Pakistan Embarks on Ambitious Journey Towards Interest-Free Banking by 2028

Pakistan is on the verge of a monumental shift in its financial landscape with the passage of the 26th Constitutional Amendment Bill, 2024, which sets a January 1, 2028 deadline for the complete elimination of Riba (interest-based banking) from the country’s economic system. This legislative move is aimed at aligning Pakistan’s banking practices with Islamic principles and represents a significant reorientation of its financial sector.

The amendment, driven by the religious and political party Jamiat Ulema-e-Islam-Fazl (JUI-F), modifies Article 38(f) of the Constitution. Originally, this article vaguely encouraged the elimination of Riba “as early as possible.” With the recent changes, it now carries a more definitive mandate, requiring that interest-based banking be eradicated “as far as practicable, by the 1st of January, 2028.” This constitutional change marks a clear timeline for transforming the country’s banking system to one that is compliant with Islamic law.

This initiative towards an interest-free economy has roots in a 2022 ruling by the Federal Shariat Court, which instructed the government to establish a banking system free from interest within five years. The court’s decision emphasized the importance of a financial system aligned with Islamic values, asserting that Riba is explicitly forbidden in Islamic law. Justice Dr. Syed Muhammad Anwer, who delivered the court’s verdict, highlighted that all transactions involving interest are inherently unjust, and its elimination is essential for upholding Islamic economic 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’s directive also included a requirement for the government to ensure that both internal and external loans, including those from international financial institutions like the International Monetary Fund (IMF) and the World Bank, are free from interest.

In response to this legal framework, the State Bank of Pakistan (SBP) has taken a proactive stance in preparing for the transition. According to the SBP Governor’s Report 2023-24, released on October 18, 2024, the central bank is collaborating closely with the government and various stakeholders to facilitate the shift to an interest-free banking system. This includes the establishment of a high-level “Committee for the Transformation of Conventional Banking into Islamic Banking,” tasked with guiding this transformation.

The committee’s responsibilities include reviewing current domestic laws, comparing them with international best practices, and reforming regulatory frameworks to support Islamic banking principles. The SBP has also initiated awareness campaigns and capacity-building programs to educate stakeholders on Islamic finance, while promoting digital solutions that align with the principles of Islamic banking.

As Pakistan advances towards a fully interest-free financial system, the SBP’s efforts are crucial to ensuring a smooth transition. The goal is not only to replace conventional interest-based practices but to also create a robust framework that fosters financial inclusion, economic stability, and compliance with Islamic ethics. This transformation promises to reshape Pakistan’s banking landscape, providing opportunities for both individuals and businesses to engage in a system that aligns with their religious beliefs.

The journey towards achieving this interest-free milestone is significant for Pakistan’s economic future. It represents a departure from conventional banking norms and a move towards a system that seeks to balance economic growth with adherence to Islamic values. As the country prepares to meet the January 2028 deadline, it sets a precedent in the region for pursuing an Islamic financial model on such a comprehensive scale. This shift not only marks a critical juncture in Pakistan’s economic development but also highlights the nation’s commitment to integrating faith-based principles into modern financial practices.