Government, SBP and SECP outline roadmap to transform the financial sector while honouring all existing conventional financial commitments
KARACHI: Pakistan has unveiled a comprehensive post-2027 strategy to transition its financial sector to a Riba-free system, assuring businesses, investors and financial institutions that the shift will be gradual, orderly and designed to preserve financial stability without disrupting existing contractual obligations.
The roadmap follows the Federal Shariat Court’s April 28, 2022 judgment declaring Riba prohibited in all its forms and directing its elimination by December 31, 2027. The constitutional deadline was further reinforced through the 26th Constitutional Amendment, enacted in October 2024, which requires the complete elimination of Riba before January 1, 2028.
According to the strategy document, the framework provides certainty on the structure of Pakistan’s financial system after 2027 and clearly defines the responsibilities of regulators, financial institutions and the government to ensure a seamless transition.
Islamic banking gains stronger foothold
Pakistan currently operates a dual banking system comprising conventional and Islamic financial institutions. However, Islamic banking has continued to expand its presence across the financial sector.
As of December 2025, Islamic banking accounted for 28 percent of total banking deposits, 38 percent of financing, and 23 percent of total banking assets. The industry comprises seven full-fledged Islamic banks alongside 16 conventional banks operating dedicated Islamic banking branches.
The strategy notes that Islamic banking assets reached Rs14.47 trillion, while deposits stood at Rs11.04 trillion by the end of December 2025.
Majority of domestic banks expected to convert
The government expects most domestically owned banks and financial institutions to gradually convert into fully Islamic institutions once an enabling legal, regulatory and commercial framework is fully established.
However, banks with majority foreign ownership will not be required to convert. Their transition will remain voluntary and subject to their respective business strategies.
The strategy also assures domestic and international investors that all existing contractual obligations entered into before the transition deadline will continue to be honoured. Conventional financing arrangements will remain valid until their contractual maturity before being replaced with Shariah-compliant alternatives.
Existing government debt to remain protected
The government has also sought to reassure investors that all conventional public debt and financing arrangements contracted before December 31, 2027 will continue to be serviced strictly according to their original contractual terms.
For future borrowing, the government intends to gradually shift domestic financing towards Shariah-compliant instruments, particularly sovereign Sukuk. It also plans to pursue Shariah-compliant foreign financing where commercially viable opportunities exist in international markets.
Sukuk market expansion at the centre of reforms
A major pillar of the strategy is the expansion of Pakistan’s sovereign Sukuk market to provide Islamic banks with adequate investment and liquidity management instruments.
The government has already developed a hybrid Ijarah-cum-Murabaha Sukuk structure approved by the State Bank of Pakistan’s Shariah Advisory Committee.
Using the new framework, Pakistan issued its first hybrid Sukuk worth Rs109 billion on April 17, 2026, offering one-year and ten-year maturities.
Authorities also intend to introduce three-month, six-month and one-year Sukuk to strengthen short-term liquidity management for banks and other financial institutions.
Assets Registry Company to support future Sukuk
To facilitate regular sovereign Sukuk issuance, the government plans to establish an Assets Registry Company (ARC) under the Finance Division.
The proposed company will maintain a centralised registry of federal government non-current assets, creating a broad asset pool to support future Sukuk issuances without affecting government ownership or operational use of those assets.
The mechanism has already received approval from the SBP’s Shariah Advisory Committee, while formal cabinet approval for establishing the company is expected shortly.
Monetary policy to become fully Shariah-compliant
The strategy outlines a gradual transformation of the State Bank of Pakistan’s monetary policy operations through Shariah-compliant instruments.
The SBP has already introduced Shariah-compliant Open Market Operations (OMOs) for liquidity injection. Additional liquidity absorption and placement facilities will be introduced as more sovereign Sukuk become available in the domestic market.
Banking sector remains financially resilient
The government emphasised that Pakistan’s banking sector remains financially strong despite recent economic challenges.
As of December 2025, the banking system’s Capital Adequacy Ratio stood at 20.8 percent, while Islamic banks maintained a 17.5 percent capital adequacy ratio. The non-performing financing ratio for Islamic banks remained low at 2.4 percent, with provisioning coverage exceeding 100 percent, indicating a well-capitalised and resilient financial system capable of absorbing potential economic shocks.
Key reforms before 2028
Before the full transition takes effect, the government plans to complete a wide-ranging reform programme. These reforms include aligning banking and commercial laws with Shariah principles, expanding sovereign Sukuk issuance across multiple maturities, establishing the Assets Registry Company, developing Shariah-compliant public finance infrastructure, securing Shariah-compliant external financing, strengthening regulatory and supervisory frameworks, enhancing Islamic financial safety nets, completing the transition of monetary policy operations, upgrading banking technology systems, and conducting nationwide awareness and capacity-building programmes.
The government concluded that the transition towards a fully Riba-free financial system will be implemented in a phased manner to minimise economic disruption while preserving financial stability and contractual certainty. It added that the Ministry of Finance, the State Bank of Pakistan, the Securities and Exchange Commission of Pakistan and other stakeholders will work jointly to complete the legislative, regulatory and institutional reforms required to establish a comprehensive Shariah-compliant financial architecture before January 2028.