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The rise of Shariah-compliant investments

By Raeda Latif
27 January, 2025

Our society naturally gravitates towards religious values, influencing multiple aspects of life, including finance. Over the last few decades, Islamic banking and financial products have gained significant traction in Pakistan.

The rise of Shariah-compliant investments

Our society naturally gravitates towards religious values, influencing multiple aspects of life, including finance. Over the last few decades, Islamic banking and financial products have gained significant traction in Pakistan.

We see that over the years, the local populace has preferred Islamic asset classes and Islamic banking, financial products and services over conventional products and services. This has been proved historically and statistically, as well, based on the increasing number of people utilising these services over the years since the introduction of Islamic financial products and services in Pakistan in the late 1970s and 80s.

A large part of our semi-urban and urban population uses these products and services. The preference for Shariah-compliant services is evident from the growth in Islamic banks’ deposits and the fact that over 50 per cent of equities listed in Pakistan's capital market are Shariah-compliant. In Mutual Funds, the AUM of conventional open-end funds is Rs1.988 trillion and that of Shariah-compliant funds is Rs1.741 trillion as of November 2024.

It is important to highlight that fostering a savings and investment culture in Pakistan is challenging due to low savings propensity caused by inflation, limited financial literacy, and unstructured spending habits. Encouraging documented savings and investments is critical for individual financial security and economic growth. This requires innovative financial products that align with Islamic principles, sustainability goals, and ethical investment standards.

One of the ways is to improve the suite of products, whether it is debt or equity, and align it with Islamic tenets and make it Shariah compliant. At the same time, we need to design the product to make it a sustainable and ethical investment. These types of Shariah-compliant sustainable investment products will genuinely appeal to the population, given the above-discussed fact that Pakistan’s population, by and large, is increasingly inclined or may already prefer investing or saving in alignment with religious tenets and Shariah compliance.

In terms of potential investors, in addition to local investors, the potential of overseas Pakistanis and international fund managers remains untapped. These investors can be categorised as follows: one, overseas Pakistani diaspora: A community with emotional and financial ties to Pakistan, eager for investment options aligned with their values. Two, corporate international investors: Frontier market enthusiasts looking for opportunities that combine growth potential with ethical responsibility. Three, local investors: Residents seeking accessible, transparent, and religiously aligned investment products.

To appeal to the aforementioned groups of investors, Shariah-compliant and sustainable instruments like Waqf Sukuks, Green Bonds, and Renewable Energy Financing Bonds can be developed, fostering trust and driving participation in Pakistan's capital market. Specifically, the following new product options can be developed:

1. Waqf Sukuks

These bonds can be tied to religious endowments (Waqf) to fund sustainable community projects like education, healthcare, and social welfare. Revenue streams from these projects can ensure financial sustainability.

These real-estate investments can focus on affordable housing, green buildings, and renewable energy projects in compliance with Shariah principles.

3. Halal Commodity ETFs

These can be Exchange-Traded Funds (ETF) investing in Halal commodities such as agricultural produce, energy, and metals, ensuring compliance with Islamic finance.

4. Renewable Energy Financing Bonds

These instruments can be dedicated to funding wind, solar, and hydropower projects, offering dual benefits of environmental sustainability and ethical returns.

5. Agricultural Impact Sukuks

These Shariah-compliant bonds can be focused on financing modern, sustainable farming techniques to improve food security and rural livelihoods.

6. Islamic Venture Capital Funds

These funds can be targeted at startups that align with Islamic ethics and sustainability, enabling the growth of innovative, responsible businesses.

7. Micro-Sukuk Instruments

These can be small-denomination Sukuks aimed at retail investors, particularly from underserved and low-income communities, fostering inclusive participation in capital markets.

8. Education Savings Sukuks

These bonds can be designed to help parents save for their children’s education in alignment with Shariah and ethical investment principles.

Amongst these types of offerings, Sukuks is a prime example of instruments which are already available on the market. Other such products that can be developed are Sukuk-based ETFs and gender bonds, to name a few of such instruments. Such products focus on impact creation and development. In essence, impact investing is inherently attached to Islamic finance, which socially focuses on welfare. This type of product which caters to Impact investing in consonance with Islamic finance is a paradigm shift from the conventional investment products. It is a new process which has not yet been explored, tested or implemented.

Keeping in mind the above types of impact-based Shariah-compliant instruments and the three types of potential investment markets, a fourth type of market that can be added to the mix is the corporate sector in Pakistan. The case for this is based partly on the philanthropic inclination of the sponsors/ owners of the companies or due to taxation planning by the said entities. Companies such as large corporates which abide by the Code of Corporate Governance & Corporate Trust are also looking to comply and report on ESG standards. They are keen to showcase their activities and operations within the ESG, Sustainability or Impact domains for greater visibility to their stakeholders/partners.

Expanding the scope of Islamic and sustainable finance through innovative solutions can position Pakistan as a global leader in ethical investments. By creating a diverse range of Shariah-compliant and sustainable products, leveraging technology for accessibility and transparency, and learning from successful global models, Pakistan’s capital market can attract a broader investor base and contribute to socio-economic development

A large number of companies exercise substantial CSR activity (such as committing two per cent of their profits to CSR activities), give donations, and engage in social work including employee well-being. In essence, corporates are looking for ways and avenues to integrate ESG, sustainability or impact-related activities within their business structures. Therefore, these two key factors, cultural and societal tendencies towards philanthropy as well as a keenness to integrate ESG and Sustainability by corporates, can be leveraged to build demand for impact-based products such as:

1. Green Corporate Sukuks: These instruments can be designed to help corporations fund renewable energy projects or adopt green technologies.

2. Gender Bonds: These instruments can be aimed at empowering women entrepreneurs, fostering gender equality in business and promoting female education initiatives in rural areas.

3. Zakat-Based Investment Funds: These structured products can allow corporates to channel their Zakat obligations into impactful social projects.

These products can enable corporates align their CSR budgets with ethical and sustainable investment principles, creating a robust ecosystem for growth.

A very important and relevant point to note in the case of such instruments is that they are not necessarily profit-based. Given that products like the Gender Bond can help women entrepreneurs, or the Zakat Fund can help the helpless of society and the deserving, these instruments may not be profit-based; their underlying objective is the welfare and betterment of society on sustainable and Islamic terms.

Such funds and bonds will also become financially sustainable because they will be contributed to by the budgets of the companies and corporations which are assigned for CSR and philanthropy. Hence these are not revenue or commercial-oriented activities but can be categorised as not-for-profit operations that have a basis in ethical, impactful or Shariah-compliant investments.

The concept behind this type of investment into such Zakat Funds and Gender Bonds, for example, is relevant to the adage that it is better to teach someone to fish rather than to give him fish to eat. In this way, entities like NGOs, not-for-profit organisations or charity organisations can raise capital by listing their sustainable and ethical instruments on the capital market and procure investment from corporates which are secure in their objectives that these are not originally for-profit investments; rather, they are structured on philanthropic and social responsibility values. This aligns with the core Islamic principles of welfare and growth of society.

All this can be expedited and effectively materialised if and when we can bring technology to the table and integrate it into the picture. By leveraging technology, we can create such instruments, secure investment in them, and list them on the Exchange. SMEs can also be engaged in this exercise for capital raising through Islamic compatible fintech solutions. Technology can be used as a catalyst for ethical, green and Islamic financing. The capital market can be used to issue Green Sukuk through technological innovation, where the funds raised can be used for environmentally friendly projects.

There are some success models where Islamic finance is closely aligning itself with sustainability as technology also improves simultaneously. These success stories can be learned from and replicated. Some examples of Islamic finance synergising with sustainability include Malaysia's Green Sukuk Initiative and Saudi Arabia’s Vision 2030. Malaysia was the first country to introduce Green Sukuk which combines principles of Islamic finance with sustainability goals. Another such model is Saudi Arabia where Tadawul Exchange incorporates ESG factors into its Shariah-compliant offerings. It promotes investment in renewable energy and Sustainable infrastructure projects. Pakistan has a high prospect of duplicating similar models by introducing Renewable Energy Sukuk, sourced from digital platforms that attract local as well as international investors.

The rise of Shariah-compliant investments

One can thus conclude that the scope of sustainable and Islamic finance can be expanded and mainstreamed in the capital market. However, for these initiatives to succeed, key stakeholders -- including investors, issuers, corporates, and regulators -- must be educated on the structuring and designing of ethical and sustainable financial products. Collaborative efforts between financial institutions, regulatory bodies, and technology providers will be essential to create awareness and trust.

It is also clear that creating and listing innovative Shariah-compliant and sustainable financial instruments with the support of fintech can further unlock a wide variety of growth opportunities. Pakistan can replicate these initiatives by introducing products like Renewable Energy Sukuks, Sustainable REITs, and Green Investment Platforms, leveraging digital tools to attract both local and international investors.

Expanding the scope of Islamic and sustainable finance through innovative solutions can position Pakistan as a global leader in ethical investments. By creating a diverse range of Shariah-compliant and sustainable products, leveraging technology for accessibility and transparency, and learning from successful global models, Pakistan’s capital market can attract a broader investor base and contribute to socio-economic development.

This approach will not only align with the rising global demand for ethical investments but also reinforce Pakistan’s commitment to sustainability, innovation and financial inclusion. With the right steps, Pakistan can redefine its capital market as a hub for responsible and impactful investing.


The writer works for the Pakistan Stock Exchange Limited.

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