The Iranian Association of Islamic Finance held a specialized session on “The Islamic Banking Status in Pakistan” on the 7th of November, 2023.

Speaker, Syed Mazhar Abbas Zaidi, Executive Committee Member, Al-Sadiq Institute of Islamic Banking, Finance and Takaful, Pakistan

In Pakistan, there are two main financial regulators that oversee different sectors of the financial industry:
1. State Bank of Pakistan (SBP):
As the central bank of Pakistan, the State Bank of Pakistan is the main regulator overseeing the country's monetary policy, banking industry and financial institutions. This organization supervises conventional and Islamic banking operations and regulatory matters, formulates monetary policies and ensures the stability of the financial system.
2. Securities and Exchange Commission of Pakistan (SECP):
The SECP regulates and supervises the corporate sector, securities markets, insurance companies, non-banking financial institutions (NBFIs) and asset management companies in Pakistan. It ensures transparency, protection of investors and fair functioning of capital markets.
These two key regulatory bodies namely the State Bank of Pakistan and the Securities and Exchange Commission of Pakistan play an important role in monitoring and regulating various sectors of the financial industry and ensure compliance with regulations and standards in their respective areas.

Subsidiaries of Central Bank of Pakistan:
Central Bank of Pakistan has "three" wholly owned subsidiaries to enhance its functions. These subsets are:
• State Bank of Pakistan’s Banking Services Corporation, which was established in 2001, from this company, the Central Bank performs tasks such as currency and credit management, facilitating the interbank settlement system, and selling/purchasing government savings instruments on behalf of the Central National Savings Department. The Banking Services Corporation of the SBP also earns revenue and makes payments for and on behalf of the government. It also performs operational tasks related to development finance, public debt management, foreign exchange operations and export refinancing.

• National Institute of Banking and Finance:
It is the training arm of the State Bank of Pakistan that provides executive development training to new recruits and various levels of the Central Bank employees. This subsidiary institute also conducts international courses in central and commercial banking in collaboration with the federal government. In addition, it provides training to banking services companies and other financial institutions.

• Deposit Protection Company (DPC):
Deposit Protection Company was established in 2016 as a wholly-owned subsidiary of the SBP. This institution is responsible for the protection of deposits of member financial institutions active in Pakistan. The purpose of the Deposit Protection Company is to compensate depositors for the amount of protected deposits in case of bankruptcy of a member financial institution.

Overview of Progress and Market Share of Pakistan Islamic Banking Industry:
The assets of Pakistan's Islamic banking industry (IBI) increased by 327 billion rupees during the last quarter of 2022 and exceeded the seven trillion rupees and reached 7229 billion rupees by the end of December 2022. Deposits in the Islamic banking industry also increased by 140 billion rupees during this period and stood at 5,161 billion rupees by the end of December 2022, which was a record.
According to the annual report, IBI's assets and deposits experienced significant growth during 2022. The assets of Pakistan's Islamic banking industry increased by 29.6% year-on-year to 1652 billion rupees. Also, deposits increased by 950 billion rupees, which shows an annual growth rate of 22.6%. It is important to mention that this is the maximum annual increase in the size of Islamic banking assets and deposits in a year.
As a result of relentless growth, the market share of Islamic banking assets and deposits in the entire banking industry increased to 20.2% and 22%, respectively, by the end of December 2022.

Network of Islamic banking branches in Pakistan:
The Islamic banking industry network consists of 22 Islamic banking institutions, including 5 full-fledged Islamic banks and 17 conventional banks with Islamic banking branches. The network of Islamic banking branches experienced a quarterly growth of 205 branches and increased to 4396 branches (in 129 regions of Pakistan) by the end of December 2022. In 2022, a total of 440 branches were added to the branch network.

In terms of financing, the share of Diminishing Partnership (34.8 percent) is the highest figure in Islamic banking industry, followed by Partnership (25.2 percent) until the end of December 2022.

The State Bank of Pakistan’s Islamic Banking Industry Strategic Plan (2021-25):

The plan urges the Islamic banking industry to resort to innovative products based on distinctive Shariah features to address the underserved sectors that are critical to the growth of Pakistan's economy.
This plan has a broad focus on improving the public understanding of Islamic banking as a distinct and viable system that is able to meet the diverse needs of financial services of different segments of society. The role of different stakeholders will be crucial to effectively achieve the goals under each pillar in the implementation of the strategy. The industry must fully invest on the potential of Islamic finance to achieve the shared vision of a dynamic and sustainable Islamic banking sector in Pakistan.

This plan shows consists of six pillars to achieve these anticipated goals:

1. Strengthening the legal landscape
2. Increasing the capability of the regulatory framework
3. Strengthening the comprehensive framework of Shariah governance
4. Improving the liquidity management framework
5. Expansion and development of the market
6. Strengthening human capital and enhancing awareness