KARACHI: Pakistan’s government has unveiled a comprehensive roadmap for transforming the country’s financial sector into a fully Shariah-compliant system, setting the stage for one of the most significant economic transitions in the country’s history as a constitutional deadline approaches.
A strategy paper released this month, “Post-2027 Financial System in Pakistan,” lays out how the country intends to eliminate riba (interest) from its banking and financial system before January 1, 2028, a deadline rooted in a landmark 2022 ruling by the Federal Shariat Court (FSC) and reinforced by the 26th Constitutional Amendment passed in October 2024.
The court had declared that “Riba is absolutely prohibited in all its forms and manifestations,” giving the state until the end of 2027 to bring the system into compliance.
A System Already Halfway There
Pakistan’s financial sector currently operates a dual-track model, with conventional and Islamic banks running in parallel since the early 2000s. That parallel system has grown substantially: Islamic banking institutions now account for 23 percent of total banking assets, 28 percent of deposits, and 38 percent of financing, according to data in the strategy paper.
As of December 2025, the Islamic Banking Industry comprised seven full-fledged Islamic banks and 16 conventional banks operating dedicated Islamic banking branches, with combined assets of roughly PKR 14,467 billion.
The paper notes that Islamic banks have not only kept pace with their conventional counterparts but in some respects outperformed them, citing a non-performing financing ratio of 2.4 percent, provisioning coverage above 100 percent, and a capital adequacy ratio of 17.5 percent — all signs, the authors argue, of institutional readiness for a broader shift.
A Gradual, Not Abrupt, Transition
Despite the hard deadline, officials are at pains to stress that the changeover will not be disruptive. The strategy commits to honoring all existing conventional contracts and obligations, domestic and international, according to their original terms, with conventional financing replaced by Shariah-compliant alternatives only as each instrument reaches maturity.
Banks with majority foreign ownership will not be compelled to convert, leaving them free to continue offering both conventional and Islamic products.
After 2027, the government intends to fund all fresh domestic borrowing exclusively through Shariah-compliant instruments, while existing conventional securities will still be usable for liquidity management. Pakistan’s central bank, the State Bank of Pakistan (SBP), has committed to issuing Sukuk across a range of maturities, including short-term instruments of three, six, and twelve months, to help banks manage liquidity through the changeover.
The Sukuk Breakthrough
One of the paper’s headline disclosures is the development of a new “hybrid Sukuk” structure, combining Ijarah (leasing) and Murabaha (cost-plus sale) contracts, that has already received approval from the SBP’s Shariah Advisory Committee.
The structure allows the government to issue Sukuk valued at nearly twice the worth of the underlying assets backing them, substantially expanding its capacity to raise Shariah-compliant financing. The first such issuance, worth PKR 109 billion with one-year and ten-year maturities, was completed on April 17, 2026.
To sustain future issuances, the government plans to establish an Assets Registry Company (ARC), a wholly state-owned entity housed within the Finance Division, tasked with cataloguing non-current assets held by the federal government and its entities.
Crucially, assets assigned to the registry will remain in normal use by the agencies that own them; only their designation as Sukuk-backing collateral changes. Cabinet approval for the ARC’s formal establishment is still pending.
Monetary Policy and Safety Nets
The SBP has already rolled out Shariah-compliant open market operations for injecting liquidity and a Shariah-compliant standing ceiling facility. A corresponding liquidity-absorption “floor” facility is expected to follow once a sufficient supply of government Sukuk becomes available. On the protective side, a Shariah-compliant lender-of-last-resort facility and deposit protection scheme are already operational for Islamic banks, with resolution and recovery frameworks for failed institutions still to be updated.
The paper also addresses a thorny technical question that has worried bank executives: what happens to retained earnings when a conventional bank converts to Islamic banking. A dedicated SBP workstream involving Shariah scholars and bank CFOs has reportedly identified several Shariah-compliant mechanisms allowing banks to retain these earnings on their books post-conversion, with some options already approved and others pending.
Legal Reform and Capacity Building
A review of banking-related laws in light of the FSC judgment has largely been completed, with the paper describing the necessary amendments as “minor in nature.” A review of the remaining body of commercial and financial law is expected to conclude during the current calendar year, with legislation to follow in 2027.
On the human capital side, the State Bank has rolled out a Capacity Building Strategy targeting bank boards, senior management, branch staff, academia, Shariah scholars, parliamentarians, journalists, and auditors, alongside public awareness campaigns combining digital outreach with roadshows and mass media campaigns.
Outstanding Risks
The paper is candid about what it considers the single largest hurdle: converting Pakistan’s existing stock of conventional public debt into Shariah-compliant instruments. Officials are betting heavily on the ARC mechanism and a regular Sukuk issuance calendar to manage this transition, alongside continued work on short-tenor Sukuk structures, which remain at an advanced stage of development. On the technology front, the paper strikes a more reassuring tone, noting that most conventional banks already operate the necessary IT infrastructure through their existing Islamic banking windows, making a full system-wide conversion technically feasible.
What Comes Next
The strategy frames the transition as a coordinated effort between the federal and provincial governments, the SBP, the Securities and Exchange Commission of Pakistan, and other regulators, organized around seven pillars: legislative reform, public finance infrastructure, multilateral and bilateral financing arrangements, regulatory alignment, financial safety nets, monetary policy redesign, and public awareness.
With roughly eighteen months remaining before the constitutional deadline, the document positions itself less as a final blueprint than as a signal of direction — an attempt, as the authors put it, to remove uncertainty about the shape of Pakistan’s post-2027 financial landscape and to reassure markets, institutions, and the public that the shift away from interest-based finance will proceed without major disruption to the broader economy.
