RECENT debate by a Senate panel on the government’s plan — if we can call it one — to implement a riba-free banking and financial system in the next five years has brought to the fore serious challenges that will have to be overcome before the Federal Shariat Court’s order can be executed. The finance ministry and the State Bank appear clueless as to how the transformation is to be effected and what implications there would be for the country’s economy and its financial dealings with the rest of the world. This reinforces the perception that, rather than being based on logical reasoning, the decision to withdraw legal challenges to the FSC verdict was meant to appease and win over right-wing elements. PPP Senator Saleem Mandviwalla’s disclosure that some foreign banks, including the Bank of China, had informed him that it would not be easy for them to function in Pakistan if interest-free banking were to be implemented underlines the risks the transformation plan poses to the economy. The SBP itself has admitted that the path towards interest-free banking is beset with hurdles related to public and external debt, monetary policy, etc.

Defining riba in this age of a complex and globally connected financial system is not as straightforward as some clerics would have us believe. Nor is it easy to have 100pc interest-free banking within five years as indicated by State Minister for Finance Ayesha Ghaus Pasha during the Senate hearing. Even if the existing Islamic banking system is accepted as ‘Sharia-compliant’, it may be riba-free but not necessarily interest-free as pointed out by a panel member. Therefore, the government must heed the panel’s advice to cautiously tread this path to avoid disrupting efforts to integrate Pakistan with the global financial system and attract foreign financial institutions and investors. The FSC should also review its decision, and allow the government and SBP to make a decision based on extensive research and according to the realities of the present global financial system.

Published in Dawn, December 11th, 2022