Legal Foundations For SHARĪʿAH-COMPLIANT ISLAMIC BANKING IN PAKISTAN: CHALLENGES AND WAY FORWARD

Authors

  • Sami Uddin International Islamic University, Islamabad
  • Dr. Muhammad Asghar International Islamic University, Islamabad
  • Dr. Muhammad Abubaka International Islamic University, Islamabad

Keywords:

Islamic banking, , Legal framework, , Regulatory framework, , Sharīʿah compliance

Abstract

The Islamic banking industry in Pakistan has grown significantly, yet it faces critical challenges related to its legal and regulatory foundations. This paper presents a qualitative analysis of the existing primary laws that administer the Islamic banking industry, focusing on the legal cover these foundational laws provide and the inconsistencies that arise from their fragmented nature. Based on nine in-depth interviews with experts in banking, Sharīʿah, academia, and law, this study examines how the industry faces multifaceted juridical challenges and the potential way forward. The existing banking fundamental laws like the Banking Companies Ordinance, 1962 (BCO), the Financial Institutions (Recovery of Finance) Ordinance, 2001and the SBP Act, 1956 do not effectively address the legal and administrative disputes of the industry due to which the industry often tries to adopt alternate disputes resolutions. Similarly, the Sharīʿah Governance Framework (SGF) is effective from January 01, 2025. The administrative bodies like the Islamic Banking Department (IBD) and the Sharīʿah Advisory Committee of the SBP lack legal backing in these primary laws. Moreover, these primary laws do not dictate the banking judges and the legal counsels to resolve the issues of the Islamic banking institutions (IBIs) on Islamic principles of business and finance nor are the existing cape of the judges capable of deciding matters of the industry on such principles. The capacity building of the SBP and IBIs poses legal hurdles in transforming the economy according to the Constitution article 38(f) and the judgment of the Federal Shariat Court. The recent amendment by the parliament in the BCO has made the ongoing transformation of conventional banking into Sharīʿah-based more difficult because it has given silent approval to the traditional system of banking by incorporating Part-II under section 39 which made the BCO more legally conflicting. The research explores the historical neglect and non- Sharīʿah-compliant embeddedness of the legal framework over the last four decades in contrast to the perpetual but inconsistent development of the regulatory framework. This institutional behaviour left the two foundational frameworks legally mismatching and even conflicting. The study provides a roadmap about the proposed Sharīʿah-based promulgation of the legal and regulatory frameworks that legally support operations of the industry keeping in view the Higher Objectives of Sharīʿah. The findings offer valuable insights for legislators, policymakers, regulators, and industry stakeholders on the way forward to strengthen the legal foundations of the Islamic banking industry in Pakistan.

Author Biographies

Dr. Muhammad Asghar , International Islamic University, Islamabad

Lecturer, School of Islamic Banking and Finance, International Institute of Islamic Banking and Finance, International Islamic University, Islamabad

Dr. Muhammad Abubaka, International Islamic University, Islamabad

Chairperson, School of Islamic Banking and Finance, International Institute of Islamic Economics, International Islamic University, Islamabad 

Published

31-12-2024