Diversification of Islamic Financial Instruments
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Some of the main challenges facing the Takaful industry in Pakistan are:
 Both Life and General Takaful inherently seek to provide risk coverage. However, the
current market mainly views the profit rates/returns from investments of these
instruments. Hence, the Operators are faced with the challenges of providing
competitive returns to their participants, as opposed to providing better risk coverage
 The general awareness about Takaful and its products among the population is very
limited. This has improved in certain segments of the population since 2015 with
repeated educational trainings on Takaful. However, there are many segments of the
population who may understand Islamic banking but not insurance in general, or may
comprehend insurance but may not be able to differentiate between conventional
insurance and Takaful.
 There is a long-term need for local Re-Takaful firms, particularly in General Takaful.
3.3.6 POLICY RECOMMENDATIONS
Islamic banking in Pakistan is gradually increasing in awareness since 2015, with the State
Bank of Pakistan and Finance Minister helping in the establishment of three active Centers of
Excellence in Islamic Finance (at IBA Karachi, LUMS Lahore, and IM Sciences Peshawar) by the
end of 2015. The Islamic asset management industry in Pakistan was the first segment to
commence, back in 2003. The number of Takaful operators significantly increased in 2015 and
2016 with the introduction of Takaful windows. However, there are still significant challenges
facing the three sectors, in terms of product diversification and innovation as well as Shariah
compliance:
 Islamic banking has a dominant share in the Consumer financing market, capturing
close to 60% of the market, via its popular Ijarah, Diminishing Musharakah and
Murabaha based financing products. However, its share in the corporate financing
needs to be increased
 One of the most important issues facing Islamic banks is the lack of Shariah compliant
avenues for Liquidity Management. There are very few sovereign Shariah compliant
products available, such as Bai Muajjal (credit sale) and GoP (government of Pakistan)
Ijarah Sukuk. However, the profitability of Islamic banks, as well as the rates they
subsequently offer to their depositors, has been significantly lower than that of
conventional banks due to an acute shortage of well performing Shariah compliant
investment products. In December 2016, Islamic banks had a total of Rs. 610 billion
liquid assets, with an average ROE of only 10.6%, compared to the main industry
average ROE of 14.4%.65
 There is a gradually increasing awareness in Pakistan that Islamic banks, in essence,
should be more of financial intermediaries and trading houses rather than a
replication of conventional banking. However, the current Islamic banking operating
mode is mainly geared towards ‘Islamizing’ the existing conventional products. This is
restricting the growth of product diversification and innovation in Islamic banking.,
65 State Bank of Pakistan’s Islamic Banking Bulletin, December 2016, pages 8-9.