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Growth of Islamic Funds in Pakistan: issues & challenges

Published on 15th Sep, Edition 37, 2014


Islamic funds have actually provided a window to a number of individuals, who were previously reluctant to invest because of their religious beliefs. The Islamic funds constitute 12 percent of the overall fund management in Pakistan. The country currently has the total assets worth Rs58 billion under management of Islamic mutual funds. Islamic funds industry is still at its initial stage. Presently, the country has all types of funds available on the Islamic side. These funds include money market, equity, sovereign, corporate fixed income, capital protected and index tracker. Fixed income, interest bearing bonds are not permissible in Shariah. Islamic finance, however, faces numerous challenges for its growth in the country. There is however a long way to go forward in this regard. There is still a high need to work for expansion of client base of Islamic funds management industry in the country.
Sukuk is a Shariah-compliant bond. Sukuk securities are structured to comply with the Shariah and its investment principles, which prohibit the charging, or paying of interest.

Dubai Islamic Bank (DIB) has shown interest in promoting Islamic banking in Pakistan and is willing to assist in floating the country’s Sukuk bonds. In a meeting between a DIB delegation headed by DIB chief executive officer Dr Adnan Chilwan and Finance Minister Senator Ishaq Dar in Dubai this month, Chilwan expressed the desire that DIB is keen to work closely with the Government of Pakistan particularly in the promotion of Islamic Banking in the country.

An Islamic mutual fund is essentially a modaraba structure in which the funding is provided by the investors, while asset management companies provide the professional expertise in investment. The SECP regulates the asset management companies and ensures safety of the money deposited in mutual funds. At present, there are about 16 companies that manage 32 Islamic mutual funds in the country.

The asset management companies are required to appoint Shariah Advisor, who reviews the working of the Islamic mutual funds and provides guidelines and criteria for investments. The Advisor’s guidelines are binding on the fund manager.

Islamic mutual fund industry has witnessed a phenomenal growth all over the world particularly in the Islamic world as $1.34 trillion of assets are being managed according to Islamic investment principles says a Global Islamic Finance Report 2012. Such principles form part of Shariah, which is often understood to be ‘Islamic Law’, but it is actually broader than this in that it also encompasses the general body of spiritual and moral obligations and duties in Islam.

Standard & Poor’s recently estimates that 20 percent of banking customers would now spontaneously choose an Islamic financial product over a conventional one with a similar risk-return profile In the Persian Gulf region and Asia.

Pakistan is not at par with the Muslim world in growth and development of Islamic finance, yet it has shown an impressive growth and diversification in Islamic finance over the past three decades. There are 29 Islamic open ended funds, 18 voluntary pension funds and 1 closed ended fund in the country. Islamic funds industry has yet to evolve, develop and grow with new market players in Pakistan.


Last year, the Securities and Exchange Commission of Pakistan (SECP) took a decision of establishing a Shariah Advisory Board with an aim to guide Islamic Financial Institutions (IFIs) and Islamic Capital Markets in their transactions. It was decided that the board would comprise of nine members including prominent Islamic scholars, jurist, and accountant. The SECP board would undertake educational activities for understanding Shariah principles and introduction and implementation of new models and products based on global research. For the country’s central bank, Islamic banking has been a high priority area and it has taken steps to make Islamic banking industry robust enough to offer a viable alternative to conventional banking. State Bank is striving for developing a progressive and sound Islamic banking system compatible with the global financial sector, providing innovative Shariah compliant products and services so as to achieve equitable economic growth. Established in September 2003, the Islamic Banking Department has been entrusted with the huge task of promoting and developing the Shariah-compliant Islamic banking as a parallel and compatible banking system in Pakistan.

Islamic principles encourage entrepreneurship in productive sector, or in other words they enhance productive capacity of the economy. The experts, however, believe that there remains entrepreneurial risk, which can only be eliminated at the cost of compromising the basic distinctions of Islamic economic principles. There is a dire need for establishment of institutions, which could promote entrepreneurial culture. Questions have also been raised against the performance of Mudarabah companies and some Islamic scholars have declared investment with these companies as non-compliant from Islamic principles standpoint.

Islamic banking is one of the emerging fields in global financial market. It is growing at very fast pace all around the world. Islamic investment banks and Islamic venture capital funds are yet to be launched in Pakistan. Islamic banking does suit to religious mindset in the Muslim country where the people generally abstain from purchasing insurance policies on religious grounds. Similarly, the people have reservations on banking, which also involves payment of interest. The people believe that Islam forbids insurance due to involvement of fixed rate of interest and hence, they are more inclined to buying Shariah-compliant products. Islamic banking is a system of banking that is consistent with Islamic law and guided by Islamic economics. Islam prohibits usury, the collection and payment of interest.

What primarily concerns the users of Islamic financial services is the Shariah-compliant of the services. Noncompliance of Islamic law can result in withdrawal of funds from an Islamic bank. Hence, Shariah compliance is a serious matter for an Islamic bank. Islamic finance can find rich social grounds for its growth and expansion in the country. The concept of Islamic finance needs to be introduced for the promotion of Islamic banking and insurance industry in the country. As a regulatory authority of the insurance sector, the SECP should take initiatives to tap the country’s enormous potential in the sector by providing level playing fields to government and private sector.


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