Pakistan to Implement Interest-free Banking System

November 11, 2022

The Pakistan Government is planning to implement an interest-free banking system in the country from 2027 under the Islamic law.

What is interest-free banking system?

The concept of interest free banking system is derived from the Islamic form of banking. It operates based on ethical standards and prevents Muslims from paying or receiving any kind of interest. It is considered to be an effective tool to achieve the economic objectives of Islam.

Background

The first petition to abolish the existing interest-based banking system in Pakistan was filed in 1990 at the Federal Shariat Court (FSC) – the constitutional court that has the power to examine and determine whether the Pakistani laws comply with the Sharia law.
In 1992, a three-member bench at the FSC sought the implementation of the interest-free banking system in the country.
The government of Pakistan challenged this decision in the country’s Supreme Court.
In 1999, the Supreme Court upheld the FSC’s decision and again directed the government authorities to implement the system by June 30, 2000.
In 2002, a review appeal was filed at the apex court and the decision of the FSC was suspended. The case was referred back for the FSC’s interpretation.
In April 2022, the FSC again called for abolishing interest-based system in five years since it goes against the Sharia law.
It called on the government to eliminate Riba – the Islamic term for interest – from the country’s banking system by December 31, 2027.
Government borrowings from domestic and foreign sources also come under the definition of Riba and is prohibited under Islamic law.
However, the FSC’s ruling clarifies that Pakistan is bound to honour the existing international financial commitments, though they do not comply with the sharia laws.

What is Pakistan government’s announcement on interest-free system?

Pakistan’s finance minister announced that the government has decided to implement the FSC’s decision to get rid of the interest-based banking system in the country. He announced that Pakistan’s central bank and largest state-owned bank – National Bank of Pakistan – will withdraw their appeals from the apex court challenging the ruling of the FSC.

Does Pakistan have interest-free banks now?

Over the years, several banks have been established to provide completely sharia-compliant services while conventional banks have also introduced interest-free products and instruments in compliance with the Islamic law. Meezah Baank – Pakistan’s first completely Islamic bank – was established in the early 2000s. It was followed by banks establishing several Islam subsidiaries to follow similar principles. These banks currently have over 20 per cent share in Pakistan’s banking industry.

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