Riba elimination ‘strategy paper’

The Post-2027 Financial System in Pakistan strategy paper, released by the Ministry of Finance, is an important acknowledgement that the elimination of Riba [Quranic term for unjust gain and enrichment by exploitative use of capital without any real underlying economic activity] can no longer remain an open-ended constitutional promise. The paper correctly links the transition to the Federal Shariat Court judgment of April 28, 2022, and the Constitution (Twenty-sixth Amendment) Act, 2024, which inserted a deadline into Article 38(f) for the complete elimination of Riba before January 1, 2028.

The main weakness is that the paper converts a binding constitutional requirement into a gradual, conditional and partly voluntary programme. The strategy therefore supports the objective of eliminating Riba while simultaneously preserving routes through which interest-based finance could continue after the constitutional deadline.

The Islamic legal standard is stricter than the strategy’s policy language. The Federal Shariat Court held in Shariat Petition No. 30-L of 1991 and connected matters that Riba is prohibited in all its forms and manifestations, while the International Islamic Fiqh Academy’s Resolution No. 10 (10/2) of 1985 treats any stipulated increase on a loan or overdue debt as prohibited Riba.

The Qur’anic rule permits the creditor to recover the principal but not an agreed increase merely because time has passed, while Sahih Muslim 1598 condemns the receiver, payer, recorder and witnesses of an interest transaction. The legal test is therefore based on economic substance rather than terminology. The contract does not become Islamic merely because interest is renamed as profit or mark-up where the financier receives a predetermined debt increase without genuine ownership or risk.

The strategy’s most serious contradiction concerns foreign-owned financial institutions. The paper expects most domestically owned institutions to convert, but it makes the transformation of majority foreign-owned banks voluntary and later suggests that such banks may continue offering both conventional and Islamic products.

The exemption is inconsistent with Article 38(f) of the Constitution because the constitutional character of Riba cannot depend on the nationality of shareholders. The same interest-bearing loan cannot be prohibited when issued by a Pakistani-controlled bank and acceptable when issued by a foreign-controlled bank [Rethinking Pakistan’s economic model—III: Banking, debt & Illusion of Reform, Minute Mirror, May 3, 2026]

The exemption would create a two-tier market in which domestic banks bear conversion costs while foreign institutions retain conventional products. The strategy should instead impose an activity-based rule under which no licensed institution, regardless of ownership, may originate a new interest-bearing contract in Pakistan after December 31, 2027.

The treatment of existing conventional debt creates a second constitutional problem. The strategy promises that obligations contracted before the deadline will continue according to their original terms and that conventional public debt will be replaced only when each instrument matures.  The approach may preserve interest payments for years after January 1, 2028, where sovereign bonds, multilateral loans or syndicated facilities have long residual maturities.

The concern does not mean that Pakistan should repudiate contracts, because unilateral default could trigger litigation, acceleration, cross-default and loss of market access. The Government must distinguish unavoidable transitional obligations from liabilities that can be refinanced, converted or redeemed early. The policy should require a debt-by-debt register showing principal, interest, maturity, governing law, conversion options, creditor consent and final sunset dates rather than granting a blanket exception until maturity.

The language governing new finance is also too weak. The strategy says that the Government will “explore all options” for Shariah-compliant domestic funding and will “strive” to obtain Islamic foreign financing where reasonable and commercially viable options are available. The constitutional obligation is not a best-efforts commitment conditioned on pricing convenience.

The revised policy should prohibit new interest-bearing public borrowing after the cut-off and require every proposed Murabaha, Ijarah, Istisna, Salam, Musharakah, Mudarabah or Wakalah structure to receive documented legal, fiscal and Shariah approval.

The legislative programme must also identify the precise amendments required to the State Bank of Pakistan Act, 1956, the Banking Companies Ordinance, 1962, the Financial Institutions (Recovery of Finances) Ordinance, 2001, the Government Securities Act, 2006, the Securities Act, 2015, the Companies Act, 2017, the Deposit Protection Corporation Act, 2016, the Insurance Ordinance, 2000 and relevant tax, insolvency and provincial laws. The paper’s assertion that banking-law amendments are “minor” understates the scale of the required transformation.

The monetary policy framework requires scrutiny because Shariah compliance cannot be achieved merely by relabeling conventional central bank instruments [Who will draft Riba Prohibition Law? Minute Mirror, April 7, 2026]. The strategy states that the State Bank will use Shariah compliant open market operations and standing facilities, yet SBP’s DMMD Circular No. 24 of 2021 provides that the expected return on its Mudarabah based standing facility equals the conventional overnight reverse repo ceiling rate.

The use of a conventional benchmark does not automatically invalidate a genuine Mudarabah, but mechanical replication creates a material form over substance risk. The revised framework should require transparent profit pools, ex-post reconciliation of returns, genuine exposure to permissible assets and clear treatment of losses—Is Riba free banking possible?, Dawn, April 27, 2012.

The framework should also explain how reserve requirements, lender-of-last-resort support, liquidity absorption, foreign-exchange operations and monetary transmission will function without continuing dependence on an interest-rate corridor.

The proposed hybrid Ijarah-cum-Murabaha Sukuk and Assets Registry Company are practical responses to the shortage of sovereign assets, but they require stronger safeguards. The paper states that the hybrid structure could support Sukuk issuance approaching twice the value of underlying assets and that registered federal assets would remain in governmental use.

The International Islamic Fiqh Academy requires Sukuk to establish true ownership, effective disposal rights and corresponding liability rather than fictitious or circular asset transfers. The registry should disclose title, valuation, encumbrance, beneficial ownership, usufruct and the exact risk transferred to investors.

The treatment of retained earnings also requires a purification methodology separating lawful capital and trading income from identifiable interest-derived earnings. The paper’s statement that converting banks may keep retained earnings is incomplete unless independent Shariah audit, charitable disposal of prohibited income and transparent shareholder disclosure are mandatory.

The comparative experience of major Gulf jurisdictions demonstrates that strong Shariah governance must be grounded in enforceable regulation. The Saudi Central Bank’s Shariah Governance Framework, issued through Circular No. 41042498 under the Saudi Central Bank Law and Banking Control Law, assigns responsibility to boards, management, Shariah committees, compliance, risk management and internal audit.

The UAE’s Decretal Federal Law No. 14 of 2018 establishes the Higher Shari’ah Authority as the ultimate interpretive authority for Islamic finance. The Central Bank of Bahrain and Financial Institutions Law, promulgated by Decree No. 64 of 2006, supports a separate CBB Rulebook Volume 2 for Islamic banks.

The Kuwait model adds a dedicated Islamic-banking section to Law No. 32 of 1968 through Law No. 30 of 2003. The jurisdictions operate dual systems, however, and therefore cannot justify Pakistan’s continuation of conventional finance after a constitutionally mandated elimination date.

The wider international comparison reinforces the need for statutory clarity. The Omani Banking Law issued under Royal Decree No. 2/2025 expressly regulates Islamic, digital and investment banking. The Malaysian Central Bank Act 2009 gives Bank Negara Malaysia’s Shariah Advisory Council authoritative status and makes its rulings binding in relevant court and arbitration proceedings.

The Indonesian Law No. 21 of 2008 provides a dedicated framework for Sharia banking, licensing, ownership, activities and prudential supervision. The Brunei Islamic Banking Order, 2008, S 96/2008, similarly establishes a distinct statutory regime. The lesson is not to copy any single jurisdiction because most comparison countries permit conventional and Islamic finance to coexist.

The lesson is that Pakistan requires clearer primary legislation, a binding national Shariah authority, judicial consistency, external Shariah audit and enforceable remediation where non-compliance occurs.

The strategy should therefore be revised around a binding prohibition on new interest-bearing contracts after December 31, 2027, a uniform rule for domestic and foreign institutions, and a transparent conversion plan for every regulated entity. The strategy should establish a National Shariah Authority with jurisdiction across banking, public debt, monetary policy, securities, Takaful, pensions and non-bank finance.

The strategy should require genuine ownership, possession, risk transfer and profit generation in every Islamic structure, together with annual external Shariah audits, publication of non-compliant income and mandatory purification. The strategy should also include measurable objectives for financial inclusion, small-business finance, affordable housing, agricultural risk sharing and Qard Hasan so that the reform advances the justice-based purposes of Islamic finance rather than merely changing product labels.

The strategy is therefore a valuable starting point but not yet a complete policy settlement. Though the strategy correctly recognizes the constitutional deadline, the need for Sukuk infrastructure, legal reform, liquidity facilities, safety nets and institutional capacity.

The strategy, however, weakens its own objective through voluntary foreign-bank conversion, open-ended servicing of conventional debt, commercially conditioned Islamic financing, interest-linked monetary benchmarks and insufficient rules on ownership, purification and enforcement. The transition will become credible only when aspirational language is replaced with binding statutory duties and when Islamic contracts transfer real ownership, risk and responsibility rather than reproducing conventional interest outcomes through different terminology.

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Dr. Ikramul Haq, Advocate Supreme Court, specializes in constitutional, corporate, environment, media, ML/CFT related laws, IT, intellectual property, arbitration and international tax laws.  He holds an LLD in tax laws with specialization in transfer pricing. He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He served Civil Services of Pakistan from 1984 to 1996.

He established Huzaima & Ikram in 1996 and is presently its chief partner. He studied journalism, English literature and law. He is Chief Editor of Taxation.  He is country editor and correspondent of International Bureau of Fiscal Documentation (IBFD) and member of International Fiscal Association (IFA).  He is Visiting Faculty at Lahore University of Management Sciences (LUMS) and member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE).

He has coauthored with Huzaima Bukhari many books that include, Tax Reforms in Pakistan: Historic & Critical Review, Towards Broad, Flat, Low-rate, and Predictable Taxes (third edition, 2024),  Pakistan: Enigma of Taxation, Towards Flat, Low-rate, Broad and Predictable Taxes (revised/enlarged edition of December 2020), Law & Practice of Income Tax, Law , Practice of Sales Tax, Law and Practice of Corporate Law, Law & Practice of Federal Excise, Law & Practice of Sales Tax on Services, Federal Tax Laws of Pakistan, Provincial Tax Laws, Practical Handbook of Income Tax, Tax Laws of Pakistan, Principles of Income Tax with Glossary and Master Tax Guide, Income Tax Digest 1886-2011 (with judicial analysis).

He is author of Commentary on Avoidance of Double Taxation Agreements, Pakistan: From Hash to Heroin, its sequel Pakistan: Drug-trap to Debt-trap and Practical Handbook of Income Tax. Two books of poetry are Phull Kikkaran De (Punjabi 2023) and Nai Ufaq (Urdu 1979 with Siraj Munir and Shahid Jamal).

He regularly writes columns/article/papers for many Pakistani newspapers and international journals and has contributed over 3000 articles on a variety of issues of public interest, printed in various journals, magazines and newspapers at home and abroad.

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Abdul Rauf Shakoori, Advocate High Court, is a subject-matter expert on AML-CFT, Compliance, Cyber Crime and Risk Management. He has been providing AML-CFT advisory and training services to financial institutions (banks, DNFBPs, Investment companies, Money Service Businesses, insurance companies and securities), government institutions including law enforcement agencies located in North America (USA & CANADA), Middle East and Pakistan.  His areas of expertise include legal, strategic planning, cross-border transactions including but not limited to joint ventures (JVs), mergers & acquisitions (M&A), takeovers, privatizations, overseas expansions, USA Patriot Act, Banking Secrecy Act, Office of Foreign Assets Control (OFAC).

Over his career he has demonstrated excellent leadership, communication, analytical, and problem-solving skills and have also developed and delivered training courses in the areas of AML/CFT, Compliance, Fraud & Financial Crime Risk Management, Bank Secrecy, Cyber Crimes & Internet Threats against Banks, E–Channels Fraud Prevention, Security and Investigation of Financial Crimes. The courses have been delivered as practical workshops with case study driven scenarios and exams to ensure knowledge transfer.

His notable publications are Rauf’s Compilation of Corporate Laws of Pakistan, Rauf’s Company Law and Practice of Pakistan and Rauf’s Research on Labour Laws and Income Tax and others.

His articles include: Revenue collection: Contemporary targets vs. orthodox approach, It is time to say goodbye to our past, US double standards, Was Due Process Flouted While Convicting Nawaz Sharif?, FATF and unjustly grey listed Pakistan, Corruption is no excuse for Incompetence, Next step for Pakistan, Pakistan’s compliance with FATF mandates, a work in progress, Pakistan’s strategy to address FATF Mandates was Inadequate, Pakistan’s Evolving FATF Compliance, Transparency Curtails Corruption, Pakistan’s Long Road towards FATF Compliance, Pakistan’s Archaic Approach to Addressing FATF Mandates, FATF: Challenges for June deadline, Pakistan: Combating the illicit flow of money, Regulating Crypto: An uphill task for Pakistan. Pakistan’s economy – Chicanery of numbers. Pakistan: Reclaiming its space on FATF whitelist. Sacred Games: Kulbhushan Jadhav Case. National FATF secretariat and Financial Monitoring Unit. The FATF challenge. Pakistan: Crucial FATF hearing. Pakistan: Dissecting FATF Failure, Environmental crimes: An emerging challenge, Countering corrupt practices .

The recent publication, coauthored by these writes with Huzaima Bukhari is:                       

Pakistan Tackling FATF: Challenges & Solutions, available at:

https://aacp.com.pk/book-detail/pakistan-tackling-fatf-challenges-and-solutions-35

https://www.amazon.com/dp/B08RXH8W46