Role of Islamic banking in financial inclusiveness in Pakistan: promise, performance and prospects

This paper reviews the progress in Islamic banking industry of Pakistan in contributing towards an egalitarian and equitable financial system. A set of quantitative indicators are used to examine the performance of Islamic banks towards fostering an inclusive financial system. The results highlight that so far, the performance of Islamic banks on these indicators shows a gap between promise and performance. This study highlights that high average cost of financing and concentration on the corporate sector and upper-class individuals is inconsistent with the goal of circulation of wealth and equitable distribution of income. The paper also identifies that people might need finance for health, education and setting up small businesses, but they cannot be served by Islamic banks with the available product structures. The paper gives a geographical footprint of Islamic banks which shows that they are primarily operating in big urban cities. Finally, it is argued that most of the Islamic banking debt-based products are close, but relatively expensive, substitutes for conventional banking in terms of financial costs.