Pakistan: Asia’s emerging Riba-free frontier of US$8 billion

• Shariah assets surged to US$8.03 billion in fourth quarter 2025
• Money market funds dominate, holding US$3.9 billion in total assets.
• Pakistan funds target riba-free Shariah economy by 2028.

Overview

Pakistan’s financial landscape is undergoing a profound structural shift as it moves toward a mandated Riba-free economy by 2028. Despite a history of fiscal volatility, the country has solidified its position as a powerhouse in the Shariah compliant asset management sector.

Data for Q4 2025 reveals a market in high gear. Pakistan’s Shariah AuM surged nearly 34% to US$8.03 billion from US$6.02 billion in Q2, accounting for a commanding slice of the Asia Pacific Islamic finance pie.

Momentum and stature

While Malaysia remains the undisputed regional titan with US$47.27 billion in AuM, Pakistan has comfortably pulled ahead of other neighbors. Its US$8.03 billion asset base dwarfs the combined Shariah markets of India, Singapore, and Australia. The growth is underpinned by a robust fund count, which reached 262 by the end of 2025, up 19% year-on-year.

Chart 1: Pakistan Shariah AuM and fund count vs select domiciles

Source: IFN Investor Funds Database, Q4 2025

Riba-free promise

The SECP has been steadily reducing its debt thresholds, dropping the allowable non-compliant debt-to-total assets ratio for listed companies to 33% from a prior 37%. This forces corporate Pakistan to deleverage from conventional debt to remain eligible for Shariah indices.

The commission has also introduced a new three-to-five-star Shariah compliance rating for listed stocks to enhance transparency and prevent so-called "Shariah-washing."

S&P Global Ratings notes that Pakistan is one of the few global markets where regulation is explicitly driving the full conversion of conventional banking units into stand-alone Islamic banks by end-2027.

Flight to liquidity

Investors in the Islamic market continue to show a sophisticated, if cautious, preference for highly liquid instruments. Money market funds dominate the landscape, holding US$3.9 billion in AuM across 76 different funds.

Fixed income follows as the second-largest asset class at US$1.92 billion, while equities have seen a significant uptick to US$1.06 billion. This diversification suggests that while "cash is king" for stability, there is a growing appetite for the record-breaking returns seen in the KSE-100 index, which gained 51% in 2025.

Chart 2: Pakistan Shariah AuM by asset class and fund count

Source: IFN Investor Funds Database, Q4 2025

Regulatory and strategic tailwinds

Regulatory reforms, paired with a recent staff-level agreement with the IMF for approximately US$1.2 billion in fresh funding, provide a stable macro backdrop for continued Islamic finance growth.

The State Bank of Pakistan (SBP) is reporting a surge in the profitability of Islamic banking institutions, with profit before tax jumping 37.7% in the final quarter of 2025 alone.

The central bank is also fostering a digital frontier, with assets in Shariah compliant digital banks doubling to PKR6.9 billion (US$24.74 million) in just three months.

The SECP’s introduction of the star-rating mechanism for Shariah compliance adds a further layer of transparency to the Pakistan Stock Exchange.

Highest capitalized funds

Al Meezan Investment Management’s Meezan Cash Fund remains a primary vehicle for capital preservation. IFN Investor data shows AuM leaping 194% year-on-year to US$945.37 million in Q4 2025 from US$321.91 million in Q4 2024.

The sheer buildup came amid three major events in Pakistani markets. The first was a yield-chasing pivot as inflation began to cool toward the 7% mark. Next was a major stock market rally in late 2025 and finally a shifting of "idle" conventional cash into Shariah compliant aggressive income plans as the 2028 Riba-free agenda gained momentum.

But there were also volatile periods for some of the top 10 Pakistani funds for Shariah AuM, IFN Investor data shows.

The Alfalah Islamic Money Market Fund, managed by Alfalah Asset Management, saw its value tumble from US$343.81 million in Q1 2025 to US$224.92 million in Q2.

HBL Islamic Money Market Fund, an entity of HBL Asset Management Ltd, experienced an AuM drop to US$292.72 in Q2 from US$312.3 million in Q1.

While the broader Shariah market was growing, these specific low-risk vehicles faced heavy redemptions as capital sought higher-alpha opportunities.

Table 1: Pakistani Shariah funds by AuM

Source: IFN Investor Funds Database, Q4 2025

Top-earning funds

The Dolmen City REIT posted a return of 70.1% for Q4 2025, leading Pakistani Shariah funds’ earnings.The REIT remains a cornerstone of Pakistan’s Shariah compliant property sector, anchoring its value in Karachi’s premier real estate. Managed by Arif Habib Dolmen REIT Management, the fund oversees a 3.4 million square foot complex comprising the massive Dolmen Mall Clifton and the Harbour Front office tower.

Financial data from the half-year ending December 31, 2025, reveals a fund grappling with accounting volatility despite its operational strength. While headline profit dropped 44% to PKR 3.79 billion due to fair value adjustments, the core rental income surged 18.2% to PKR 3.09 billion.

The REIT also maintains a commanding market presence with occupancy levels consistently exceeding 98% across its retail and corporate portfolios. Multinational tenants like Engro and Procter & Gamble anchor the Harbour Front, while the mall remains the nation’s largest retail destination with heavy daily footfall.

UBL Funds’ Al-Ameen Islamic Aggressive Income Plan-1 was a close second, delivering a Q4 2025 return of 65.24%. The fund’s portfolio is heavily weighted toward high-yield Sukuk issuances. Key holdings include corporate debt from leaders like Engro Fertilizer, Lucky Electric Power Company, and K-Electric.

Table 2: Pakistani Shariah funds by one-year return

Source: IFN Investor Funds Database, Q4 2025