New govt loans to be Shariah-compliant from 2028

• Ministry of Finance drafts strategy for post-2027 Riba-free financial system• Existing conventional loans to continue until maturity• Majority foreign-owned banks may offer both Islamic, conventional products• Cabinet nod will set legal transition in motion

ISLAMABAD: As part of its strategy to gradually shift to a Riba-free financial system by Dec 31, 2027, the government has decided that all new transactions, including loans, will be contracted on a Shariah-compliant basis from Jan 1, 2028, while existing arrangements will continue until maturity.

Majority foreign-owned banks and financial institutions will be allowed to continue with a hybrid system offering both conventional and Islamic modes.

The legal and constitutional requirements and timelines will be set in motion after formal approval by the federal cabinet. The Ministry of Finance has finalised the strategy for the post-2027 financial system in Pakistan in consultation with stakeholders, regulators, banks, financial institutions and religious scholars through an institutional arrangement for transition.

The strategy has been formulated in light of the Federal Shariat Court’s April 28, 2022, judgement, which declared that “Riba is absolutely prohibited in all its forms and manifestations” and mandated its elimination from Pakistan by Dec 31, 2027.

The 26th Amendment to the Constitution, issued in October 2024, also set a timeline for the earlier constitutional provision and envisaged the elimination of Riba “before the first day of January, two thousand twenty-eight”.

The Ministry of Finance said that with clear direction and operational guidelines, the shift to a Riba-free financial system would be smooth, seamless and without any major disruption. The strategy envisages the post-2027 financial system landscape and highlights key actions, risks and milestones during the transition to remove uncertainty about the shape and environment of the financial system after 2027. It also defines the roles and responsibilities of different stakeholders.

Under the plan, the government and regulators will ensure that enabling legal, taxation, regulatory and supervisory frameworks are in place and that Shariah-compliant liquidity management instruments are available at regular intervals. The absence of such instruments has remained a key challenge for banks interested in conversion and transformation into Shariah-compliant institutions. This work will be completed over 12 months.

“During and after the transition, all existing commitments and obligations towards domestic and international counterparties and stakeholders will continue to be honoured as per the terms of the contracts,” the ministry said, adding that conventional financing would be replaced with........

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