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The Future of Banking in Pakistan: Will We Ever Become Interest-Free?

According to the Finance Minister of Pakistan, Ishaq Dar, the federal government of Pakistan plans to adopt an “interest-free” banking system as soon as it is practically possible, and in the next few days, it will dismiss petitions that have been brought against it before the Supreme Court.

“interest-free banking” refers to a specific subset of banking products and services that do not charge interest.

In 1980, during Ziaul Haq’s reign as military dictator of Pakistan, the Federal Shariah Court was established to determine whether or not any legislation or provision of the law violates the fundamentals of Islam. 

In April of 2022, a court ordered that interest could no longer be charged, and the government has been given until the 31st of December, 2027, to eliminate riba from the financial system. Riba is the Islamic word for interest. In addition, the court decided that interest on government borrowings, regardless of whether the money was borrowed from domestic or international sources, fulfilled the requirements of riba and, as a result, was prohibited under Islamic law.

Riba, a set interest rate, is prohibited in Islam, as is the lending and borrowing of money. To comply with Islamic law, conventional banks have begun offering interest-free commodities and instruments, and during the last several decades, a large number of Islamic banks have emerged, all of which provide services that are in complete compliance with sharia law.

There were appeals by banks, including the State Bank of Pakistan.

After the judgment was handed down, Pakistan’s central bank, the National Bank of Pakistan, the largest state-owned bank in the country, and three commercial banks, all filed appeals with the Supreme Court.

Despite this, the finance minister announced that both the central bank and the NBP would be withdrawing their appeals from the highest court, and he committed to following the ruling of the Shariat court and ridding the nation of interest as quickly as possible. 

Meezan Bank, Pakistan’s first bank to be run entirely according to Islamic law, played an important role in reviving Islamic banking in the country in the early 2000s. Islamic banking now has a sizeable 20 percent part of the industry because of the establishment Islamic banking units at several large banks.

It will not be an easy shift.

As the Minister of Finance himself conceded, this was not a job that could be completed “overnight.” He said that several challenges needed to be solved.

Despite this growth, some analysts believe that the government’s recent commitment to transition to a system without interest may be little more than political rhetoric intended to appease the religious vote bank. This is because fundamental structural issues must be solved before a new system can be developed.

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