THE keen interest that the government’s economic team led by Finance Minister Muhammad Aurangzeb is showing to promote Islamic finance raises hopes that the country’s economic system will get rid of Riba by the deadline of January 01, 2028 as stipulated in the 26th Constitution Amendment. The speech that the Finance Minister delivered at the inaugural session of the Second International Islamic Capital Markets Conference & Expo in Karachi reflects determination and sincerity of the Government to move firmly towards realization of the goal. He described the conference as reflective of Pakistan’s commitment to fostering a robust Islamic capital market and highlighted the government’s dedication to transforming the financial ecosystem in line with Shariah principles.
Going by the fact that Muhammad Aurangzeb has the track record of delivering on his plans and commitments, it is expected that under his guidance practical steps will be taken by all stakeholders to complete this challenging task within the time frame given by the Constitution. There is no doubt that Herculean efforts are needed to translate the dream of elimination of Riba from the economy because of the fact that the current system is heavily interest based and is deeply linked to the global financial system based on Riba. However, apart from several Muslim countries, a number of other countries of the world have successfully evolved different instruments of Islamic finance, which have become popular and can be replicated in Pakistan as well. A remarkable progress has also been made in Pakistan as well due to the active interest of the banking sector to offer Shariah-compliant instruments to its customers, attracting a significant investment. Following the decision of the Federal Shariah Court (FSC), issued in 2022 (ruling that interest or Riba is forbidden in all its forms and must be eliminated by December 2027, the State Bank intensified its efforts to transform the country’s banking system to align with Islamic principles. The Securities and Exchange Commission of Pakistan (SECP) is also engaged in efforts to create an enabling environment for Islamic finance through regulatory frameworks, Shariah-compliant indices and governance guidelines.
Leading financial institutions, including major banks, began establishing Islamic branches, with the objective of full conversion to Shariah-compliant operations by 2027. The SBP has issued regulations for Islamic banking, established a Shariah Board and aims to have Islamic banks account for 30% of banking assets and deposits by 2025. Some conventional banks are converting to Islamic banks due to the growth potential and more relaxed regulations. This process will surely get momentum after reports that the Meezan Bank, which is one of the most prominent Islamic banks in the country, showed sustained profitability. It reported an after-tax profit of Rs. 84.5 billion last year, marking an 88% increase over preceding year – much higher than other banks like HBL and NBP that are considered as banking giants in Pakistan. The Finance Minister also highlighted the progress that the country has made in moving towards Shariah-based finance and investment. He pointed out that as of June 30, 2024, 56% of the Pakistan Stock Exchange’s market capitalization comprised Shariah-compliant securities. In the collective investment segment, 48% of mutual fund assets, 66% of voluntary pension fund assets, and 95% of REIT assets are Shariah-compliant. However, due to the complexity of the situation, the Minister for Finance rightly underlined that realizing the full potential of Islamic finance required collaborative efforts from scholars, institutions, regulatory bodies, and practitioners to overcome challenges, develop innovative products, and build public trust. No doubt, the Minister has before him a number of other challenging assignments as well but it will be a great service if he succeeds in meaningfully promoting the goal of getting rid of Riba from the country.
