Main Features of the Interest-Free

Banking Movement in Pakistan

Author of Research Article:

M. Mansoor Khan
 Council of Islamic Ideology mandate
Interest free banking got significant shape in the
globe late 1970s
In 1977 in Pakistan, President of Pakistan
assigned task to CII to formulate blueprint for an
interest free economy within three years.
In February 1980 report titled Report on the
Elimination of Interest from the Economy was
submitted to CII by the panel of experts assigned
the task.
Proposed Model, Criticism & implementation
 The CII Banking Model
Banking Model
Profit and loss system being recommended
throughout the economy as replacement to
interest
For transitional period, eight secondary interest
free instruments were suggested.
Secondary instruments and some other proposals
were claimed as interest free by CII but they
remained controversial as hybrid.
 The CII central banking Model

Radical changes proposed for bank rate and

open market operations replacement with PLS
system.
Criticism on CII raised by researchers
panel of experts
government borrowings
international trade financing issues
Interest free banking practice in Pakistan
1n 1980, CIIs report implementation task to
Ministry of finance who gave it to SBP and PBC.
PBC-Superior Task Force proposed major changes
in Banking Companies Ordinance 1962 for
adoption of PLS system and mark up in pricing.
Mudaraba Ordinance 1984 promulgated.
Banks started to receive deposits on PLS basis,
during 1981-85, the profit rates remained high as
to conventional and PLS gained remarkable
deposits.
 Criticism raised on such practices as actual
mark-up financing was fictitious transaction of
sale and purchase of good in paper only.
Accounting, tax, legal and other structural
constraints were also remained present.
Banks invested of amount deposited under PLS
system to interest based modes.
Return rates on PLS accounts almost fix and
predetermined
 SBP allowed banks to invest in government
interest based securities
SBP did not established its own Islamic research
and sharia compliant board
No sharia related training to bankers
SBP introduced some conventional schemes like
Khas, DSC etc with higher returns to Islamic
leading to drop in Islamic portfolio
In 1985, the president of Pakistan admitted
before the National Assembly his unsuccessful
efforts regarding elimination of interest from
economy
 FSC Judgment on Riba in 1991
In 14th November 1991, FSC banned riba from
economy of Pakistan and highlighted 20 laws of
markup as interest based.
FSC gave time to government by 1st July 1992 for
replacement of these 20 laws.
As a result, foreign aid, loan, local investors were
hit and declined in financial activities were
observed.
Government of Pakistan challenged FSC
Judgment in Supreme Court.
 CIEs models on interest free banking
in Pakistan
In 1991, the GoP constituted CIE with objective to
make recommendations for improving the
credibility of interest-free banking practice.
In June 1992, it submitted the first draft of report
with some serious observations on unIslamic
banking practice in Pakistan.
e.g. bank investment in short notice, trade bills and
all types of government securities are based on
fixed return.
The markup financing was a interest based activity.
 Interest on government securities
Foreign currency deposits return being paid
under SBP instructions.
Banks major borrowing from SBP, other banks
and foreign lending agencies based on
interest.
CIE Recommendations
bank and client should given full freedom to
decide PLS ratio under true Sharia spirit
 Suggested income tax rebate on Islamic
securities
Trade bills to dealt as stated in CII 1980 report.
Criticism were also raised on CIE
recommendations
incomplete