The record profitability of Pakistan’s Islamic banking sector has drawn both admiration and accusations of hypocrisy, fueling debates about its ethical underpinnings and policy implications. However, a closer look reveals that this profitability is less a reflection of systemic strength and more a byproduct of one institution’s outsized performance: Meezan Bank.
Despite perceptions of industry-wide success, excluding Meezan Bank’s exceptional results shows that Islamic banks have consistently underperformed their conventional counterparts in terms of return on equity over the past 15 years. This suggests that the sector’s profitability is not the result of inherent advantages but rather the dominance of a single, well-managed player.
The notion that Islamic banks rely on customers willing to accept lower returns also proves inaccurate. While regulations allow for lower rates, actual returns are determined by brand strength and competitive pressures, much like in conventional banking. This dynamic underscores the broader reality: the transition to a fully Islamic financial system in Pakistan is unlikely to fundamentally alter the competitive landscape or economic dynamics of the banking sector.
This transition gained momentum with the Federal Shariat Court’s 2022 ruling mandating the elimination of “riba” (interest) by December 2027, a move further entrenched by a constitutional amendment in early 2024. While legally and culturally significant, this shift appears more symbolic than revolutionary from an economic perspective. Banks will continue to compete on service quality, innovation, and pricing, with little evidence to suggest that Islamic finance inherently lowers borrowing costs or increases depositor returns.
Meezan Bank’s success offers lessons for other institutions but also highlights the limitations of the sector as a whole. The perception of Islamic banking as a profit powerhouse is largely a function of one standout performer rather than systemic advantages. For other banks, the challenge lies in matching Meezan’s operational efficiency and customer trust, especially in a market that demands both innovation and adaptation.
As Pakistan’s financial system transitions to Islamic banking, the shift represents an evolution in regulatory frameworks rather than a fundamental economic transformation. The true test will be whether the sector can deliver value to customers while maintaining profitability. Ultimately, the success of Islamic banking in Pakistan will depend on its ability to balance religious principles with the practicalities of a competitive, modern financial system.
