Qudsia Bano

Pakistan's startup outlook, once hailed as a beacon of innovation and growth, has hit a sobering low as the first quarter of fiscal year 2023-24 witnessed a staggering absence of funding. Amid global recovery in venture capital investments, Pakistani startups found themselves in dire straits, with not a single dollar raised during this period. The Federal Shariat Court’s landmark ruling in April 2022, aimed at eradicating interest from Pakistan’s economy by December 2027, marked a significant shift in the nation's financial paradigm. However, the transition towards an interest-free economic system seems to have inadvertently contributed to the current challenges faced by startups in securing funding.

The ruling, which unequivocally prohibited Riba (interest), led to a concerted effort by the government and the State Bank of Pakistan (SBP) to steer the financial system towards a Shariah-compliant framework. While this transition is aligned with constitutional mandates and aims to promote equitable financial practices, it has introduced uncertainties and disruptions in the investment landscape, particularly for startups. Experts said that the ambiguity surrounding the transition, coupled with concerns regarding the future regulatory environment, has led to a significant downturn in investor confidence. As a result, startup founders are finding it increasingly challenging to attract funding, with many investors adopting a wait-and-see approach until the regulatory landscape becomes clearer.

The absence of funding in 1QFY24 reflects a concerning trend for Pakistan's startup ecosystem, which previously showed resilience and promise. Despite global efforts to stimulate venture capital investments, including a recovery of 14.2% compared to the previous quarter, Pakistani startups have struggled to regain momentum. Talking to WealthPK, Dr Syed M Abdul Rehman, Shariah Adviser at Securties and Exchange Commission of Pakistan, said, "The lack of funding in Pakistan's startup ecosystem during 1QFY24 is a cause for concern and highlights the urgent need for regulatory clarity and investor confidence. While the transition towards an interest-free economic system is a positive step towards financial inclusion and stability, it is essential to ensure that it does not inadvertently stifle innovation and entrepreneurship."

Rehman emphasised the importance of fostering a supportive environment for startups, including transparent regulatory frameworks, access to capital, and growth opportunities. He suggested that policymakers and regulatory authorities should work closely with stakeholders in the startup ecosystem to address concerns and create an enabling environment for entrepreneurship to thrive. “While Pakistan's startup ecosystem may have hit rock bottom in 1QFY24, there is still hope for recovery. With concerted efforts from government agencies, regulatory bodies, investors, and entrepreneurs, the ecosystem can overcome its current challenges and emerge stronger in the post-transition era.” However, he said decisive actions and collaborative initiatives were needed to restore investor confidence and reignite the spark of innovation in Pakistan's startup environment.

Credit: INP-WealthPk