Islamic Banking

The establishment of Islamic banking in Pakistan has its roots in the nation's founding in 1947. The vision articulated by Quaid-e-Azam Muhammad Ali Jinnah, Pakistan's founding father, emphasized the significance of Islamic financial practices. In his 1948 address at the State Bank of Pakistan (SBP), he emphasized the need to develop “banking practices compatible with Islamic ideas of social and economic life”. He also envisioned to “present to the world an economic system based on true Islamic concept of equality of manhood and social justice.”

Initially, the research on Islamic finance was undertaken by the eminent economists and Shariah scholars both from abroad and Pakistan. An Islamic Economic Division was created in the Research Department of SBP in 1950s and was entrusted to undertake research on Islamic economic system.

In line with this foundational vision, the Council of Islamic Ideology (CII), a constitutional body, was tasked with formulating a comprehensive framework for integrating Islamic economic principles into Pakistan's economy in 1963. After extensive deliberations, the CII advised the government in 1969 that interest-based lending constituted Riba (Interest). Further discussions led to a CII resolution prohibiting interest in all forms, recommending the establishment of a committee to assist in reforming the interest-based system according to Islamic principles.

Efforts for economy-wide elimination of Riba started in late 1970s and several noteworthy and practical steps were taken in 1980s. In many ways, it was the most advanced Islamic finance model compared to any other model being practiced in the world at that time.

In 1980, the CII, with the collaboration of a 15-member committee, submitted a report outlining the steps for aligning the economy with Islamic principles. Subsequently, numerous laws were amended and new laws were enacted to facilitate Islamization of economy during this period in which State Bank played a major role. In addition, following the promulgation of Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980, a regulatory framework for Modaraba companies was introduced in 1980 as well as Modaraba Rules and Prudential Regulations in 1981. For the banking system, SBP issued BCD Circular No. 13 in 1984 titled “’Elimination of Riba' from the Banking System”, which outlined steps to be taken for shifting banking system to Islamic modes of financing. In 1985, the government aimed transition to interest-free financing for all sectors, including government entities, public corporations and private companies.

However, by the late 1980s, concerns and complaints regarding the implementation of Islamic banking practices emerged. The Federal Shariat Court (FSC) delivered a verdict on November 14, 1991, declaring that existing banking and financial practices, and a multitude of fiscal laws in Pakistan were predicated upon interest. Consequently, the FSC directed the government to implement legislative actions to abolish interest from Pakistan's economy and financial sector by June 30, 1992.

Subsequently, the government and financial institutions filed an appeal with the Supreme Court of Pakistan (SCP). The appeal process extended until 1999, and on December 23, 1999, the SCP upheld the FSC's decision, recommending the abolition of the prevailing interest-based system by June 30, 2001.

While the government initiated steps to comply with the SCP's order, the deadline was not met, and an extension was sought until June 30, 2002. Recognizing the need for defined parameters for implementing an Islamic economic system, the government decided on a phased and gradual approach to eliminate interest. Consequently, Islamic banking was re-launched in 2001 as a parallel system to conventional banking.

As a primary step in this direction, the SBP established a dedicated Islamic Banking Department (IBD) to foster the growth and strengthening of the Islamic banking sector. In 2001, the SBP issued a specific Islamic banking policy outlining detailed criteria for establishing Islamic banks. In 2002, an amendment to the Banking Companies Ordinance (BCO) 1962 allowed commercial banks to establish subsidiaries for Sharia-compliant operations. This new framework permitted three models of Islamic banking institutions to operate in the country:

• Full-fledged Islamic banks
• Islamic banking subsidiaries of conventional banks
• Islamic banking branches of conventional banks

In 2002, Meezan Bank Limited became the first fully operational Islamic bank in the country. The SBP also introduced Shariah compliance framework for Islamic banking institutions, which included requirements of: (i) a Shariah board at the SBP, (ii) Shariah advisors at all IBIs, (iii) Internal Shariah audit functions, and (iv) Shariah inspections conducted by the SBP.

The Shariah Governance Framework (SGF) stipulates a comprehensive structure to ensure that Islamic Banking Institutions (IBIs) operate in compliance with Shariah principles. For details, see

The Islamic banking bulletin is a quarterly publication of Islamic Finance Policy Department (IFPD) which disseminates quarterly progress of the Islamic banking and finance industry regulated by SBP.

Islamic Banking Bulletin archive is available at the following

The Knowledge, Attitude and Practices of Islamic Banking in Pakistan (KAP) survey was conducted in 2014 to quantify demand for Islamic banking in the country – both for retail and corporate customers, and identifies demand-supply gaps. It is based on a nation-wide survey of 9,000 households (Banked and Non-Banked) and 1,000 Corporate.