Over the past two decades, Pakistani banking has undergone drastic shifts. There were the good days when foreign banks could be spotted every few kilometres in the major cities, and consumer financing was all the craze. Then came the bad days and, with them, the defaults. Global players pulled out, and everyone flocked to lending to the sovereign.

Amid these cycles, however, one trend had continued unabated: the rise of Islamic banking. Its deposit base increased from Rs83.7 billion in December 2006 to Rs4.9 trillion as of June 2022. That’s a compound annual growth rate of 30 per cent — twice the industry-wide rate. As a result, the share of Islamic in overall banking deposits has jumped from 2.8pc to 20.5pc during this period.

Of course, part of the growth is due to a low-base effect, but this is nonetheless phenomenal progress. In a deeply religious society with an aversion to riba, many firmly believe Islamic is the way forward to increase the number of banked people. Whether those financial institutions still use the same benchmark as conventional ones or engage in Bai’ Muajjal financing to ultimately get exposure to government securities is a debate for another day.

But the point is that an average Pakistani if given a choice, prefers Islamic financial products, however imperfect that may be. Banks having Sharia boards and very clear Islamic branding gives many a level of comfort that isn’t there with conventional institutions.

According to the Global Islamic Fintech Index, Pakistan ranks ninth out of a list of 64 countries, with a market size projected to be $2.8bn by 2025

Given such a clear preference, the question is: why aren’t more local fintechs coming up with Islamic products? The sector has seen great progress over the past few years, having raised around $200 million across 58 deals (some undisclosed) since 2016, as per Data Darbar. Add companies from e-commerce and agri who have some fintech offering and that’s another $216m.

According to the Global Islamic Fintech Index (GIFT), Pakistan ranks ninth out of a list of 64 countries, with a market size projected to be $2.8bn by 2025. Yet, very few identify themselves as Islamic fintechs or even use the word in their branding.

Obviously, many of the biggest names in the sector are actually payment players, primarily digital wallets, thus making it sort of understood that they are Sharia-compliant. The topic is more complicated than that, but for now, let’s keep it simple. However, there are quite a few players in the lending and investment categories as well, where Sharia compliance can be a major factor.

And that’s where you see the lack of Islamic fintechs, based on a basic audit of their websites. Of the 27 funded startups working on lending or investment products, only nine define them as Sharia compliant. Three on the list are buy-now, pay-later companies who all proclaim to be Pakistan’s first Islamic BNPL without really giving anything to substantiate the claims.

Which leads to the question, what makes a company (or a product) Islamic? Omer Bin Ahsan, founder and CEO of Haball — one of the nine startups, pins it down to three pointers: “a) Board and governance structure include Sharia audit, b) Sharia controls on financing transactions, merchant onboarding, shareholding/equity structure, and vendor/employee contracts, and c) ideological commitment and the ethical homogeneity of founders, leadership and the board.” This is a comprehensive checklist, one that Haball itself is currently in the process of meeting.

“At the moment, we are bound by Meezan Bank’s (which has comprehensive Shariah controls) contractual agreements, plus the founders weigh in to block any transaction that might be non-compliant. But this is partner and personality-driven, which is why Haball is evaluating a framework for Islamic Fintech governance, as there is no precedent and had to be made afresh to ensure that Haball is Islamic on its own, irrespective of the founders’ personal bent.

Even globally, the debate is still pretty subjective, as one survey shows that 44pc of industry participants believed that certification or declaration isn’t necessary to be considered Islamic fintech.

Among our group, the most transparent is Oraan, which has uploaded certificates to prove its Shariah compliance. It has also publicly named its Mufti, as has Trellis, while Finja’s board of directors include Dr Imran Ashraf Usmani, who holds a doctorate in Islamic Finance. The remaining two startups are CreditPer and Elphinstone, of which the former is engaged in financing while the latter makes investments.

Admittedly, the methodology to identify Islamic fintechs is flawed. Perhaps it could be that some of the players just don’t have a particularly active website that articulates the positioning well. However, that raises some questions about their own digital savviness and branding, which is lousy in its own right.

Published in Dawn, The Business and Finance Weekly, November 7th, 2022