By Staff Reporter
ISLAMABAD: The Ministry of Finance has finalised a strategy to steer the country’s financial system away from interest-based transactions, mandating that all new loans and financial contracts be structured on a Shariah-compliant basis starting Jan. 1, 2028, according to a policy paper.
The strategy, formulated in consultation with regulators, banks, financial institutions and religious scholars, sets out a roadmap for compliance with a Federal Shariat Court ruling and a constitutional amendment that require the elimination of “Riba,” or interest, from Pakistan’s financial system by the end of 2027.
Existing loans and financial arrangements will continue under their current terms until maturity, the ministry said, while all fresh financing arranged after the deadline must comply with Islamic finance principles. Majority foreign-owned banks will be permitted to keep operating hybrid models that offer both conventional and Islamic products, a concession not extended to domestically owned institutions, which are expected to complete a full transformation.
The plan requires formal approval from the federal cabinet before its legal and constitutional components take effect.
COURT RULING AND CONSTITUTIONAL MANDATE
The strategy stems from an April 28, 2022, judgement by the Federal Shariat Court, which found that Riba is prohibited in all its forms and ordered its removal from the country’s financial system by Dec. 31, 2027. The 26th Amendment to the Constitution, passed in October 2024, reinforced that deadline, calling for the elimination of Riba before Jan. 1, 2028.
The Ministry of Finance said the transition would be phased and gradual, aimed at avoiding disruption to a financial system that regulators want to keep aligned with international prudential and supervisory standards. Officials said all commitments to domestic and international creditors would continue to be honoured under existing contract terms, with conventional financing to be replaced by Shariah-compliant alternatives as each facility reaches maturity.
DEBT CONVERSION SEEN AS TOP CHALLENGE
The ministry identified the conversion of outstanding public debt into Shariah-compliant instruments as the most critical challenge facing the transition. Conventional public debt outstanding as of Dec. 31, 2027, will be converted into Islamic financing structures as each tranche matures, while debt maturing after that date will continue to be serviced under its original contractual terms.
To manage the shift, the government plans to establish an Asset Registry Company, a wholly state-owned entity to be based within the Finance Division, that will catalogue non-current assets held by the federal government and its affiliated entities. The registry will record details including ownership, valuation, location and any encumbrances, creating an asset pool to back regular sukuk, or Islamic bond, issuance.
Assets assigned to the registry will remain in use by government entities and will continue to appear on their financial statements, with a disclosure noting their assignment for sukuk purposes, the ministry said. The mechanism for issuing sukuk against portions of the asset pool has already received approval from the State Bank of Pakistan’s Shariah Advisory Committee. The government said it would seek cabinet approval to formally establish the registry company.
LIQUIDITY TOOLS AND SHORT-TERM SUKUK
A shortage of Shariah-compliant liquidity management instruments has been a persistent obstacle for banks seeking to convert to Islamic operations, according to the ministry, which said the government aims to resolve the gap within 12 months through new legal, tax, regulatory and supervisory frameworks.
The State Bank of Pakistan and commercial banks are working on structures for short-term sukuk with three-month and six-month maturities, a gap the ministry said should be resolved before the end of 2027. Once available, the securities are intended to give banks and other financial institutions tools comparable to those used in conventional short-term liquidity management, alongside existing longer-tenor instruments.
Conventional banks will also be permitted to hold Shariah-compliant government securities for liquidity purposes once such issuance becomes more common after 2027, while previously issued conventional securities will continue to qualify for that use. The government said it intends to offer sukuk across a range of maturities, including three, six and 12 months, and to pursue Shariah-compliant channels for future foreign financing where viable options exist in international capital markets.
The Debt Management Office is expected to expand the range of Shariah-compliant instruments available to banks, non-bank financial companies, insurance-equivalent Takaful firms and pension funds as the asset registry and sukuk structures come online.
LEGAL FRAMEWORK AND INSTITUTIONAL PREPARATION
The strategy calls for amendments to federal and provincial laws to be completed by December 2027 to establish a regulatory framework addressing Shariah compliance, consumer protection and financial stability. A review of laws governing financial and commercial activity has largely been completed, the ministry said, with the legislative process for required amendments due to begin shortly.
On technology infrastructure, the ministry said risks were considered relatively contained because most conventional banks already operate Islamic banking windows with much of the necessary systems in place. An information-technology working group has nonetheless prepared baseline specifications for the broader technology requirements of the transition to reduce execution risk.
The ministry also pointed to training programmes already under way for employees of conventional banks to build expertise in Islamic finance, intended to support institutional readiness ahead of the 2027 deadline.
CURRENT SCALE OF ISLAMIC BANKING
Pakistan’s Islamic banking sector currently comprises seven full-fledged Islamic banks alongside 16 conventional banks that offer Shariah-compliant products through dedicated banking windows. Total assets held by Islamic banking institutions stood at 14.467 trillion rupees as of the end of December 2025, according to the ministry.
The Ministry of Finance said the State Bank of Pakistan, the Securities and Exchange Commission of Pakistan and other stakeholders would coordinate implementation of the strategy, with priorities including legislative amendments required under the Federal Shariat Court ruling, development of Shariah-compliant public finance infrastructure, arrangement of Islamic foreign currency financing with multilateral and bilateral lenders, and the design of a Shariah-compliant monetary policy framework.
The strategy also calls for strengthening financial safety mechanisms compatible with Islamic finance principles and expanding public awareness campaigns as the 2027 deadline approaches.
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