Pakistan Aims to Eliminate Interest from Banking System by 2027 Under Islamic Sharia Law

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Pakistan is set on an ambitious path to transform its banking system in line with Islamic principles by eliminating interest, commonly known as usury, by 2027. The move is part of the country’s efforts to promote the Islamic finance sector and align its banking practices with the spirit and values of Islam. The State Bank of Pakistan (SBP) and the Security and Exchange Commission of Pakistan (SECP) are working together to implement reforms aimed at fostering Islamic banking and capital markets.

Over the past decade, Pakistan has witnessed significant growth in Islamic banking, with a remarkable 24% increase. The Islamic capital market has also flourished, reaching a substantial value of approximately USD 3 trillion. Islamic banking currently constitutes 20% of the banking sector in Pakistan, reflecting its growing popularity and acceptance among the population.

To further strengthen the Islamic finance sector, discussions are underway to fund capital market requirements through Sharia-compliant means. One such method is the issuance of Sukuk, which are Sharia-compliant bonds. Pakistan has already issued Sukuk bonds worth PKR 2.8 trillion, and a dedicated committee within the SBP has been established to convert government debt into Sukuk. These initiatives not only align with Islamic principles but also provide alternative financing options for the government.

Recognizing the relatively small size of the corporate banking sector in Pakistan, there is a push to enhance the corporate debt market. Simultaneously, promoting Sukuk can further boost the Islamic banking sector. By creating an enabling environment for Sukuk issuance and utilization, Pakistan aims to expand its Islamic financial market and attract more investors interested in Sharia-compliant investments.

The push towards eliminating interest-based banking gained momentum following a ruling by the Federal Shariat Court (FSC) in April 2022. The FSC declared the prevailing interest-based banking system contrary to the principles of Sharia. In response, the court ordered the federal and provincial governments to amend laws to ensure a banking system free from interest by December 2027. This landmark decision came after two decades of deliberation.

Pakistan’s pursuit of eliminating interest from its banking system under Islamic Sharia law represents a significant step toward aligning its financial practices with religious values. The country’s growing Islamic banking sector, coupled with the issuance of Sukuk and the development of the corporate debt market, signifies the potential for a robust and diversified financial ecosystem. While the transition poses challenges, it offers the opportunity to attract both domestic and international investors seeking ethical and Sharia-compliant investment avenues. The successful implementation of this ambitious plan could pave the way for Pakistan to emerge as a prominent player in the global Islamic finance industry.

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