Diversification of Islamic Financial Instruments
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3.3. CASE STUDY: PAKISTAN
3.3.1 SUMMARY
Pakistan presents an interesting case study for Islamic finance, as the country with the second
largest Muslim population, a growing Islamic banking segment, and significant recent efforts
on the part of the central bank, the industry as well as the academia in improving product
awareness and diversification in Islamic finance. Significant recent developments include
Pakistan’s entry into the international Sukuk market in 2014, the development of Sukuk Rules
in 2015, the central bank’s establishment of three Centers of Excellence for Islamic Finance in
Lahore, Karachi and Peshawar in late 2015, the framework for Takaful Window Operations
being passed in 2015, as well as the Islamic banking segment reaching a size of 13.3% by
December 2016. However, the country’s Islamic banking, capital markets and Takaful industry
is also facing significant challenges, in increasing awareness of Islamic finance processes and
products, developing its trained human resource, providing a greater variety of both sovereign
and private Shariah compliant products for investment and liquidity management of its IFIs,
developing Re-takaful products, etc.
3.3.2 INTRODUCTION
Islamic Republic of Pakistan is a major Muslim majority state in South Asia, which shares
borders with Iran and Afghanistan in the east, disputed Kashmir and China in the North, India
in the west, and the Arabian Sea in the south. It gained its independence along with neighbor
India in August 1947.
Pakistan is a major developing economy with a GDP of USD 283.66 billion (the 40th largest
economy by GDP in 2016) and boasts a population of 193.2 million, with 95-98% being Muslim
(2016)48.
3.3.3 ISLAMIC BANKING IN PAKISTAN
An initiative to re-launch Islamic banking in Pakistan started in the early 2000, as a long term
plan to shift the financial system to an interest-free economy, but through a gradual, market-
driven and flexible approach, without major disruptions. The government of Pakistan decided
to promote Islamic banking as a parallel and compatible system.
Islamic Banking was re-introduced in Pakistan in 2002, with Meezan as its first licensed
Islamic bank. In the year 2002, Al Meezan Investment Management Ltd, which had been
established earlier in 1995 as the country’s first wholly Shariah compliant Asset Management
and Investment Advisory firm, was granted the license by the State Bank of Pakistan to operate
the first Islamic bank. Hence, Meezan Bank Ltd. was formed, which is still the country’s first
and largest full-fledged Islamic bank
The Islamic Banking Policy had been introduced in 2001, and Modaraba Companies and
Modaraba Rules had existed in Pakistan since 1981. Today, there are a total of twenty-two
Islamic banks operating in Pakistan. These consist of (a) four full-fledged Islamic banks
48 World Bank data Pakistan, year 2016..Se