Pakistan stands on the threshold of one of the most significant financial reforms in the modern Muslim world. For decades, the transition towards an Islamic financial system remained an aspiration discussed in policy circles and academic forums. Today, it has become an achievable national objective backed by constitutional obligation, judicial direction, institutional preparedness and, most importantly, market acceptance.
According to the latest State Bank of Pakistan’s Islamic Banking Bulletin, Islamic banking assets have reached approximately Rs 14.47 trillion, while deposits have crossed Rs 11.03tr, recording annual growth of 30.7 per cent and 39.6pc, respectively. Islamic banking now accounts for 22.9pc of Pakistan’s banking assets and 27.8pc of total deposits, supported by a nationwide network of more than 6,700 Islamic banking branches.
Every year, millions of Pakistanis voluntarily choose Islamic banking not because they are compelled to do so, but because they trust the system and seek financial services aligned with their religious values.
This remarkable growth has been accompanied by equally impressive progress in Pakistan’s Islamic capital market. During FY26, the government successfully raised approximately Rs3.5tr through sovereign Sukuk, the largest Sukuk programme in the country’s history.
The post-2027 strategy presents an implementable roadmap for a fully Shariah-compliant sector
The introduction of the innovative hybrid Sukuk structure has solved one of the industry’s biggest structural challenges by significantly expanding the pool of assets available for sovereign Islamic financing. At the same time, Sukuk trading on the Pakistan Stock Exchange increased by nearly 275pc, reflecting growing investor confidence and improving secondary market liquidity.
The government’s decision to introduce three-month and six-month sovereign Sukuk is another landmark development. For years, critics argued that a complete transition to Islamic banking was constrained by the absence of short-term liquidity management instruments comparable to T bills. That argument is rapidly losing relevance. With hybrid Sukuk, regular sovereign issuances and the introduction of short-term Sukuk, Pakistan now possesses the essential building blocks of a modern Islamic money market.
These achievements deserve recognition. The Ministry of Finance, the State Bank of Pakistan (SBP) and the Securities and Exchange Commission of Pakistan (SECP) have worked in close coordination to transform Islamic finance from a parallel banking model into a comprehensive financial ecosystem. The ministry has provided strategic policy direction through the Post-2027 Financial System Strategy.
The recently unveiled Post-2027 Financial System Strategy represents perhaps the most important milestone in this journey. It translates the federal Shariat Court’s landmark judgment of April 2022 into an implementable roadmap while balancing constitutional obligations with financial stability. The strategy rightly proposes that all new domestic financial transactions and government borrowing from 1 January 2028 should be undertaken through Shariah-compliant structures.
The strategy seems both practical and responsible. Financial systems cannot be transformed overnight. Yet, as Pakistan approaches this historic milestone, one fundamental policy question deserves careful consideration. Should the transition end with a genuinely Islamic financial system, or with a permanent dual banking model? This question is not merely economic; it is constitutional. Article 38(f) of the Constitution of Pakistan obligates the State to eliminate riba as early as possible.
The Federal Shariat Court’s judgment reinforced this constitutional commitment by directing the elimination of riba by the end of 2027. Neither the Constitution nor the court’s judgment distinguishes between domestic and foreign institutions, public or private entities, or government and commercial transactions. The constitutional obligation applies to the state and, by extension, to the financial system operating under its jurisdiction. Temporary accommodations may be necessary during implementation. However, temporary transition arrangements should not evolve into permanent exemptions.
Accordingly, Pakistan should gradually transition all future domestic sovereign borrowing to Sukuk-based financing while allowing existing conventional debt to be converted to a Shariah-compliant structure. Such an approach preserves contractual sanctity while eliminating the existing stock of interest-based instruments.
Pakistan should adopt a similar long-term strategy for its external financing. Existing foreign obligations should naturally be honoured, but sincere efforts need to be made to convert them to Shariah-compliant rules. Moreover, future financing should only utilise international sovereign Sukuk, Islamic syndicated facilities and other Shariah compliant modes.
To ensure the success of the post-2027 strategy, policymakers should also establish measurable annual conversion targets across banking, capital markets and public finance. Temporary exemptions should carry clearly defined sunset clauses and periodic reviews to ensure that they remain transitional. Continued reforms in taxation, legal documentation, accounting standards, liquidity management and human capital development will further strengthen the ecosystem and remove the remaining challenges.
Perhaps the strongest argument for complete conversion, however, is not legal or regulatory — it is economic. The market has already voted with the customers’ continued shift towards Islamic banking at record pace. The debate, therefore, is no longer whether Islamic finance can support Pakistan’s economy. The evidence overwhelmingly suggests that it can. The real question is whether Pakistan now has the confidence to complete the journey it began decades ago.
If Pakistan remains committed to its constitutional vision, it has an opportunity to become the first major economy in the world to successfully transform its entire financial system into a comprehensive, modern and globally competitive Islamic financial ecosystem and also honour the aspirations of millions of Pakistanis who have long believed that economic progress and Islamic principles can advance together.
Ahmed Ali Siddiqui was the founding
director of IBA CEIF. Email: aasiddqui@iba.edu.pk.
Rabia Manahil works for Meezan Bank
Published in Dawn, The Business and Finance Weekly, August 3rd, 2026
