Pakistan Sets Bold Path to Interest-Free Banking by 2028

Pakistan Sets Bold Path to Interest-Free Banking by 2028

Pakistan is on the cusp of a historic shift in its financial landscape as the newly-passed 26th Constitutional Amendment Bill, 2024, sets January 1, 2028, as the deadline to eliminate Riba (interest-based banking) from the country’s economic system.

This decisive move, prompted by the religious and political party Jamiat Ulema-e-Islam-Fazl (JUI-F), aims to align the nation’s banking practices with Islamic principles.

The amendment modifies Article 38(f) of the Constitution, which addresses the promotion of social and economic well-being. The original clause, which vaguely called for the elimination of Riba “as early as possible,” has now been replaced with a more concrete mandate, requiring that interest-based banking be eradicated “as far as practicable, by the 1st of January, 2028.”

The push towards an interest-free economy has been in motion since 2022 when the Federal Shariat Court ruled that the government had five years to implement a banking system free from interest. The court’s decision emphasized the need for an Islamic economic system, asserting that Riba is unequivocally forbidden under Islamic law. Justice Dr. Syed Muhammad Anwer, delivering the court’s verdict, underscored that all transactions involving Riba are inherently unjust, and its abolition is central to Islamic principles.

“The elimination of Riba is a fundamental tenet of an Islamic financial system,” the court ruled, adding that the practice of charging interest, whether on loans or other financial transactions, is strictly prohibited. The court went further, mandating that the government ensure both internal and external loans, including dealings with international financial institutions like the IMF and World Bank, be interest-free.

In response to this legal framework, the State Bank of Pakistan (SBP) has been proactively preparing for the transition. According to the SBP Governor’s Report 2023-24, issued on October 18, 2024, the institution is working closely with the government and other stakeholders to ensure the smooth implementation of the court’s directive.

A high-level “Committee for the Transformation of Conventional Banking into Islamic Banking” has been established to spearhead this change. The committee is tasked with reviewing existing domestic laws, comparing them with international best practices, and reforming the regulatory framework. The SBP has also begun awareness campaigns and capacity-building initiatives to educate stakeholders on Islamic finance, while also paving the way for digital Islamic banking solutions.

As Pakistan moves towards a fully interest-free financial system, this transformation marks a critical juncture in the nation’s economic development, promising a future where banking aligns with Islamic ethics and principles, free from the bounds of interest-based transactions.