Islamic Banking: A Journey of Rewards and Financial Inclusion

Introduction:

The rise of Islamic banking in Pakistan has been both a righteous journey and a profitable one. As the share of Shariah-compliant assets and deposits continues to increase, Islamic banking has become the preferred mode of transaction for many customers. With a focus on excluding Riba (interest) from financial practices, Islamic banking offers a unique approach that brings significant changes to the finance industry. This blog post explores the growth and impact of Islamic banking in Pakistan, highlighting the rewards it brings and the potential for financial inclusion.

Growth and Financial Inclusion:

According to the State Bank of Pakistan (SBP), the share of Shariah-compliant assets and deposits in the country’s banking industry has reached 20.3% and 22% respectively. Shariah-compliant financing has also seen substantial growth, accounting for nearly 27% of the total. Over the past three years, Islamic banking institutions have experienced an average growth rate of over 30% in their assets. This expansion signifies the increasing demand for Islamic banking and its ability to attract customers from diverse backgrounds.

Addressing Financial Exclusion:

Pakistan, with the second-largest Muslim population globally, faces low banking penetration. To promote financial inclusion, the government has incorporated Islamic finance into the National Financial Inclusion Strategy. According to the World Bank, only 21% of the adult population had bank accounts in 2017, with religious reasons cited by 13% of non-banked individuals. However, surveys conducted by the SBP indicate that there is a significant demand for Islamic banking among both rural and urban areas, individuals from various income strata, and different education levels. This suggests that Islamic banking can play a crucial role in addressing financial exclusion.

The Prohibition of Riba and Economic Justice:

The prohibition of Riba (interest) in Islamic banking is rooted in the principles of economic justice and fairness. Upholding the teachings of Prophet Muhammad (PBUH), Islamic finance rejects practices that promote hoarding, selfishness, and concentration of wealth. By fostering trade and risk-sharing, Islamic banking aims to create a harmonious community based on brotherhood and mutual cooperation. The eradication of Riba also helps reduce the wealth gap between the rich and the poor, discouraging monopolies and cartels.

Advantages of Islamic Banking:

Islamic banking institutions have demonstrated a better understanding of customer businesses, leading to lower non-performing financing and improved profitability. This insight has enabled the development of Shariah-compliant products tailored to meet customer needs. As a result, Islamic banking institutions in Pakistan have outperformed their conventional counterparts. Notably, they have proven to be more profitable and have exhibited stronger performance.

Embracing Change and Ensuring Sustainability:

In a rapidly evolving economic environment, Islamic banking has emerged as a blessing, providing stability and sustainable financial practices. Globally, it has gained recognition and attracted customers from diverse backgrounds due to its ethical approach. In Pakistan, the SBP aims to further increase the share of Islamic banking to 35% by December 2023 and completely transform the financial system by 2027, aligning with the directives of the Federal Shariah Court.

Conclusion:

The growth of Islamic banking in Pakistan reflects a journey that combines righteousness with profitability. As Shariah-compliant finance gains popularity, it offers a viable alternative to conventional banking and contributes to financial inclusion. By adhering to the principles of economic justice and excluding Riba, Islamic banking ensures a fairer and more balanced financial system. As the industry continues to evolve, embracing change and promoting sustainability will be essential for Islamic banking to further strengthen its position and positively impact the economy of Pakistan.