Pakistan plans to eradicate riba by 2028 in push for Islamic financial system

ISLAMABAD: In a historic move, Pakistan’s parliament passed a constitutional amendment bill on Sunday, mandating the complete elimination of all forms of “riba” or interest by January 1, 2028. This milestone decision is expected to significantly bolster Islamic banking in the country, aligning the financial sector with Shariah law.

The amendment comes in response to a directive from Pakistan’s Federal Shariat Court (FSC), which, in April 2022, ordered the government to eliminate interest by 2027.

The FSC, responsible for ensuring that Pakistani laws adhere to Islamic principles, declared that Islam unequivocally prohibits all forms of interest, or riba, as it is viewed as exploitative and unjust in Islamic teachings.

The ruling coalition government, in the early hours of Sunday, successfully passed the 26th Constitutional Amendment Bill with the necessary two-thirds majority in both the Senate and National Assembly.

While the amendment primarily focuses on reforms related to the judiciary—an aspect that has sparked intense political debate—it also introduces a significant change to Article 38(f) of the constitution. Previously, this article urged for the elimination of riba “as early as possible.”

The new language now mandates that riba be completely eradicated before the start of 2028.

The official text of the bill states: “In the Constitution, in Article 38, for paragraph (f), the following shall be substituted, namely: (f) eliminate riba completely before the first day of January, two thousand twenty-eight.”

Growth of Islamic banking in Pakistan

The passage of this bill marks a crucial step toward promoting Islamic banking in Pakistan. In 2023, the State Bank of Pakistan set a target to increase the share of Islamic banking in the country’s commercial banking system to 35 per cent by 2025. Currently, Islamic banking accounts for about 20 per cent of Pakistan’s overall banking industry.

Pakistan already boasts multiple fully operational Islamic banks, offering a diverse range of Shariah-compliant financial products. Over the past five years, Islamic banks have seen impressive growth, with assets increasing by 25 per cent and deposits by 22 per cent annually, according to data from the central bank.

Economic benefits of eliminating riba

The elimination of riba could have far-reaching implications for Pakistan’s financial landscape. Interest-free banking systems are generally more equitable, allowing for a more just distribution of wealth. This is particularly significant in a country like Pakistan, where many borrowers struggle to repay loans due to high-interest rates.

For businesses and individuals who find themselves trapped in debt, the removal of interest would provide significant relief, making it easier for them to access capital without the burden of accumulating exorbitant repayments.

Additionally, it aligns Pakistan’s financial practices more closely with Islamic teachings, which many citizens view as a positive shift towards a more ethical economy.

Potential challenges and downsides

However, the elimination of riba also presents challenges. Interest is a fundamental component of conventional banking systems globally, and its removal could lead to reduced foreign investment, as many international financial institutions rely on interest-based models.

Furthermore, there are concerns that shifting to a fully interest-free system could limit the availability of credit, slowing down economic growth and innovation in sectors that rely heavily on loans and financing.

This could result in financial institutions needing to develop new models of profit-sharing or equity-based financing, which may take time to fully integrate.

For the average citizen, the transition to an interest-free economy might offer some immediate benefits, but it could also mean fewer options for financing in the short term. Adjusting to new banking practices may pose challenges, especially for those unfamiliar with Islamic financial products.

Islamic perspective on riba

Islam takes a clear stance against riba, viewing it as inherently exploitative. In Surah Ar-Rum, the Quran states: “Whatever riba (increased amount) you give, so that it may increase in the wealth of the people, it does not increase with Allah.” This indicates that wealth accumulated through interest does not hold any true value in the eyes of God.

Similarly, in Surah An-Nisa, it is mentioned that riba is a cause of punishment: “And for their charging riba while they were forbidden from it, and for their devouring of the properties of the people by false means. We have prepared, for the disbelievers among them, a painful punishment.”

Another reminder is found in Surah Al-Imran, which warns against the accumulation of wealth through interest: “O you who believe, do not eat up the amounts acquired through riba, doubled and multiplied. Fear Allah, so that you may be successful.”

These verses illustrate the strong prohibition of riba in Islam, highlighting its exploitative nature and its contrast with ethical wealth accumulation, which prioritises fairness and justice.

Challenges ahead

As Pakistan moves towards the 2028 deadline, the country will need to navigate the complexities of transitioning to an interest-free banking system.

While the promotion of Islamic banking is expected to offer long-term benefits, the shift will require careful management and a reevaluation of Pakistan’s financial infrastructure to ensure a smooth transition for businesses, investors, and citizens alike.