In five years, the government will end riba.
Dar asserts that the FSC’s directive on interest-free banking would be carried out.
ISLAMABAD:
The government implied that it would convert the current interest-based banking system to an interest-free model over the next five years when it declared on Wednesday that it would implement the Federal Shariat Court’s (FSC) ruling.
The State Bank of Pakistan (SBP) and the National Bank of Pakistan (NBP) withdrew their appeals against the FSC, according to Finance Minister Ishaq Dar in a pre-recorded statement, suggesting that the government would implement the interest-free banking system by December 2027.
Finance Secretary Hamed Yaqoob Sheikh unveiled a new SDG and Climate Finance Facility on the day Dar declared that it would uphold the FSC ruling. The facility aims to draw in foreign loans from non-traditional international investors.
After traditional financing from foreign creditors began to dwindle, the finance ministry of Pakistan and the United Nations Development Programme (UNDP) established the Climate Financing Facility to encourage private sector participation.
Dar also disclosed that a $500 million loan had been granted by the Asian Infrastructure Investment Bank (AIIB) on the same day. By any multilateral creditor, Pakistan has obtained the loan at one of the highest interest rates, 4.9%.
The three distinct but related occurrences underscore the difficulties Pakistan’s economy is facing as a result of growing demands that force the government to rely heavily on both domestic and foreign creditors to stay afloat.
In its April 2022 decision, the FSC also mandated that all future financial transactions between Pakistan and foreign financial institutions, as well as other bilateral and multilateral sources of funding, be conducted in accordance with Shariah law, including the issuance of Sukuk.
Dar claimed that Pakistan had not made the necessary progress in recent years toward an interest-free banking system. He continued by saying that the decision to drop the appeals was made with the SBP governor’s permission and after receiving approval from Prime Minister Shehbaz Sharif.
The FSC’s April 28 ruling that riba was forbidden in accordance with Islamic edicts and needed to be eradicated from the nation within five years was challenged by the central bank in June of this year in the Supreme Court.
In terms of assets, Islamic banks currently make up 19.4% of the nation’s total banking system, while their proportion of deposits is 20%. With a network of 3,983 branches and 1,418 Islamic banking windows, five fully operational Islamic banks are currently administered by 22 Islamic banking institutions, while 17 conventional banks have standalone Islamic banking offices.
The SBP noted in its appeal that large-scale conversion of the banking system would require mega-scale infrastructure modifications and investments within the next five years relative to the current level, which had been attained in more than 20 years.
It would now be necessary to switch from ordinary banking to Islamic banking as a result of the government’s decision to withdraw the appeals. Dar did not, however, provide a plan for carrying out his choice.
Due to the FSC ruling, Pakistan is the first Muslim nation to formally recognise modern bank interest as riba, which the Qur’an declares to be forbidden. In 1991, the FSC deemed interest-allowing rules to be incompatible with Islam.
The Supreme Court’s Shariah Appellate Bench received 67 appeals against this decision from the federal government and specific banks and financial entities.
Numerous pieces of legislation in the nation have been deemed by the FSC to be incompatible with Islamic tenets because they allow for the charging or payment of interest, which the FSC said falls under the definition of riba.
Dar declared that the administration would make every effort to quickly adopt the Islamic financial system. “God willing,” he continued, “we will lead Pakistan toward an interest-free economy.”
Traditional lending is still in place.
On Wednesday, Dar announced on Twitter that the AIIB Board has authorised a $500 million loan for Pakistan. The secured overnight financing rate (SOFR), which is now 3.8%, was agreed upon when the loan was contracted.
Due to a fixed spread and variable borrowing cost, Pakistan will pay an additional 0.81% on top of the SOFR, bringing the total to 4.61%. Then, on a loan of $500 million, there is a front-end fee of 0.25%, or $1.25 million. The overall interest rate now stands at 4.9%, which is among the highest for a multinational institution.
In the meantime, the finance secretary unveiled a brand-new financing platform with the intention of reducing the amount of climate change funding available globally.
Hamed Yaqoob Sheikh, speaking at the facility’s opening, remarked, “This is a crucial step for speeding financing for development in Pakistan.” He continued, “We must urge the corporate sector and global stakeholders to broaden the finance base and engage with marginalised groups.
According to UNDP Senior Adviser on Financing for Development Haroon Sharif, traditional financing sources are under pressure, but there is a tonne of money available for programmes promoting climate resilience that may be raised by selling ideas to potential investors.
According to Sharif, the new project aimed to finance $2 to $3 billion over the following two to three years from Pakistan’s prospective investment pool of $96 billion.
For the years 2022 to 2023, the IMF pegs Pakistan’s annual financing deficit for the SDGs at $3.72 billion. Pakistan may not be able to raise the anticipated $2 billion through conventional eurobonds due to its bad credit rating, but it can arrange $500 million through green sovereign bonds.
Three projects totaling $112 million have been selected by the government and UNDP for funding through the SDG Investment and Climate Financing Facility.
