Pakistan is embarking on a transformative journey to eliminate interest from its banking system by 2027, according to the country’s top banker, State Bank of Pakistan (SBP) Governor Jameel Ahmad. In line with Islamic principles, the government aims to promote the Islamic finance sector and establish a banking system that aligns with the values and ethos of Islam.
Over the past decade, Pakistan has witnessed a remarkable 24% growth in Islamic banking, with the Islamic capital market expanding to approximately USD 3 trillion. Ahmad highlighted that Islamic banking now constitutes 20% of the overall banking sector in the country, reflecting its positive impact on Pakistan’s economy.
To further bolster the Islamic finance sector, the SBP and the Securities and Exchange Commission of Pakistan (SECP) are collaborating on comprehensive reforms. Ahmad revealed ongoing discussions on securing funding from the capital market through Sharia-compliant means, such as Sukuk (Sharia-compliant bonds) issuance. Additionally, a committee within the SBP has been established to convert government debt into Sukuk.
Pakistan has already made significant strides in embracing Islamic finance. The country has successfully issued Sukuk bonds worth PKR 2.8 trillion, demonstrating a commitment to this financial model. Ahmad stressed the need to enhance the corporate debt market and promote Sukuk to strengthen the Islamic banking sector further.
The impetus for these reforms came from the Federal Shariat Court’s ruling in April 2022, which declared the prevailing interest-based banking system in Pakistan to be against the principles of Sharia. The court directed the federal and provincial governments to amend laws and eliminate interest from the banking system by December 2027. This decision marked the culmination of a 20-year deliberation on the matter.
Amidst a challenging political and economic climate, Pakistan is grappling with high external debt, a weak local currency, and dwindling foreign exchange reserves. The move towards an interest-free banking system reflects the country’s determination to address these issues while adhering to Islamic principles.
By embracing Islamic finance, Pakistan aims to create a financial system that fosters economic growth and stability while upholding the values of Sharia. The successful implementation of these reforms will not only strengthen the banking sector but also position Pakistan as a prominent player in the global Islamic finance industry.
As Pakistan endeavors to reshape its financial landscape, the transition to an interest-free banking system by 2027 will undoubtedly have far-reaching implications for the country’s economy and its standing within the Islamic finance community.