Is it possible for Pakistan to shift to an interest-free banking system?

Pakistan will implement the decision of the Federal Shariat Court (FSC) to rid the country of an interest-based banking system, Finance Minister Ishaq Dar said on Wednesday, but many are questioning whether it will be possible to do it at all.

The FSC was established in Pakistan in 1980 under the reign of military dictator Ziaul Haq and is responsible 'to examine and decide the question whether or not any law or provision of law is repugnant to the injunctions of Islam'.

The court ruling prohibiting interest came earlier this year in April, giving the government up until Dec 31, 2027 to eliminate Riba, the Islamic term for interest, from the country's banking system.

The court also ruled that any interest on government borrowings, whether from domestic or foreign sources, also fell under the definition of Riba and was prohibited under Islamic law.

Following the court ruling, Pakistan's central bank as well as the largest state-owned bank - National Bank of Pakistan - and three commercial banks challenged the decision in the Supreme Court.

But the finance minister said both the central bank and the NBP would be withdrawing their appeals from the apex court, as he vowed to implement the decision of the shariat court and rid the country of interest as soon as possible.

Borrowing or lending money on a predetermined interest rate (Riba) is prohibited in Islam. Over the past few decades, several banks have popped up in the the Islamic world, offering completely sharia-compliant services while conventional banks have introduced interest-free products and instruments to comply with Islamic law.

In Pakistan specifically, Islamic banking resurged considerably in the early 2000s, with the launch of the country's first completely Islamic bank - Meezan Bank. With several banks now operating Islamic banking subsidiaries, this alternative has a sizeable 20 per cent share in the banking industry.

Despite this growth, some analysts believe the latest announcement by the government to shift completely to an interest-free system may just be political rhetoric to please the religious vote bank because there are underlying structural problems that need to be addressed in order to implement a new system.

The finance minister himself conceded it was not an 'overnight' job, saying numerous challenges had to be overcome to achieve this target.

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