The Shahbaz government of Pakistan has taken a big step towards gradually making the country’s financial system riba i.e. interest free. Under which now the country’s system will run according to Sharia (according to the rules of Islamic law). The government has decided that from January 1, 2028, all new transactions including loans will be done in accordance with Sharia. However, the existing arrangements will continue till their expiry date.
The government has decided that the process of transforming the financial system will be completed by 31 December 2027 and from 1 January 2028, all new financial transactions, including loans and other financial agreements, will be made in accordance with Shariah. Most foreign-owned banks and financial institutions will be allowed to continue to operate a hybrid system consisting of both conventional and Islamic methods.
Decision taken after discussion
The Ministry of Finance has finalized the strategy for the post-2027 financial system in Pakistan in dialogue with stakeholders, regulators, banks, financial institutions and religious scholars through an institutional arrangement for transition.
The strategy to implement riba-free financial system in Pakistan has been made keeping in mind the decision of the Federal Shariat Court of April 28, 2022. In this decision, it was said that Riba (interest) is completely banned in all its forms and methods and it is necessary to eliminate it from Pakistan by 31 December 2027. After this, this deadline was also fixed in the 26th amendment to the Constitution in 2024 and a plan was made to abolish the Riba system before January 1, 2028. The Finance Ministry has prepared this transition plan after talking to stakeholders, regulators, banks, financial institutions and religious scholars. So that the process of change can be made practical and effective.
How will the transition happen?
The Finance Ministry has assured that with clear guidelines this change will happen smoothly without any major problems. The strategy outlines the financial system after 2027, major risks, milestones and roles of different stakeholders.
New loan only based on Shariah: From January 1, 2028, the government, banks and financial institutions will provide all new loans and financing through Sharia-based methods.
Old agreements will remain intact: All commitments and obligations, including traditional financing availed through December 2027, will be fulfilled and repaid in accordance with the promises made under the Contract. Conventional loans outstanding until December 31, 2027, will be converted into Shariah-compliant financing on their maturity dates. This will maintain the confidence of investors.
Exemptions to Hybrid System: Banks and financial institutions in which the majority stake is foreign will be allowed to offer both conventional and Islamic products. But domestically owned institutions will have to be completely converted to the Sharia system.
Different arrangements for domestic and foreign banks
The government has made different arrangements for domestic and foreign banks. Most domestically owned financial institutions will be encouraged to move towards a fully Shariah-based system. At the same time, most foreign-owned banks and financial institutions will be able to adopt hybrid model. That means they will be able to continue providing both Islamic banking and conventional banking services. The government believes that this arrangement will maintain the confidence of international investors and will not be affected by sudden changes in the financial market.
Framework will be ready in 12 months
Legal, tax, regulatory and supervisory framework will be prepared in the next 12 months. Additionally, Shariah-compliant liquidity management instruments will also be made available at regular intervals. Till now, lack of these instruments has been the biggest challenge for banks to convert to Islamic banking. For this, the government is planning to strengthen the Sharia based securities i.e. Sukuk market.
After 2027, the federal and state governments will try to raise all new funding from domestic and foreign sources through Shariah-based means. All arrangements for this will be completed by December 2027. The government will issue securities with different tenures, i.e. Sukuk, which will also include short tenure options like 3 months, 6 months and 12 months. So that it becomes easier for financial institutions to manage liquidity. Conventional banks will also be able to use Shariah-compliant securities for liquidity management, existing conventional securities will also remain valid for liquidity management.
biggest challenge
The strategy recognizes that the biggest challenge is to convert outstanding conventional government debt into Shariah-compliant debt by December 2027. The government will replace the outstanding debt with Shariah financing after maturity, but conventional debt maturing after 2027 will be repaid as per the contract.
Asset registry company will be formed
The government will create an asset register system for issuing Sukuk. For this, a fully government-owned ‘Asset Registry Company’ will be established under the Finance Division. This company will keep records of non-current assets of the federal government and its institutions. This will create a pool of assets for issuing Sukuk.
The register will contain information like ownership, nature, size, location, book value, market value and unencumbered value of each asset. However, the assets handed over to the company will remain available for government use and will also be reflected in the balance sheets of the institutions. All that needs to be disclosed is that the property has been handed over to the company for Sukuk. The Sharia Advisory Committee of SBP has approved this structure. Approval for forming the company and handing over the properties will soon be taken from the Cabinet.
The purpose of this entire exercise is to eliminate uncertainty regarding the financial system after 2027 and to ease the transition to a riba-free system. The government says that all existing commitments to domestic and foreign partners will be fulfilled as per the contract during and after the transition.
Leave a Reply