Pakistan’s journey to eliminate interest (riba) from its economy has entered a defining stage. It is now a policy target backed by judicial directives, political commitments, and increasing public demand.

In April 2022, the Federal Shariat Court (FSC) directed the government to phase out interest-based banking by December 2027. The landmark decision was not just symbolic — it set a clear legal and constitutional obligation for the state to transition toward a fully Shariah-compliant system.

Moreover, through the 26th Constitutional Amendment (2024), the elimination of riba was enshrined in Pakistan’s constitution, pushing the deadline to January 2028 with stronger legal backing and requiring all state and non-state entities to plan for the conversion.

Yet, the path to full-scale Islamic banking is neither simple nor without obstacles. Within three years of the court decision, the country’s Islamic banking industry has made significant progress, but much still needs to be done to achieve the goal.

According to the State Bank of Pakistan’s (SBP) latest report for March 2025, Islamic banking assets have surpassed Rs11.5 trillion, accounting for 21.1 per cent of the sector, while deposits have reached 25.4pc, crossing Rs8.4tr. Branches of Islamic banks have also surged past 6,090, with another 2,651 Islamic banking windows operating in conventional banks — covering almost 49pc of the banking network across Pakistan.

With the December 2027 deadline for phasing out of conventional banking nearing, success depends on bold transparent reforms

There are now six full-fledged Islamic banks operating in the country, including Meezan Bank, Faysal Bank, and Dubai Islamic Bank, while fourteen conventional banks — including HBL Islamic, UBL Ameen, Bank Alfalah Islamic, and SCB Sadiq — are expanding their Islamic banking offerings to meet public demand.

The growth rate of Islamic banking remains north of 20pc. However, the numbers also reveal the challenge ahead. The government had hoped Islamic deposits would reach 50pc by early 2025. With the 2027 deadline fast approaching, the main question now is: what more must the government and SBP do to deliver on their promise?

In this context, both the government and SBP have moved beyond rhetoric. Several policy initiatives signal serious intent. In December 2022, the SBP and the federal government announced their joint commitment to implementing the Federal Shariah Court ruling, backed by a phased transition strategy. A high-powered committee, headed by the SBP governor, was also formed to develop a conversion roadmap.

In 2024, SBP directed all conventional banks to submit their plans for complete conversion to Islamic banking, ensuring top-level accountability. SBP has also strengthened its Shariah Governance Framework to ensure that Islamic banks follow standardised compliance practices.

The Securities and Exchange Commission of Pakistan (SECP) has intensified its efforts and is actively engaging with non-banking financial institutions (NBFIs), insurance companies, and capital market institutions to formulate and implement a conversion strategy for its regulated entities.

The federal Ministry of Finance has also scaled up the issuance of Ijarah Sukuk to provide Shariah-compliant alternatives to conventional T-bills and Pakistan Investment Bonds (PIBs). This is a crucial step, since government borrowing drives the financial system.

To date, over Rs6tr worth of Sukuk have been issued, with regular monthly issuances of around Rs100 billion. However, Sukuk issuance still falls short of targets and remains insufficient to meet the financing and conversion needs of the government.

The conventional domestic public debt of Rs37tr has emerged as the single biggest challenge. With the constitutional bar in place prohibiting the government from dealing in or paying interest after December 2027, it is imperative to ensure regular and large Sukuk issuances for the smooth conversion of existing bonds, while restricting the issuance of new T-bills and PIBs beyond the maturity date of January 2028.

To meet this challenge, the Ministry of Finance and the industry must coordinate to explore new and innovative structures, backed by strong political support. These moves demonstrate that the government and regulators are moving in the right direction, but experts warn that without decisive structural reforms, progress could stall.

To ensure a successful and smooth conversion of the financial system, a public conversion roadmap is needed. Pakistan still lacks a published, time-bound roadmap for complete conversion with clear targets for each sector, including banks, NBFIs, state-owned enterprises, public debt, and federal and provincial governments.

A high-level cabinet committee should be formed under the Prime Minister to monitor and coordinate the country’s conversion, with participation from government officials, regulators, scholars, and industry experts.

Islamic banks and financial institutions remain disadvantaged, with limited tools for overnight and short-term liquidity management. SBP must roll out Shariah-compliant alternatives for liquidity management facilities and central bank Islamic open market operation arrangements.

The challenge of capacity building and trained human resources needs to be addressed on a priority basis. A skilled workforce is the backbone of Islamic banking, and a coordinated National Islamic Finance Training Programme — linking universities, seminaries, industry, and SBP’s own National Institute of Banking and Finance — could bridge the talent gap.

To ensure financial inclusion alongside the transition to an Islamic financial system, mass media programmes and public awareness drives are needed. A massive national financial literacy campaign — especially targeting traders, small and medium-sized enterprises, and rural areas — is essential to remove doubts stemming from a lack of knowledge and to build public confidence.

If reforms remain half-hearted, Pakistan could face an awkward scenario by 2028: a stronger Islamic banking sector, but still co-existing with interest-based instruments. Such a dual system would contradict both the FSC ruling and public expectations.

The risks are real — legal disputes, liquidity crunches, and investor uncertainty. Yet the opportunities are even greater: a stable, Shariah-compliant financial system that could attract ethical investment, broaden inclusion, and make Pakistan a leader in global Islamic finance.

Islamic banking is no longer a side experiment in Pakistan. With over one-fourth of the sector already converted, the momentum is real. But the December 2027 deadline is fast approaching, and success now depends on the political will to implement reforms boldly and transparently.

If Pakistan can align regulatory improvements with fiscal reform, strengthen human capital, and expand Shariah-compliant markets, the country may not only meet its domestic goals but also emerge as a global model of Islamic finance. The clock is ticking—but so is the opportunity.

Ahmed Ali Siddiqui is the Founding Director of IBA Centre for Excellence in Islamic Finance, and Dr Maqbool Hassan is an Industry Fellow at Meezan Bank and Assistant Professor at Bahria University

Published in Dawn, The Business and Finance Weekly, September 1st, 2025