Reality check for Shariah funds in Pakistan

Acknowledging the challenges involved to meet the 2028 constitutional deadline for the entire national financial sector to be Riba-free, the Securities and Exchange Commission of Pakistan (SECP) has issued a slight relaxation of Shariah compliance rules for asset management companies (AMCs).

“The amendments were finalized following extensive stakeholder consultations, including engagements with AMCs, PFMs (pension fund managers) and the Mutual Funds Association of Pakistan,” SECP said in a statement dated the 15^th April 2025.

The 26^th Constitutional Amendment Bill was passed by the Pakistan Senate in October 2024, to eliminate Riba transactions by the 1^st January 2028, cementing the five-year mandate set down by a 2022 Federal Shariat Court ruling for Pakistan to fully implement an Islamic financial system.

The latest Shariah compliance relaxation comes in the form of final amendments to the Non-Banking Finance Companies and Notified Entities Regulations, 2008 – which took effect from the 10^th April 2025. Essentially, the regulator has made it easier for collective investment schemes (CIS) with similar structure and strategy with an existing Islamic scheme to secure a Shariah compliance certificate.  All CIS have till the 30^th September 2025 to be certified Shariah compliant.

Further, all such funds need to have annual reports prepared by external Shariah auditors – in compliance with regulation 29(5) of the Shariah Governance Regulations, 2023 – for submission to the fund management’s board of directors.

This “annual Shariah advisor’s report will now be included in the financial statements distributed to unit holders and voluntary pension system participants”, the SECP emphasized.

However, the SECP’s new rules do not make any reference to private equity and venture capital operations – which are also expected to need Shariah compliance certification under the 2028 constitutional mandate.

The latest regulatory amendments further scrap the current total expense ratio capping regime – which will be replaced with caps on management fees, effective the 1^st July 2025. In addition, new market development charges are imposed – with these to be used for investor education, awareness and market development activities of mutual fund and pension funds.

Table 1: SECP-registered fund managers as at the 31^st March 2025

Source: Securities and Exchange Commission of Pakistan

The IFN Investor Funds Database currently tracks 221 Shariah compliant funds operating in Pakistan, with total assets under management standing at US$6.94 billion as at the 20^th April 2025.