting up of an Islamic banking subsidiary by the existing conventional commercial bank,
 Opening of standalone Islamic banking branches (IBBs) by a conventional commercial bank
 Moreover SBP has also issued:
 Criteria for Conversion of Conventional Branch into Islamic Banking Branch
 Instructions on Islamic Banking Windows Operations
 Guidelines for Conversion of conventional Bank into Islamic Bank
 Guidelines & criteria for Commencement of Shariah Compliant Business and Operations by a DFI
SHARIAH COMPLIANCE
Shariah Advisory Committee at SBP

Shariah Board at IBIs comprising of at least three

members at bank’s level
How to
Instructions and guidelines for Shariah ensure
compliance
&
Shariah
Model Agreements Compliance?
&
Adoption of Internationally acceptable
Shariah Standards (i.e. AAOIFI)
Systematic and standardized approach towards Shariah
Compliance: Issuance of comprehensive Shariah
Internal& External Shariah Audit
Governance Framework for institutionalizing
Shariah compliance function in IBIs;
Shariah Inspections by the Central Bank
MAJOR INITIATIVES FOR PROMOTION OF ISLAMIC BANKING

 Issuance of Strategic Plans for the Islamic banking

industry
 Islamic Finance - Component of Financial Inclusion
 Establishment of three Centres of Excellence for
Islamic Finance
 Guidelines for Islamic Microfinance & Agriculture
 Adoption of International Shariah & Prudential
Standards
 Issuance of number of Shariah compliant incentive
schemes
MAJOR INITIATIVES FOR PROMOTION OF ISLAMIC BANKING

 Knowledge, Attitude and Practices (KAP) Study

 National wide Mass Media campaign
 Regular holding of targeted seminars and conferences for
awareness building of business community, academia,
bankers and policy makers
 Effective coordination with national and international
organizations for capitalizing on their expertise for
promotion of Islamic banking in Pakistan
WAY FORWARD
GOVERNANCE STRUCTURE FOR IMPLEMENTATION OF FSC
JUDGEMENT
Steering Committee for Providing
Strategic Guidance in Implementation
of
Federal Shariat Court’s Judgement on
Riba Case

Committee for… Committee for…

(e.g. conversion of public (e.g.. Capital Market &
debt) Committee for transformation of conventional banking into Takaful)
Islamic

SBP internal champions SBP internal champions

Working Group-1 Working Group-2 Working Group -3 Working Group-4 Working Group-5 Working Group- 6 Working Group-7

Legal Reforms Regulatory & Awareness Creation Review of Fast track adoption of Coordination with IT Ecosystems
Supervisory Reforms & Capacity Building Conversion Plans of International Government and (IT Systems &
Banks Standards other Stakeholders Controls)
THANKS