ISLAMABAD: While the Federal Shariat Court (FSC) judgment of 2022 and the 26th Constitutional Amendment envisage a Riba-free financial system post-2027, the Ministry of Finance stated transition towards Riba-free financial system is likely to be phased and gradual to avoid any major disruption, which may have far-reaching implications for the economy.
In its report titled “Strategy Paper Post 2027 Financial System in Pakistan”, released by the Ministry of Finance, it is stated realisation of post-2027 financial system envisaged in the strategy is contingent upon addressing several key challenges and risks.
The report identifies conversion of existing public debt into Shariah-compliant debt as most critical challenge. To address this, the strategy proposes establishment of an Asset Registry Company (ARC), along with securing consent of federal government entities to transfer their non-current assets to ARC for issuance of Sukuk (Islamic bonds). It also emphasises need for a Cabinet-approved mechanism for assigning assets to ARC, developing a regular Sukuk issuance framework and introducing an annual Sukuk issuance calendar.
Another key challenge is development and issuance of short-term Sukuk with three-month and six-month maturities. The State Bank of Pakistan (SBP) and commercial banks are reportedly at an advanced stage of finalising structure of these short-term Sukuk, with the issue expected to be resolved before December 2027.
The report notes amendments to various federal and provincial laws must be enacted by December 2027 to establish a legal and regulatory framework that ensures Shariah compliance, consumer protection and financial stability.
To facilitate this, a comprehensive review of laws governing financial and commercial activities has largely been completed, necessary amendments have been identified and legislative process will begin shortly.
From an information technology perspective, the report considers technical risks to be relatively limited because most conventional banks already have required infrastructure through their Islamic banking windows.
Nevertheless, to reduce execution risks and address potential system gaps, relevant IT Working Group has prepared baseline specifications for the required technology ecosystem.
The report highlights several initiatives have already been launched to provide large-scale training and capacity building for employees of conventional banks in Islamic finance. These efforts are expected to strengthen institutional readiness, bridge knowledge gaps and support a smooth transition to a Shariah-compliant financial system. The ministry maintains transition to a Riba-free financial system will be gradual, orderly and free from major disruptions, while maintaining financial stability and compliance with international prudential and supervisory standards.
Most domestically owned financial institutions are expected to complete their transformation in accordance with evolving legal, regulatory and business environment, as well as availability of Shariah-compliant liquidity management systems.
In contrast, most foreign-owned banks and financial institutions are expected to continue offering both Islamic and conventional financial products.
After 2027, federal and provincial governments are expected to ensure all new domestic and international financing is raised through Shariah-compliant instruments and financing modes. All necessary arrangements are expected to be finalised and officially notified by December 2027.
The report clarifies all existing contractual commitments, including conventional financing obtained before December 2027, will be honoured according to their original terms. Outstanding conventional debt as of December 31, 2027 will be converted into Shariah-compliant financing upon its respective maturity.
Th federal government will establish a mechanism for regular issuance of Sukuk, including creation of Asset Registry Company within the Finance Division. The SBP will also formulate and implement monetary policy using Shariah-compliant instruments.
The report concludes the government, SBP, Securities and Exchange Commission of Pakistan (SECP) and other relevant stakeholders will work together to implement post-2027 strategy. Their priorities include: Enacting legislative amendments required under FSC judgment; developing Shariah-compliant infrastructure for public finance; arranging Shariah-compliant foreign currency financing with multilateral and bilateral institutions; reviewing regulatory and supervisory framework; strengthening Shariah-compliant financial safety mechanisms; developing a Shariah-compliant monetary policy framework; promoting public awareness and building institutional capacity.
These measures are intended to ensure transition after 2027 is supported by a comprehensive legislative, regulatory and supervisory framework, enabling a smooth shift to a fully Shariah-compliant financial system.
The strategy also calls for harmonising laws with FSC judgment while strengthening public finance through diversified sovereign Sukuk structures and the establishment of a centralised Asset Registry Company (ARC).
