In Pakistan, Islamic finance covers the Sharia-compliant banks, windows, sukuk, funds and takaful operators regulated by the State Bank of Pakistan and the SECP, in a country whose Constitution sets 1 January 2028 as the date for eliminating riba.
A first Islamisation launched around 1980
Under General Zia ul-Haq, the state tried to Islamise the whole financial system by decree. The 1980 Modaraba Companies Ordinance and the profit-and-loss sharing accounts of the early 1980s mostly changed names, without altering how the nationalised banks actually worked.
Why that reform stayed on the surface
State banks went on paying near-fixed returns and funding the government through interest-bearing paper. The mark-up charged on loans looked like a rate under another name, which several scholars criticised and which fed the court challenges that followed.
The 1991 and 1999 rulings against interest
In 1991 the Federal Shariat Court declared bank interest contrary to Islam. On appeal, the Shariat Appellate Bench of the Supreme Court confirmed in 1999 the prohibition of riba in all its forms and ordered a full overhaul of the system within a set period.
The 2002 remand and what followed
In 2002 the Supreme Court set aside the 1999 judgment on review and sent the case back to the Federal Shariat Court. Forced conversion stopped, and the authorities chose another route: letting conventional and Islamic banks coexist until a gradual transition.
A market-led relaunch from 2002
Meezan Bank received in 2002 the first full-fledged Islamic banking licence of the new generation. The State Bank then allowed Islamic subsidiaries and Islamic branches inside conventional banks, so supply grew without any compulsory conversion.
A dedicated department and Sharia board at the State Bank
The central bank set up an Islamic Banking Department in 2003, followed by a Sharia board that reviews model contracts. Its instructions require every institution to have a Sharia board and Sharia audit and to apply AAOIFI standards adopted with local adaptations.
Which standards govern the contracts?
Several AAOIFI Sharia standards, including those on Murabaha, Ijara and Musharaka, were made mandatory by circular. On the accounting side, Islamic standards issued with the Institute of Chartered Accountants of Pakistan govern how financings and deposits are presented.
Islamic windows and branches: required separation
A conventional bank running Islamic branches must keep separate funds, allocated capital and distinct accounts. Deposits collected in those branches can only finance compliant assets, and Mudaraba pools are managed independently of the conventional balance sheet.
The 2022 judgment on riba
On 28 April 2022 the Federal Shariat Court again ruled interest contrary to Sharia and called for riba to be eliminated by the end of 2027. After debate, the State Bank and several banks withdrew their appeals, and the central bank structured a conversion plan.
The 26th Amendment sets 1 January 2028
In October 2024 the 26th constitutional amendment wrote in the goal of eliminating riba as completely as possible by 1 January 2028. The main challenge is domestic public debt, still largely funded through interest-bearing Treasury bills.
Government sukuk to replace interest-bearing debt
The state has issued domestic Ijara sukuk since 2008, often backed by motorways or airports, and an international dollar sukuk as early as 2005. The task now is to scale volumes sharply to refinance a domestic debt that remains mostly conventional.
SECP, takaful and an Islamic stock index
The Securities and Exchange Commission of Pakistan supervises Modaraba companies, Islamic funds and takaful operators under dedicated takaful rules. The Pakistan Stock Exchange publishes the KMI-30 index, which only includes companies passing a Sharia screen on activity and leverage.
Specialist external source
The State Bank of Pakistan publishes its Islamic banking circulars, the Sharia standards it has adopted, sector statistics and documents on its conversion strategy.