In April 2022, the Federal Shariah Court issued a landmark ruling, nearly three decades in the making, mandating the conversion of Pakistan’s banking system to Islamic banking. This has caused much debate in boardrooms and drawing rooms across the country. Ultimately, the question of the hour remains: Is Pakistan ‘ready’ for Islamic banking?
ISLAMIC BANKING
In April 2022, the Federal Shariah Court issued a landmark ruling, nearly three decades in the making, mandating the conversion of Pakistan’s banking system to Islamic banking. This has caused much debate in boardrooms and drawing rooms across the country. Ultimately, the question of the hour remains: Is Pakistan ‘ready’ for Islamic banking?
For context, global Islamic finance assets will reach $7.5 trillion by 2028, up from $5.5 trillion in 2024, reflecting the expanding relevance of Shariah-compliant finance globally. In 2024, the Islamic finance industry surpassed $5 trillion in global assets -- a 12 per cent rise from 2023 and 43 per cent increase from 2020. We are seeing Islamic finance mature in the GCC and Malaysia while markets like Indonesia, Turkey and Pakistan are fuelling the next phase of expansion.
What this tells us is that Islamic finance is entering a new era defined by scale, sustainability and strategic integration and Pakistan will be a contributing member of this growth. Standard Chartered Saadiq is uniquely positioned as one of the few truly Islamic banking franchises offering Shariah-compliant solutions across Asia, the Middle East and Africa. Our presence in key markets, such as the UAE, Malaysia, Saudi Arabia, Pakistan and Bahrain, provides us with deep insight into the needs of cross-border clients and regional financial dynamics.
Pakistan is ready for this transformation. While challenges exist, they are not insurmountable. By gradually shifting to a Sharia-compliant financial ecosystem, we can pave the way for an economic system that adheres to Islamic principles and serves as a catalyst for financial growth and stability.
The primary challenge lies in effectively deploying PKR liquidity generated from the conversion of conventional deposits into Islamic deposits, thereby creating Shariah-compliant instruments. Currently, the government of Pakistan is the largest borrower with a total outstanding of around Rs45.5 trillion (PIBs Rs31.2 trillion; T-bills Rs8.6 trillion and Sukuk Rs5.7 trillion) in local currency, of which 12.5 per cent is Sukuk and the balance is T-bills and PIBs. Ee rely predominantly on a single structure: Ijara Sukuk, backed by fixed assets, for issuing local currency government paper. This is despite the existence of multiple globally accepted Sharia-compliant structures for issuing both tradeable and non-tradeable government paper.
At Standard Chartered (SC) Saadiq, we have been diligently collaborating with the State Bank of Pakistan (SBP) and key stakeholders, including Shariah scholars, to facilitate the introduction of viable financial structures for Pakistan. Concurrently, the SBP, in partnership with relevant ministries, has been developing a comprehensive database of fixed assets belonging to public sector entities and autonomous bodies. These assets will be structured for the issuance of Ijara Sukuk and asset-lite Sukuk. To advance Islamic finance in Pakistan, it is imperative to institutionalise an Islamic liquidity setup through strategic reforms and the establishment of a robust framework.
The second area of focus is assessing institutional readiness, reviewing the legal framework and ensuring stakeholder alignment. While the SBP and SECP have initiated the conversion journey, broader engagement with relevant government functions is essential to create an enabling environment -- legal, financial and institutional. This engagement is crucial to building consensus and developing a roadmap for transforming the entire financial ecosystem, including the National Savings Centre, insurance companies and asset management companies. Establishing a comprehensive legal infrastructure, standardisation and global partnerships is vital for a smooth and sustainable transformation.
For the banking sector, another hurdle is establishing reliable correspondent banking partnerships that support international trade and cross-border transactions. The conventional banking system is deeply rooted in interest-based infrastructure, making the adoption of Shariah-based solutions difficult. SC Pakistan is the only international bank in Pakistan with an Islamic banking license and has built robust partnerships with global banks over the last 30 years. We partner with financial institutions across markets to enable Islamic liquidity management, Sukuk structuring and advisory. This institutional connectivity is a key differentiator and can facilitate the journey to the Islamic ecosystem.
In SC’s recent Islamic banking for Financial Institutions (FI) report, the following solutions, in addition to having Shariah-compliant Nostros are available, which can serve Pakistan’s FI market needs:
Islamic finance in Pakistan is at a critical juncture, poised for significant growth and development. The sector benefits from a wealth of experience, knowledgeable scholars, a supportive regulator and a robust market demand
Comprehensive trade finance structures: Leveraging on its global footprint of over twenty-five markets, Saadiq offers tailored Islamic (Murabaha and Istisna-based) trade finance instruments for Shariah-compliant supply chain financing across borders. Saadiq is a conduit for cross-border Islamic finance. With our global network and deep-rooted presence in high markets, SC Saadiq enables international flows of Islamic capital, trade finance and investment, particularly between China, GCC, Africa & Pakistan.
Shariah-compliant liquidity & cash management tool: Saadiq offers Shariah-compliant liquidity management frameworks, supported by its state-of-the-art technology platform, enabling real-time interest-free cash pooling, investment of surplus funds and automated reporting for FIs.
Green Sukuk and ESG-aligned solutions: the report underlines the strong demand for sustainable Islamic finance, and Saadiq is leading the way in ‘Green Sukuk’ offerings. Climate risk is an existential crisis for Pakistan. We are one of the climate-vulnerable countries in the world and need Shariah-compliant solutions to access liquidity and build infrastructure, as well as take measures to combat the evolving global climate risk.
Deep Shariah governance and advisory: with five Shariah Boards across Saadiq markets and access to seasoned Islamic jurists, Saadiq has the breadth and depth to offer structured advisory and Shariah-compliant solutions for liquidity management and trade solutions.
Another area that requires attention is International Capital Market transactions. Pakistan needs access to international capital markets. Sukuk (Islamic bonds) are the preferred avenue for raising such funding. Pakistan has accessed these markets through FCY Sovereign Sukuk issuances; however, broadening this access remains a work in progress. Encouragingly, global Islamic finance has matured significantly in this space.
Financial institutions have undertaken cross-border Sukuk issuances, offering expertise in structuring, distribution capabilities and investor access across markets. These institutions have facilitated the issuance of Sukuk for sovereigns, banks, and corporates, particularly in the GCC and Southeast Asia, in raising Shariah-compliant funding that aligns with both commercial and sustainability goals. SC Saadiq has been leading this space for over a decade.
Another challenge is human resource development and the role of Academia.
Islamic banking in Pakistan has grown into a significant part of the financial system, yet the academic ecosystem meant to support its evolution has struggled to keep pace. While the industry has advanced through pragmatic innovations and Shariah-compliant structures, much of academia remains anchored in abstract ideals. In the initial stages, Islamic finance education focused on normative ideals such as risk-sharing and Maqasid al-Shariah, anchored in Islamic economics and jurisprudence. However, these ideas often fail to align with the transactional realities of Islamic banks, which prioritise Shariah-compliant contracts over idealised financial models.
As a result, a gap emerged between classroom knowledge and industry practice. Academic programmes teach theoretical concepts that often lack relevance and fail to provide the interdisciplinary depth needed to understand the complex legal, economic, and operational landscape of Islamic banking. Meanwhile, the industry is increasingly relying on in-house training, Shariah scholars and market practitioners to meet its human resource needs, sidelining universities and diminishing the academic influence on policy and practice.
Looking ahead, Islamic finance education in Pakistan must reposition itself as a creative partner in shaping the future of the industry. This entails developing educational models that are empirically grounded, conceptually rigorous and oriented towards product development to meet client needs.
Islamic finance in Pakistan is at a critical juncture, poised for significant growth and development. The sector benefits from a wealth of experience, knowledgeable scholars, a supportive regulator and a robust market demand. The evolving financial ecosystem, which includes dedicated bankers, academics and legal experts, is further bolstered by a supportive regulatory environment.
To fully realise the potential of Islamic banking, continued collaboration and innovation are essential. By addressing existing challenges and leveraging these strengths, Pakistan can solidify its position as a leader in Islamic finance, providing a sustainable and ethical alternative to conventional banking.
The writer is the head of Islamic Banking at Standard Chartered Pakistan.
