By Abdul Ghani

Pakistan has unveiled a comprehensive strategy outlining how the country's financial system will transition to a Riba-free framework after December 31, 2027, with the government emphasizing that the shift will be gradual, orderly and designed to preserve financial stability while honouring all existing contractual obligations.

According to the Post-2027 Financial System in Pakistan strategy paper, available with Wealth Pakistan, the roadmap has been formulated in light of the Federal Shariat Court's April 2022 judgment declaring Riba prohibited in all its forms and the 26th Constitutional Amendment, which requires its complete elimination before January 1, 2028.

The strategy aims to remove uncertainty surrounding Pakistan's post-2027 financial landscape by providing clear operational direction for banks, development finance institutions, microfinance banks, non-banking finance companies, insurance firms, mutual funds, real estate investment trusts, Modarabas and other financial intermediaries. It also defines the responsibilities of various stakeholders to facilitate a smooth transition.

The document states that the government is committed to creating a conducive legal, regulatory and business environment that facilitates the transition while safeguarding the stability of the financial system. It notes that regulatory and supervisory frameworks will continue to align with internationally recognised prudential standards and Shariah principles.

According to the strategy, the majority of domestically owned financial institutions are expected to transform into Islamic banks and financial institutions in line with the constitutional requirement once the necessary legal, regulatory and liquidity management frameworks are in place. However, the transition of banks and financial institutions with majority foreign shareholding will remain voluntary and depend on their respective business plans and strategies.

The government has assured that all existing commitments and obligations to domestic and international counterparties will continue to be honoured according to contractual terms. Conventional financing raised before the end of 2027 will remain in force until maturity before being replaced with Shariah-compliant financing, a measure intended to preserve contractual sanctity and maintain investor confidence during the transition.

The strategy further states that after 2027, the government will explore all available options to ensure that fresh domestic financing is undertaken through Shariah-compliant modes and instruments. It also plans to increasingly secure new foreign financing through Shariah-compliant mechanisms, subject to the availability of commercially viable options in international capital markets, while continuing to service existing conventional obligations according to agreed contractual commitments.

The document says the State Bank of Pakistan will formulate and implement monetary policy using Shariah-compliant instruments, while the transition will also extend to capital markets, insurance and other non-bank financial services. Existing conventional contracts in these sectors executed before December 2027 will likewise continue to be honoured until their maturity.

To support the transition, the strategy identifies several priority areas, including legislative amendments, development of Shariah-compliant public finance infrastructure, arrangements for Shariah-compliant foreign financing, review of regulatory and supervisory frameworks, strengthening of financial safety nets, development of a Shariah-compliant monetary policy framework, and awareness and capacity-building initiatives.

According to the strategy paper, these measures are intended to ensure that Pakistan's transition to a post-2027 Riba-free financial system is implemented through a comprehensive legislative, regulatory and supervisory framework while maintaining financial stability and supporting sustainable economic activity.

Credit: INP-WealthPk