Pakistan: The causeway for Islamic Finance

August 26, 2008 1:27 pm

New hopes came up regarding the future of the Islamic Republic of Pakistan when President Pervez Musharraf stepped down.

As former US-president Richard Nixon did in 1974, Musharraf avoided being taken out by parliament through impeachment with his preemptive move.

But although Pakistan is mainly seen by outsiders as a country shattered by social unrest and fighting on its border with Afghanistan, its economy has been booming in recent years.

Pakistan, with a total population of 170 million people and a GDP per capita of around $2,900, has been growing about 7% annually since 2004.

‘Superficially, Pakistan does not look that attractive for investment, but when you study the country, you see the possibilities,’ says American investment bank Goldman Sachs, which regards Pakistan (as well as Iran, Egypt, Vietnam and others as a member of the ‘Next 11’, a group of emerging markets which have the potential to become the world’s largest economies, alongside the BRIC countries).

One of these economic possibilities lies in Islamic banking. Although The State Bank of Pakistan established an Islamic Banking Department in 2003 with the objective to transform the whole financial system on the basis of shariah principles, there are only five Islamic banks, and another 21 conventional banks operating with an Islamic window such as ABN Amro, Barclays or Citigroup.

Banks from the UAE have also entered the market. From March 2005, Dubai Islamic Bank has established 16 branches throughout the country. In August of the same year, Dubai Bank acquired an 18.75% stake in Bank Islami Pakistan.

With Sheikh Taqi Usmani and his son Dr. Imran Usmani, the country is also home to some of the most respected Shariah scholars in Islamic Finance.

In order to give fund managers from abroad a tool to invest in Shariah-compliant stocks, Dow Jones Islamic Markets, New York, launched the Dow Jones JS Pakistan Islamic Index. The index is a cooperation between the leading index provider and Karachi-based asset manager JS Investment Ltd. (formerly JS Abamco).

‘We regard Pakistan as the Islamic finance causeway between the GCC and the Far East’, says Rushdi Siddiqui, Global Director of the Dow Jones Islamic Market Index Group. Siddiqui launched the index, which mainly contains Shariah-compliant values from the energy, construction and telecom sector listed at the Karachi Stock Exchange.

Apropos Karachi: the KSE witnessed riots in July when the benchmark declined 35% in value. After Musharraf stepped down in on 18 August, the stock market quickly rebounded 4.5%, along with the Rupee (up1.1%).

‘Pak’, as most expats in Dubai call their country, is suffering from high inflation, which reached 20%, a 30 year high in May. But such risks apply to all emerging markets nowadays, it is this that gives investors the opportunity to achieve superior returns over the global benchmark.