Pakistan Stock Exchange to Collaborate with Malaysia on Islamic Finance Expertise

Ever wondered how stock markets embrace Islamic finance? The Pakistan Stock Exchange (PSX) is making waves! They recently hosted top Malaysian Shariah scholars and finance gurus. This isn’t just a friendly visit; it’s a strategic move to power up Pakistan’s Islamic finance game. Think of it as Pakistan tapping into Malaysia’s vast Islamic Finance Expertise to grow its Shariah-compliant capital markets. This collaboration signals a bold step towards a more ethical and faith-based investment landscape in Pakistan.

The meeting, held at the PSX in Karachi, signals a deepening commitment from both the PSX and the Securities and Exchange Commission of Pakistan (SECP) to cultivate a robust Islamic capital market. Over the past few years, these regulatory bodies have been actively working to create an enabling environment that encourages the growth of Shariah-compliant investments, recognizing the increasing demand for such avenues within Pakistan.

Related: Pakistan Wants To Follow Malaysian Economic Model

Understanding the Principles: The Essence of Shariah Compliance

At the heart of Islamic Finance Expertise lies the adherence to Shariah principles, a comprehensive ethical and legal framework derived from Islamic teachings. These principles govern financial contracts and business conduct, with a particular emphasis on prohibiting transactions involving interest (riba). Ensuring Shariah compliance for any financial product or service necessitates its freedom from such forbidden elements and its conformity to other intricate requirements of Islamic law.

Globally, various stock exchanges, including the PSX, have recognized the importance of catering to these specific requirements by designing and launching Shariah-compliant products and services. This includes the listing of Shariah-compliant equities, Sukuk (Islamic bonds, a cornerstone of Islamic Finance Expertise), Islamic Exchange Traded Funds (Islamic ETFs), and Islamic Real Estate Investment Trusts (Islamic REITs). Furthermore, subscribing to the Initial Public Offerings (IPOs) of Shariah-compliant securities is also deemed permissible under Shariah for investors seeking ethical investment options.

The PSX has also developed Shariah-compliant indices, which track the performance of listed companies that meet stringent predefined Shariah and technical screening criteria. Additionally, through the National Clearing Company of Pakistan Limited (NCCPL), a Shariah-compliant facility known as Murabahah Share Finance is available to facilitate the purchase of shares in a permissible manner. These initiatives demonstrate Pakistan’s commitment to building a comprehensive Islamic capital market infrastructure.

A Meeting of Minds: Collaboration for Growth

Welcoming the esteemed Malaysian delegation, PSX Chairperson Dr. Shamshad Akhtar expressed optimism about the potential for enhanced collaboration between the Islamic Finance Expertise of the two nations. “Pakistan is also witnessing a growing demand for Shariah-compliant investment avenues,” Dr. Akhtar stated, as quoted by the PSX. “With over 50% of listed companies on the exchange being Shariah-compliant, PSX offers a compelling platform for faith-based investments, including equities, Sukuk, Islamic mutual funds, and ETFs.”

Dr. Akhtar’s remarks highlight a significant aspect of Pakistan’s capital market: a substantial portion of listed companies already adhere to Shariah principles, making the PSX an attractive destination for investors seeking ethical and faith-based opportunities. This existing foundation provides a strong base upon which to further develop and expand the Islamic finance sector, and collaboration with Malaysia, a recognized leader in this field, is a strategic step in this direction.

Pakistan’s journey in the realm of Sukuk began in 2008 with its first Ijarah-based issuance. Since then, the nation has made considerable strides, issuing Ijarah Sukuk worth over PKR 6.5 trillion (approximately USD 22 billion based on current exchange rates) as of August 2024. This growth trajectory underscores the increasing acceptance and demand for Islamic financial instruments within the country.

The PSX statement further emphasized the positive momentum within Pakistan’s Islamic finance sector, attributing it to “the continued expansion of Islamic finance institutions, diversified asset classes, and investor-friendly regulatory frameworks.” This holistic approach, encompassing both the supply and demand sides of the market, is crucial for sustainable growth.

SECP’s Role: Nurturing a Shariah-Compliant Ecosystem

Tariq Naseem, Head of Islamic Finance at the SECP, provided the visiting Malaysian dignitaries with a detailed briefing on the progress and advancements in Islamic Finance Expertise within Pakistan’s capital markets and non-banking financial sectors. His presentation highlighted the significant regulatory reforms and developments in the Islamic financial services industry undertaken to cater to both local and international market needs.

The discussions also delved into the potential for enhanced collaboration between Malaysia and Pakistan in promoting Islamic finance on a global platform. This cross-border cooperation is not just about knowledge transfer; it’s about leveraging the strengths of both nations to contribute to the wider global Islamic finance ecosystem.

Malaysia’s Global Footprint in Islamic Finance

Malaysia has long been recognized as a global hub for Islamic Finance Expertise. Its comprehensive regulatory framework, innovative Shariah-compliant products, and deep pool of talent have positioned it as a benchmark for other nations seeking to develop their Islamic finance sectors. According to recent data, Malaysia holds a significant share of the global Islamic finance assets, estimated to be around 12% of the approximately $4 trillion global market.

Malaysia’s success story is built on decades of strategic development, supported by strong government initiatives, a well-developed Islamic banking sector, a vibrant Sukuk market, and a thriving Takaful (Islamic insurance) industry. The country’s commitment to standardization, regulatory clarity, and talent development has created a robust ecosystem that attracts both domestic and international investors.

The visit of Malaysian Shariah scholars and professionals to the PSX is a testament to Pakistan’s recognition of Malaysia’s leadership and its eagerness to tap into this wealth of Islamic Finance Expertise. The potential for collaboration spans various areas, including the development of new Shariah-compliant financial instruments, the establishment of best practices in regulatory frameworks, and the fostering of greater cross-border investment flows.

PSX’s Vision: Advancing Pakistan’s Capital Market through Islamic Finance

Farrukh H. Sabzwari, Managing Director and CEO of the Pakistan Stock Exchange, warmly welcomed the Malaysian delegation and articulated his aspiration to benefit from Malaysia’s Islamic Finance Expertise for the further advancement of Pakistan’s capital market.

Mr. Sabzwari highlighted a key challenge and opportunity for growth within Pakistan’s capital market: the relatively small investor base. He noted that only 0.14% of Pakistan’s population currently participates in the stock market, compared to 1% in Bangladesh, underscoring the significant untapped potential. This indicates a substantial opportunity to broaden investor participation, and the development of a robust Islamic finance sector can play a crucial role in attracting a wider segment of the population seeking Shariah-compliant investment options.

Interestingly, Mr. Sabzwari also pointed out that approximately 80% of daily transactions at PSX are already Shariah-compliant. This high percentage suggests a strong underlying preference for Islamic finance principles within the Pakistani market and further reinforces the strategic importance of developing this sector.

The PSX management, concluding the event, reaffirmed the Exchange’s dedication to building a robust Shariah-compliant capital market. They also highlighted the ongoing efforts of the PSX Shariah Focus Group — a multi-stakeholder platform comprising industry leaders, Shariah scholars, and financial experts — working collectively to foster an inclusive, faith-based financial system. This internal commitment, coupled with international collaboration, signals a determined push towards advancing Islamic finance in Pakistan.

Pakistan’s Journey Towards a Riba-Free Economy

While Pakistan has made significant progress in developing its Islamic finance sector, the journey towards a fully Shariah-compliant financial system is not without its challenges. The government has been working towards eliminating interest (riba) from the banking system, following a directive from the Federal Shariat Court (FSC) in April 2022, which mandated the elimination of interest by 2027.

In line with this directive, the government and the State Bank of Pakistan (SBP) have taken several measures, including legislative changes in October 2024 and the issuance of Sukuk bonds to replace interest-based treasury bills and investment bonds. The SBP had also set ambitious targets to increase the share of Islamic banking deposits in the country, aiming for 50% by January 2025, with subsequent increases leading to 100% by December 2027.

However, recent official documents indicate that Pakistan has missed the initial target, achieving a market share of Shariah-compliant banking deposits of only 24.9% by December 2024. This highlights the complexities and the time-intensive nature of transitioning an entire financial system towards Islamic principles.

Several factors contribute to the challenges in the rapid expansion of Islamic finance in Pakistan. These include:

• Awareness and Education: A significant portion of the population may still lack sufficient awareness and understanding of Islamic financial products and services.
• Product Innovation: While progress has been made, there is a continuous need for innovative and diverse Shariah-compliant products that cater to the varying needs of investors and businesses.
• Standardization: The lack of complete standardization in Shariah interpretations and product structures can create complexities and hinder wider adoption.
• Talent Development: A sufficient pool of qualified professionals with expertise in both conventional finance and Shariah principles is crucial for the continued growth of the sector.
• Regulatory Framework: While the SECP and SBP are actively working on developing supportive regulations, continuous refinement and adaptation are necessary.

Despite the complexities of fully transitioning to an Islamic financial system by 2027, Pakistan’s commitment to Islamic Finance Expertise is firm. The PSX and SECP actively promote Shariah-compliant investments nationwide. Strategic collaboration with Malaysia, a global leader, is pivotal for knowledge transfer. This partnership aims to refine regulations and introduce innovative products. By leveraging Malaysia’s experience, Pakistan seeks a more ethical and inclusive financial future. This effort strengthens Pakistan’s position in global Islamic finance.