By Farooq Awan

Pakistan plans to gradually shift both its domestic and foreign borrowing to Shariah-compliant financing after 2027 as part of its strategy to eliminate Riba from the country's financial system while ensuring that all existing debt obligations continue to be honoured until maturity.

According to the Post-2027 Financial System in Pakistan strategy paper, available with Wealth Pakistan, the government will explore all available options to ensure that fresh domestic financing is raised through Shariah-compliant modes and instruments after December 31, 2027. The move forms part of the broader roadmap for transitioning the country's financial system to a Riba-free framework without disrupting fiscal operations or investor confidence.

The strategy notes that as the government increasingly issues Shariah-compliant securities after 2027, conventional banks will also be permitted to use these instruments for liquidity management. Existing conventional government securities will continue to qualify for liquidity management purposes until they mature, ensuring continuity during the transition period.

To support this transition, the government plans to ensure the regular availability of sovereign Sukuk across a wide range of maturities. In addition to long-term instruments, the strategy envisages the issuance of short-term Sukuk with maturities of three, six and 12 months to help banks and other financial institutions manage their liquidity more efficiently under the evolving Islamic financial framework.

The strategy also outlines a gradual transformation of Pakistan's external financing framework. It states that after 2027, the government will strive to raise all fresh foreign financing through Shariah-compliant modes, subject to the availability of commercially viable options in international capital markets. The transition will be implemented carefully to safeguard Pakistan's debt sustainability while broadening access to Islamic sources of international finance.

According to the document, the government plans to strengthen strategic arrangements with multilateral and bilateral development partners, including those that maintain co-financing partnerships with Islamic financial institutions. Such arrangements are expected to facilitate Shariah-compliant external financing for both development projects and budgetary requirements while diversifying Pakistan's funding sources.

The strategy further states that the government will endeavour to establish financing arrangements with international commercial banks and global capital market platforms capable of providing Shariah-compliant funding for both current and development expenditures. It also encourages the private sector to increasingly align its external borrowing with Shariah-compliant financing options wherever reasonable and commercially viable alternatives are available in international markets.

At the same time, the strategy makes it clear that the transition will not affect Pakistan's existing financial commitments. All conventional domestic and external debt raised before the end of 2027 will continue to be serviced and repaid in accordance with the original contractual terms. This includes obligations to multilateral and bilateral lenders as well as borrowings from domestic and international capital markets.

Rather than replacing outstanding conventional debt immediately, the government plans to convert it gradually into Shariah-compliant financing as individual obligations mature. According to the strategy, this phased approach is intended to preserve contractual sanctity, maintain the confidence of domestic and international investors, and avoid disruptions to government financing operations.

The document also identifies the conversion of existing public debt into Shariah-compliant financing as one of the most significant challenges facing the post-2027 transition. It says the successful implementation of the strategy will depend on expanding the government's capacity to issue sovereign Sukuk regularly, supported by mechanisms such as the proposed Asset Registry Company, development of diversified Sukuk structures and the introduction of an annual Sukuk issuance calendar.

The strategy acknowledges that the availability of short-term Sukuk will also be critical for ensuring smooth liquidity management across the financial system. It notes that the State Bank of Pakistan and commercial banks are already at an advanced stage of finalising structures for three-month and six-month Sukuk, which are expected to become available before December 2027.

According to the strategy paper, the gradual shift towards Shariah-compliant domestic and external financing is intended to strengthen Pakistan's Islamic financial architecture while ensuring uninterrupted access to funding, protecting fiscal stability and preserving the country's credibility with domestic and international creditors throughout the transition period.

Credit: INP-WealthPk