For a common man, figuring out how to manage and invest money in Pakistan is sometimes like finding your way through a maze. There are different ways to handle money, like keeping it with conventional banks, buying mutual funds units or stock, holding on to gold or property, investing funds, or opening an account with an Islamic bank that follows Sharia principles.

According to the 2021 World Bank’s Global Index, a mere 21 per cent of adults in Pakistan have robust access to financial services, significantly below the global average of 69pc. The gender gap intensifies this issue, with only 13pc of women holding bank accounts, ranking Pakistan as the fourth-lowest globally for female banking. The State Bank of Pakistan’s (SBP) gender finance policy aims to increase the percentage of female customers to 30pc by 2025.

As per the SBP website, out of Pakistan’s total adult population, the financially excluded population makes up 53pc. The situation for Pakistan is also unique as it includes a voluntary unbanked segment.

The main reasons behind this trend include a lack of financial literacy as well as a deep-rooted religious belief about the impermissibility of interest-based dealings, including banking. The issue worsens if the right choices are not made available for savings and investment. Consequently, a common man may fall prey to the traps of shady investment companies or Ponzi schemes, enticing unaware customers to trust them with their hard-earned money to avoid interest.

An SBP study states that 94.5pc of the respondents with banking experience believe that interest is prohibited

The Knowledge, Attitudes and Practices of Islamic Banking in Pakistan study conducted by the State Bank of Pakistan states that 94.5pc of the respondents with banking experience acknowledge that Riba (interest) is prohibited and 88.4pc of respondents further acknowledge that conventional banking profits are based on Riba. Moreover, this ratio sours to 98pc in the unbanked segment of society where the masses believe Riba is prohibited.

The social stigma associated with interest in Pakistani society complicates discussions around financial practices. A recent study in a finance journal highlights that people may not openly admit their use of conventional interest-based financial services due to this social taboo.

Policymakers need to ensure that everyone, irrespective of gender, age, wealth, or religious beliefs, has access to viable financial services. This is especially important in a country like Pakistan, where a significant portion of the population lacks basic education, let alone knowledge about finances. For them, using banks may seem problematic due to concerns about potential conflicts with religious values.

Luckily, we have seen positive steps taken by the State Bank of Pakistan over the last two decades. The emergence of licensed Islamic commercial banks, separate Islamic banking regulations, and supervision mechanisms from early 2002 has provided a viable alternative to those who are faith-sensitive and avoid interest.

Today in Pakistan, we have six full-fledged Islamic banks and 16 Islamic banking windows with over 6,550 branches offering Sharia-compliant products and services to customers. Faysal Bank’s recent successful conversion to completely Islamic banking has given much-needed encouragement to other banks, and at least three banks are now eyeing complete conversion, confirming the demand at the grassroots level for Sharia-compliant banking.

According to the latest SBP Islamic banking bulletin data, the Islamic banking market share has reached 26pc of the total financing and 22.5pc of the total industry deposits. The assets of the Islamic banking industry have crossed Rs 8.4 trillion, while investments have grown to Rs3.9tr.

The growth of Islamic banking is making it easier for individuals who were away from banks for religious reasons to be confident that their savings can adhere to Islamic principles and can be invested to earn suitable returns.

By further supporting this growth, the country can boost the savings rates, which are much needed to support economic activities. When idle money moves to formal banking instead of staying at home, it will help the overall wealth and benefit everyone in society.

On the non-banking front, the Securities And Exchange Commission, the apex regulator for Pakistan’s non-banking and finance sector, has taken a proactive approach to support Islamic finance in recent years.

This has resulted in several noteworthy accomplishments, including the development of the Takaful sector, growth in Islamic mutual funds, increased offering of listed and privately placed and very recently supporting the launch of the first sovereign Sukuk at Pakistan Stock Exchage. These steps will provide more avenues for faith-based investors and more options for the market.

Islamic finance follows the rules based on Sharia principles, which means it focuses on doing morally right things, avoiding transactions involving interest, promote real economic transactions linked to real assets or business activities.

Islamic finance also encourages the sharing of risks and rewards and promotes real trade activities while avoiding speculation and artificial financial deals like conventional derivatives, options, swaps, and futures.

Additionally, the social aspect of Islamic finance promotes a strong sense of social responsibility, where people contribute to charities (through Zakat) and are encouraged to give voluntary donations to help others and promote social well-being.

Ahmed Ali Siddiqui is the Director of IBA Centre for Excellence in Islamic Finance and Ahmar Aleem is a lecturer at NED University and a research fellow at Meezan Bank

Published in Dawn, The Business and Finance Weekly, January 29th, 2024