Finance Minister Ishaq Dar on Wednesday announced that the incumbent government will implement a Federal Shariat Court (FSC) decision for Pakistan to adopt an interest-free banking system, adding that instructions had been issued to withdraw objections to the ruling.
In a pre-recorded, brief statement, Dar said that the State Bank of Pakistan (SBP) and the National Bank of Pakistan (NBP) would withdraw their appeals against the FSC decision from April, suggesting that authorities are now committed to eliminating interest from banking transactions by December 2027.
“With the permission of Prime Minister Shehbaz Sharif and consultations with the SBP governor, I am announcing a decision of the PDM [Pakistan Democratic Movement] government that both the SBP and NBP would withdraw their appeals filed in the Supreme Court of Pakistan against the FSC order within the next few days,” he said. This was also conveyed by former finance minister Miftah Ismail in June, but none of the appeals have been withdrawn thus far.
According to the minister, there had been significant progress in adopting an Islamic financial system during the Pakistan Muslim League (Nawaz)’s last term from 2013 and 2018. However, he claimed, the speed of achieving Shariah compliance could not be sustained subsequently. He vowed that it was the government’s priority to make decisions as per the teachings of the Quran and Sunnah.
Acknowledging the challenges that would emerge from the country’s banking and financial systems being based on differing philosophies, he stressed this could not be achieved overnight. However, he maintained, the government would strive to implement the FSC’s decision as quickly as possible.
The FSC initially declared interest-based banking against the teachings of Islam in December 1991, requiring the government to eliminate it by June 1992. This order could not be implemented as the PMLN-led government of the time appealed the ruling in the Supreme Court, stressing that such a rapid transformation carried significant risks. While the apex court initially upheld the FSC judgement, it subsequently suspended its implementation and referred it back for review to the FSC.
The issue was taken up once again in April, with the FSC noting that sufficient time had passed since 1991 for the country’s banking system to be adapted to an interest-free model. It then directed the government to eliminate interest from Pakistan by Dec. 31, 2027. This ruling was then challenged in the Supreme Court by the SBP, NBP, MCB, United Bank Limited and Allied Bank Limited. In its appeal, the SBP said the order lacked clarity on how to ensure the stability and security of the financial sector, which has grown increasingly linked to the prevailing global financial system.
According to the SBP, Islamic banks across Pakistan currently comprise 19.4 percent of the country’s overall banking system in terms of assets. It noted in its appeal that the investment required for 100 percent conversion required significantly more time than had been granted by the FSC.