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Islamic finance industry facing challenge of undocumented economy:


Mar 21, 2007
United States

Islamic finance industry facing challenge of undocumented economy: SECP

Sohail Sarfraz


ISLAMABAD: The Islamic finance industry in Pakistan is facing the biggest challenge of undocumented economy and informal channels used by investors for meeting their financial needs.

A new report of the SECP on “Islamic Finance Industry: Specific Issues and Challenges” has stated that in the case of Islamic capital markets, as of June 30, 2022 there are 258 (49 percent) Shariah-compliant securities out of total of 530 listed securities at the Pakistan Stock Exchange (PSX), with a market capitalisation of Rs 4,643 billion (67 percent) out of a total market capitalisation of Rs 6,957 billion. Assets valuing Rs 448.13 billion (35 percent) under management of mutual funds schemes, and Rs 26.93 billion (64.7 percent) under management of pension fund schemes were Shariah-compliant as of June 30, 2022.

Although Sukuk market in Pakistan is relatively underdeveloped, but it is getting considerable attention from the government and corporate sectors alike for raising funds. Issuance and listing of Pakistan Energy Sukuk-II (PES-II) of Rs 200 billion in 2020 by Power Holding Limited (PHL) through book-building process which helped the government in addressing the challenges for resolving circular debt in the country’s power sector.

It is also pertinent to mention that the PES-II issue was 1.7 times oversubscribed and the rate of return paid by PHL was very competitive and saved the government significant financing cost due to the dedicated efforts of the SECP.

The SECP-regulated REIT sector, which had been largely inactive since 2015, has reinvigorated and shown very encouraging growth. As of June 30, 2022 the size of REITs was Rs 98.344 billion, marking a growth of 81 percent over the previous year’s growth.

The Takaful sector in Pakistan is marking its ground in line with the increasing demand for the Shariah-compliant solutions for risk management. Takaful sector of Pakistan consists of 35 Takaful operators. This includes 6 dedicated Takaful operators and 29 window Takaful operators.

The asset size of the Takaful sector (dedicated and window) is Rs 88.731 billion as of June 30, 2022. In terms of insurance premium, Takaful market share is 13 percent of the total size of the insurance market as of December 31, 2021, as compared to 12 percent as of December 31, 2020.

The SECP highlighted that the legal and regulatory frameworks play a pivotal role in the development of any regulated sector and Islamic finance industry is no exception to that. Comprehensive financial laws bring required clarity for every stakeholder, enable development of medium-to-long term strategies, support business growth, expansion and help to complete financial ecosystem.

According to the SECP, a substantial portion of economy is undocumented and participants of economic activities generally resort to and are dependent on informal channels for meeting financial needs.

In order to identify and document key issues and challenges in non-bank financial sector, the published reports and documents, in-house reviews and feedback received by the IFD of the SECP through a series of meetings and interactions with key industry players, have been reviewed.

The SECP has constituted a committee for the promotion of Islamic finance in the non-bank financial sector. The said committee has been primarily mandated to conduct a gap analysis to identify potential bottlenecks and opportunities for development of Islamic finance in capital market, other non-bank financial sectors and insurance industry.

On the recommendation of the committee, the feedback from the industry was also solicited through letters and feedback received also be incorporated.

The industry-wide macro issues, equally impacting the overall financial system and capital markets, also have material impact on the non-bank Islamic financial sector of Pakistan.

The report said that a substantial portion of economy is undocumented and participants of economic activities generally resort to and dependent on informal channels for meeting financial needs.

There was very small number of investors in Pakistani capital market i.e. 220,000 as compared to the investor base linked with the CDNS i.e. around three million. Whereas, the number of bank accounts in Pakistan is 66.13 million as of March 2022, according to data by the SBP.

The low investor base is leading to other problems like low volumes consequently impaired investor confidence. Similarly, institutional investor base in form of mutual funds, pension funds, insurance companies, retirement schemes, etc is also limited.

Due to the fewer formalised and lucrative investment options, a large chunk of public opts the informal investment schemes, including the traditional “committee system,” the report added.


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