Composite Islamic Finance Index: A performance base measure of Islamic Financial Sector of Pakistan

Abstract

Islamic indices are now paramount to Islamic Finance because they specify how Islamic investors evaluate the financial markets and the spectrum of financial instruments available for investment. This research created Pakistan's first-ever Islamic Finance Index (IFI). It incorporates a total of five variables, including IBFIN (Islamic Banks Financing), IBINV (Islamic Banks Investment), IBROA (Islamic Banks Return on Assets), IBROE (Islamic Bank's Return on Equity), and TCPBT (Takaful Companies Profit Before Tax) regarding Islamic insurance. Annual data from 2005 to 2022 was incorporated. The principal component analysis (PCA) was used to create this index, and various diagnostics were applied. The results revealed that Pakistan's Islamic finance industry gradually increased from 2005 and peaked in 2020, then declined slightly during COVID-19 but is on track to rise again from the third quarter of 2021 till now. The study's final results divulged that Pakistan's Islamic financial industry was not severely affected and was strong enough to survive during COVID-19 rather than collapse. This study is precious in serving policymakers, financial analysts, and potential investors in understanding the performance of Pakistan's overall Islamic finance industry.