Key facts
- Pakistan will require all domestically owned banks to adopt a Sharia-compliant model by 2028.
- Foreign banks will be allowed to continue offering conventional banking services.
- The transition aims to eliminate interest-based (riba) finance in Pakistan.
- Governments will raise all new financing through Islamic instruments from 2028.
- Existing conventional loans will mature before conversion to Sharia-compliant terms.
- The State Bank of Pakistan is developing Sukuk instruments for liquidity management.
Pakistan is set to mandate a complete shift to Islamic finance for its domestic banking sector by 2028, eliminating interest-based (riba) transactions. This significant reform, driven by a Federal Shariat Court directive and public preference, aims to create a Riba-free financial system.
Under the new regulations, all domestically owned banks must operate under a Sharia-compliant model. However, foreign banks will retain the ability to offer conventional, non-Islamic financial services alongside their Islamic offerings, potentially creating a competitive edge for them.
The government plans to raise all new domestic and international financing through Islamic instruments from 2028, with existing conventional loans continuing until maturity. To facilitate this, the Finance Division will establish an Asset Registry Company for sovereign Sukuk issuance, and the State Bank of Pakistan is developing short-term Sukuk for liquidity management.
Amendments to laws are planned to strengthen the legal framework for Islamic finance. Most conventional banks already possess the necessary technological infrastructure, and staff training programs are in progress. The State Bank will also transition its monetary policy implementation to Sharia-compliant instruments.
Islamic banking has seen substantial growth in Pakistan, with assets reaching Rs. 7.2 trillion and deposits Rs. 5.8 trillion by mid-2023, comprising 23% of total deposits. Despite this, conventional banking still holds a 79% market share. Surveys indicate over 80% of Pakistanis prefer Islamic banking, yet only 14% have access to its services, highlighting a significant untapped market and potential for financial inclusion, particularly for the unbanked population and SMEs.