ISLAMABAD/KARACHI: Commercial banks and their regulator, State Bank of Pakistan (SBP), have filed an appeal before the Sup­reme Court challenging the Federal Shariat Court (FSC) direction to the government for complete transformation of banking system into Shariah-compliant banking by December 2027 and seeking guidance of the appellate bench on the matter.

The FSC in its April 28 order had directed the government to adopt Shariah-compliant modes in future while borrowing from domestic or foreign sources. Explaining that five years were reasonably enough to convert Pakistan’s economy into one that is equitable, asset-based, risk-sharing and interest-free, the FSC had directed the federal and provincial governments to complete the necessary legislative amendments to the laws concerned and bring them into conformity with the injunctions of Islam by Dec 31, 2027.

In its appeal, the SBP contended that being the premier custodian and regulator of the financial and monetary framework of Pakistan, the bank was deeply committed to ensuring compliance with the injunctions of Islam while protecting the stability and security of Pakistan’s financial sector that functions as part of the global financial system.

However, the SBP said, “While Islamic modes of finance are a growing area of interest for foreign providers of finance, the adoption of particular modes of finance with respect to any particular advance is not in the hands of the state of Pakistan and its various instrumentalities. Funding arrangements with international providers of finance are a matter of negotiations carried out by the designated officials/authorities of the state of Pakistan. The form and the terms of such arrangements are not dictated by any law in force in Pakistan but are a result of the best outcome that the state can achieve in the arena of international finance.”

It argued that the prescribed time frame for transformation of banking system “is not relatable to any particular law. Even otherwise, a mass-scale conversion of the banking system will require infrastructural investment and changes at a mega scale (at least five times more within the next five years as compared to the current level that has been achieved in more than 20 years). Accordingly, transactions costs, documentation requirements and dearth of risk management solutions will put additional pressure on the conversion process. Abruptness in implementation will create uncertainty in the banking sector, which may bring instability to the whole economy”.

The appellant then requested the apex court that the FSC’s judgement “may kindly be modified so as to address the issues”.

The SBP also placed “Strategic Plan for Islamic Banking Industry 2021-25” for perusal of the SC. “A gradual approach for the transformation of banking system into Shariah-compliant banking was adopted at the start of this millennium, wherein both the Islamic and conventional banks were allowed to operate simultaneously in the country,” the SBP recalled. According to the SBP, Islamic banks now accounts for 19.4 per cent of the country’s overall banking system in terms of assets, while in terms of deposits the share is 20pc (as of March 31, 2022). Currently, 22 Islamic Banking Institutions (IBIs) — five full-fledged Islamic banks and 17 conventional banks having standalone Islamic banking branches — with a network of 3,983 branches along with 1,418 Islamic banking counters at conventional branches are operational across the country.

According to a statement issued on Saturday, the SBP reached out to SC for guidance in FSC decision that had declared the prevailing interest-based banking system as against the Shariah.

“After detailed review of the judgment and based upon the advice of our Chief Legal Adviser and external counsel, we have sought guidance from the honorable Shariat appellate bench of the Supreme Court in terms of its implementation and practicalities involved,” said the SBP.

Published in Dawn, June 26th, 2022