Pakistan is making a bold move to align its entire banking system with Islamic principles by December 2027. This follows a 2022 ruling by the Federal Shariat Court declaring interest-based banking un-Islamic and unconstitutional. Islamic banking operates on Sharia law, which prohibits charging interest on loans.
Instead, it relies on profit-sharing and asset-backed financing. Products like Murabaha (cost-plus financing), Ijara (leasing), and Musharaka (partnership) ensure that profit and risk are shared among all parties. The growth of Islamic banking in Pakistan has been driven by both religious sentiment and commercial advantages.
Many Pakistanis prefer to avoid interest and are willing to accept lower returns for religious compliance. This has fueled the rapid growth of Islamic banks’ deposit base. Regulatory advantages have also played a role.
The State Bank of Pakistan (SBP) imposed a Minimum Deposit Rate on conventional banks, squeezing their margins. Islamic banks were exempt for a long time, allowing them greater pricing flexibility. These factors have led to the exponential growth of Islamic banking.
Islamic banking growth in Pakistan
Meezan Bank is now the most profitable bank in Pakistan, and other Islamic banks continue to show impressive performance. The SBP is working to support the transition by developing Islamic liquidity management tools, expanding capital markets via sovereign Sukuk, enhancing Shariah board capacities, and increasing the availability of trained Islamic finance professionals.
However, challenges remain. Developing Shariah-compliant lending products that are commercially viable and risk-mitigated is complex. Islamic finance requires risk-sharing, making margins more volatile and documentation more complex.
Recovery in loss scenarios is also a concern. In some contracts, losses are borne by the financier unless gross negligence or fraud can be proven. This exposes banks to strategic defaults and potential abuse.
Pakistan’s external debt, mostly interest-based, creates a fundamental contradiction. How can Pakistan operate a fully Islamic financial system while remaining part of the global interest-based financial architecture? Experts argue that a phased, pragmatic, and dual-track approach is more sustainable.
The goal should be to build a credible, transparent, and scalable Islamic banking ecosystem that flourishes within a connected global economy.
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