Regulatory Convergence of Conventional Banking with Islamic Banking: A Comparative Study of Pakistan and Saudi Arabia

Abstract

This investigation examines the role of Islamic banking in promoting financial inclusion in Pakistan, with a particular focus on the policy initiatives introduced by the State Bank of Pakistan (SBP). Islamic banking, grounded in Shariah principles, offers a potential avenue for addressing the financial needs of underserved and unbanked populations, especially in regions where conventional banking has limited reach. The study explores how SBP’s regulatory framework, along with its efforts to encourage the development of Shariah-compliant financial products, has contributed to enhancing access to financial services. Key policy initiatives, including the promotion of Islamic microfinance, the expansion of branchless and digital banking, and the encouragement of innovative Islamic finance products, are critically assessed. Despite these advancements, the study also highlights persistent challenges such as limited financial literacy, inadequate infrastructure in rural areas, and the complexity of the dual banking system. The investigation concludes by proposing recommendations for improving the inclusivity of Islamic banking in Pakistan, emphasizing the need for continued innovation, regulatory support, and increased public awareness to maximize its potential in fostering greater financial inclusion.