• Ministry of Finance drafts strategy for post-2027 Riba-free financial system
• Existing conventional loans to continue until maturity
• Majority foreign-owned banks may offer both Islamic, conventional products
• Cabinet nod will set legal transition in motion

ISLAMABAD: As part of its strategy to gradually shift to a Riba-free financial system by Dec 31, 2027, the government has decided that all new transactions, including loans, will be contracted on a Shariah-compliant basis from Jan 1, 2028, while existing arrangements will continue until maturity.

Majority foreign-owned banks and financial institutions will be allowed to continue with a hybrid system offering both conventional and Islamic modes.

The legal and constitutional requirements and timelines will be set in motion after formal approval by the federal cabinet. The Ministry of Finance has finalised the strategy for the post-2027 financial system in Pakistan in consultation with stakeholders, regulators, banks, financial institutions and religious scholars through an institutional arrangement for transition.

The strategy has been formulated in light of the Federal Shariat Court’s April 28, 2022, judgement, which declared that “Riba is absolutely prohibited in all its forms and manifestations” and mandated its elimination from Pakistan by Dec 31, 2027.

The 26th Amendment to the Constitution, issued in October 2024, also set a timeline for the earlier constitutional provision and envisaged the elimination of Riba “before the first day of January, two thousand twenty-eight”.

The Ministry of Finance said that with clear direction and operational guidelines, the shift to a Riba-free financial system would be smooth, seamless and without any major disruption. The strategy envisages the post-2027 financial system landscape and highlights key actions, risks and milestones during the transition to remove uncertainty about the shape and environment of the financial system after 2027. It also defines the roles and responsibilities of different stakeholders.

Under the plan, the government and regulators will ensure that enabling legal, taxation, regulatory and supervisory frameworks are in place and that Shariah-compliant liquidity management instruments are available at regular intervals. The absence of such instruments has remained a key challenge for banks interested in conversion and transformation into Shariah-compliant institutions. This work will be completed over 12 months.

“During and after the transition, all existing commitments and obligations towards domestic and international counterparties and stakeholders will continue to be honoured as per the terms of the contracts,” the ministry said, adding that conventional financing would be replaced with Shariah-compliant financing on respective maturities.

This would preserve contractual sanctity, enhance investor confidence and ensure a smooth transition towards a Riba-free financial system, the ministry said.

The transition will be gradual and without any major disruption, while ensuring financial system stability and conformity with international prudential and supervisory standards.

Majority domestically owned financial institutions will pursue transformation in line with the prevailing legal, regulatory and business environment and the availability of Shariah-compliant liquidity management systems. Majority foreign-owned banks and financial institutions may opt to offer both Islamic and conventional products.

After 2027, the federal and provincial governments will explore options to ensure that all fresh financing from domestic and international sources is arranged through Shariah-compliant modes and instruments. All arrangements for this purpose will be completed and notified by December 2027.

All commitments and obligations, including conventional financing raised by December 2027, will be honoured and serviced as per contractual commitments. Conventional debt outstanding as of Dec 31, 2027, will be converted into Shariah-compliant financing on respective maturities.

As the government will mostly issue Shariah-compliant securities after 2027, conventional banks will also be allowed to use Shariah-compliant securities for liquidity management. Existing conventional securities will continue to qualify for liquidity management.

The government will ensure the availability of sukuk of different tenors, including shorter tenors of three, six and 12 months, to facilitate financial institutions in managing liquidity. After 2027, the government will also strive to secure all fresh foreign financing through Shariah-compliant modes, subject to the availability of reasonable options in global capital markets.

The transition will be underpinned by institutional realignment, under which the government will endeavour to establish and strengthen strategic arrangements with multilateral and bilateral partners, including structured co-financing mechanisms with Islamic financial institutions, while maintaining national debt sustainability.

Conventional public debt outstanding as of December 2027 will be replaced with Shariah-compliant financing on respective maturities, while the government will continue to service conventional debt maturing after 2027 as per contractual commitments.

The strategy also highlights key challenges and risks. Among them, the conversion of existing public debt into Shariah-compliant debt is the most critical challenge.

A system of asset register will be developed for all non-current assets owned by the federal government and its entities. The asset register, to be managed by the Asset Registry Company — a fully federal government-owned entity to be housed in the Finance Division — will maintain the record of non-current assets of the federal government and unlisted entities owned by it, creating a pool of assets to support sukuk issuance.

The asset register will include detailed information about each asset, including ownership, nature, size or quantity, location, book value, market value, encumbrance, if any, and unencumbered market value.

However, assets assigned to the Asset Registry Company will continue to be available to the federal government and its entities for normal use and will continue to be reflected in the financial statements of the entities, with a disclosure that the asset has been assigned to the company for sukuk issuance.

The pool of assets available with the company will provide flexibility to the government to issue sukuk against a portion of the asset pool on a regular basis. The proposed mechanism for the issuance of sukuk based on a portion of the asset pool has already been approved by the SBP’s Shariah Advisory Committee.

The government will soon seek formal cabinet approval for the establishment of the Asset Registry Company and the assignment of assets owned by the federal government and its entities to the company for regular sukuk issuance.

With the availability of a hybrid Sukuk structure and asset register, the Debt Management Office will aim to introduce a wider variety of Shariah-compliant instruments of various tenors to meet the liquidity management and investment portfolio needs of banks, non-bank financial companies, Takaful companies and pension funds.

The development and issuance of shorter-tenor sukuk of three and six months will also be a key challenge. The SBP and banks are at an advanced stage of finalising short-term sukuk structures, which is likely to address the issue before December 2027.

At present, the Islamic banking industry in Pakistan consists of seven full-fledged Islamic banks and 16 conventional banks offering Shariah-compliant services through dedicated Islamic banking branches.

As of end-Dec 2025, total assets of Islamic banking institutions stood at Rs14.467 trillion.

Published in Dawn, July 1st, 2026