Islamic banking

THE roadmap for eliminating riba from Pakistan’s financial system from 2028 offers some clarity on how the government intends to implement the four-year-old Federal Shariat Court ruling. The policy direction itself was settled when the government embraced the court’s verdict by incorporating its deadline into the Constitution through the 26th Amendment, a move seen as part of a political bargain to secure the support of religious parties for the amendment.

Uncertainty has persisted over how an economy deeply integrated with conventional banking and global capital can manage such a profound transition. By opting for a gradual, contract-respecting approach, the government has committed itself to honouring existing obligations until maturity. This preserves legal certainty, protects investor confidence and avoids financial disruption. The decision to allow most foreign-owned banks to continue operating hybrid models offering both conventional and Islamic banking services is also a step in the right direction as complete uniformity is neither practical nor desirable.

The roadmap is only the beginning. The challenge lies in executing it. Pakistan’s Islamic finance sector has expanded rapidly, but still lacks the depth, diversity and liquidity management tools to support an economy of this size. The government’s commitment to regular issuance of sukuk across different maturities addresses a big structural weakness of the sector.

The proposal to develop a comprehensive register of federal assets is another important reform for sustained sukuk issuance and reduced reliance on the limited stock of assets currently available for Islamic financing. The initiative will demand transparency, accurate valuation and robust governance to safeguard the credibility of asset-backed instruments.

However, the roadmap sidesteps an important debate among scholars, bankers and economists, centring on the lack of universal agreement on whether modern bank interest constitutes riba at all. Some argue that what is prohibited is exploitative lending and debt traps rather than every form of interest (return on the time value of money) on capital. Others agree with the FSC. Indeed, the coexistence of conventional and Islamic banking in Muslim-majority countries, and the relatively modest penetration of Islamic banking despite decades of policy support suggest that many still prefer a choice.

The government’s own decision to allow foreign-owned banks to continue offering hybrid services implicitly recognises this reality. It is then difficult to justify denying the same flexibility to domestically owned banks. The government’s intention to seek Sharia-compliant external financing where ‘feasible’ is itself an implicit endorsement of personal choice. If financial stability and consumer choice warrant a hybrid or dual system, market preferences should be allowed to evolve naturally rather than through regulatory compulsion. If the aim is to build confidence in Islamic finance, competition and performance will prove more effective than compulsion.

Published in Dawn, July 6th, 2026 ...