Source:  Halal Times

Kawaguchiko, Japan – In a significant development for Pakistan’s financial sector, the Pakistan Stock Exchange (PSX) has initiated a strategic collaboration with Malaysian Islamic finance experts. A high-level delegation of Malaysian Shariah scholars and financial specialists recently visited the PSX headquarters in Karachi, marking an important step in Pakistan’s journey to enhance its Islamic finance capabilities. This partnership aims to leverage Malaysia’s extensive experience in Shariah-compliant markets to strengthen Pakistan’s growing Islamic financial ecosystem.

Building on Shariah-Compliant Foundations

The meeting underscores a serious commitment from both the PSX and the Securities and Exchange Commission of Pakistan (SECP) to develop a comprehensive Islamic capital market. These regulatory entities have been progressively working to establish frameworks that promote Shariah-compliant investments, responding to increasing domestic demand for ethical financial options.

At its core, Islamic finance adheres to Shariah principles—a framework prohibiting interest (riba) and requiring compliance with Islamic ethical standards. The PSX has already made considerable progress in this domain, offering various Shariah-compliant products including Islamic equities, Sukuk (Islamic bonds), Islamic Exchange Traded Funds (ETFs), and Islamic Real Estate Investment Trusts (REITs).

The exchange has also developed specialized Shariah-compliant indices that track companies meeting strict Islamic screening criteria. Additionally, through the National Clearing Company of Pakistan Limited (NCCPL), investors can access Murabahah Share Finance, a Shariah-compliant mechanism for purchasing shares.

Promising Market Potential

During the meeting, PSX Chairperson Dr. Shamshad Akhtar highlighted Pakistan’s significant potential for Islamic finance growth. “With over 50% of listed companies on the exchange already being Shariah-compliant, PSX provides a compelling platform for faith-based investments,” Dr. Akhtar noted. This substantial proportion of Shariah-compliant listings creates a strong foundation for further sector development.

Pakistan’s experience with Islamic financial instruments dates back to 2008 when it issued its first Ijarah-based Sukuk. Since then, the country has made remarkable progress, with Ijarah Sukuk issuances exceeding PKR 6.5 trillion (approximately USD 22 billion) as of August 2024. This growth trajectory reflects the increasing acceptance and demand for Islamic financial products within Pakistan.

The PSX attributes this positive momentum to “the continued expansion of Islamic finance institutions, diversified asset classes, and investor-friendly regulatory frameworks,” indicating a holistic approach to market development that addresses both supply and demand factors.

Regulatory Support and Future Directions

Tariq Naseem, Head of Islamic Finance at the SECP, provided the Malaysian delegation with a comprehensive overview of regulatory reforms and developments in Pakistan’s Islamic financial services industry. These discussions covered potential areas for collaboration between the two nations in advancing Islamic finance on the global stage.

Malaysia stands as a recognized global leader in Islamic finance, holding approximately 12% of the estimated $4 trillion global Islamic finance market. Its success stems from decades of strategic development, supported by strong government initiatives and a well-established ecosystem encompassing Islamic banking, Sukuk markets, and Takaful (Islamic insurance).

Farrukh H. Sabzwari, Managing Director and CEO of the Pakistan Stock Exchange, expressed his enthusiasm for learning from Malaysia’s expertise. He identified a significant growth opportunity in Pakistan’s relatively small investor base, noting that only 0.14% of Pakistan’s population currently participates in the stock market, compared to 1% in Bangladesh.

Notably, Mr. Sabzwari revealed that approximately 80% of daily transactions at PSX are already Shariah-compliant, indicating strong underlying market preference for Islamic finance principles. The PSX management reaffirmed their commitment to building a robust Shariah-compliant capital market, highlighting ongoing efforts of the PSX Shariah Focus Group—a multi-stakeholder platform working to foster an inclusive, faith-based financial system.

Challenges on the Path to a Riba-Free Economy

While Pakistan has made significant strides in developing its Islamic finance sector, the journey toward a fully Shariah-compliant financial system presents considerable challenges. Following a Federal Shariat Court directive in April 2022, the government is working to eliminate interest from the banking system by 2027.

The government and the State Bank of Pakistan (SBP) have implemented various measures, including legislative changes introduced in October 2024 and the issuance of Sukuk bonds to replace interest-based treasury instruments. The SBP had set an ambitious target to increase the share of Islamic banking deposits to 50% by January 2025, with plans to reach 100% by December 2027.

However, official reports indicate that Pakistan missed its initial target, achieving only 24.9% market share of Shariah-compliant banking deposits by December 2024. This shortfall highlights the complexities involved in transitioning an entire financial system to Islamic principles.

Several factors contribute to these challenges:

• Public awareness: Many Pakistanis still lack sufficient understanding of Islamic financial products and services
• Innovation gaps: Despite progress, there remains a need for diverse Shariah-compliant products tailored to various investor needs
• Standardization issues: Inconsistencies in Shariah interpretations and product structures create market complexities
• Talent shortages: Growth requires professionals skilled in both conventional finance and Shariah principles
• Regulatory evolution: Continuous refinement of supportive regulations remains necessary

A Strategic Path Forward

Despite these challenges, Pakistan maintains a firm commitment to advancing Islamic finance. The collaboration with Malaysia represents a strategic approach to knowledge transfer and capability building. By drawing on Malaysia’s decades of experience, Pakistan aims to refine its regulatory framework, introduce innovative products, and develop local expertise.

This partnership holds the potential to accelerate Pakistan’s transition to a more ethical and inclusive financial system while strengthening its position in the global Islamic finance landscape. As both regulatory bodies and market participants work together, Pakistan appears positioned to make significant progress toward its vision of a comprehensive Shariah-compliant capital market.

Original Articles:

halaltimes.com. (n.d.). Pakistan Stock Exchange to Collaborate with Malaysia on Islamic Finance Expertise. Retrieved April 20, 2025, from https://www.halaltimes.com/pakistan-stock-exchange-to-collaborate-with-malaysia-on-islamic-finance-expertise/