When the IMF approved Pakistan’s latest programme review in May 2026, it quietly highlighted a contradiction that now sits at the centre of Pakistan’s economic model.

The Fund warned that Pakistan’s biggest external vulnerability was its growing dependence on Gulf-linked financing flows, deposits, rollovers, oil facilities, and bilateral support from Saudi Arabia and the UAE, all tied to global liquidity conditions and international pricing benchmarks.

Pakistan’s financial stability, the IMF effectively noted, remained deeply embedded in a conventional global monetary system governed by interest rates, sovereign yields, and dollar funding cycles.

At almost the same moment, Pakistan was moving in the opposite direction domestically. The country is now constitutionally committed to eliminating Riba interest from its financial system by January 1, 2028.

That contradiction captures the central illusion surrounding modern Islamic banking.

For nearly half a century, Pakistan, like Saudi Arabia, Malaysia, and much of the Gulf, has experimented with “Islamic finance” as an alternative to conventional banking.

Yet after decades of institutional evolution, financial innovation, and legal restructuring, the uncomfortable reality has become increasingly difficult to avoid: modern Islamic banking does not function as a fundamentally different economic system. It functions as conventional banking operating through Islamic contractual forms.

The structure did not.

The story begins long before the current court rulings. Pakistan’s first Constitution in 1956 already contained language calling for the elimination of Riba “as early as possible”. But the modern Islamisation drive accelerated under General Zia-ul-Haq after 1977. In 1979, Pakistan began introducing Islamic financial instruments into the banking system, attempting to replace interest-bearing arrangements with profit-and-loss-sharing structures inspired by classical Islamic jurisprudence.

The ambition was enormous. Islamic finance was supposed to create a morally distinct financial order. Instead of lenders earning guaranteed interest, banks would supposedly become partners in productive enterprise, sharing both profits and losses. Finance would remain tied to real economic activity rather than expanding through debt creation and leverage. Risk would be distributed more fairly across society.

The closer Islamic finance moved towards genuine profit-and-loss sharing, the more commercially unstable it became

The closer Islamic finance moved towards genuine profit-and-loss sharing, the more commercially unstable it became

But almost immediately, the system encountered a practical problem: modern economies require predictability. Depositors want stable returns and capital protection. Governments need liquid debt markets to........

© The Friday Times