Danish Abbas
Webmaster : Centre of Advisory Services for Islamic Banking and Finance

History of Islamic Banking in Pakistan

Steps for Islamization of banking and economic system of Pakistan were started in 1977-78. Pakistan was among the three countries within the world that had been trying to implement interest free banking at comprehensive/national level. But because it was a mammoth task, the switchover plan was implemented in phases. The Islamization measures included the elimination of interest from the operations of specialised financial institutions including HBFC, ICP and NIT in July 1979 which of the commercial banks during January 1981 to June 1985. The legal framework of Pakistan’s financial and company system was amended on June 26, 1980 to allow issuance of a replacement interest-free instrument of corporate financing named Participation Term Certificate (PTC). An Ordinance was promulgated to permit the establishment of Mudaraba companies and floatation of Mudaraba certificates for raising risk based capital. Amendments were also made within the Banking Companies Ordinance, 1962 (The BCO, 1962) and related laws to incorporate provision of bank finance through PLS, mark-up in prices, leasing and hire purchase.
Separate Interest-free counters started operating altogether the nationalized commercial banks, and one foreign bank (Bank of Oman) on January 1, 1981 to mobilize deposits on profit and loss sharing basis. Regarding investment of those funds, bankers were instructed to supply financial accommodation for state commodity operations on the idea of sale on credit with a mark-up on price . Export bills were to be accommodated on rate of exchange differential basis. In March, 1981 financing important and inland bills which of the then Rice Export Corporation of Pakistan, Cotton Export Corporation and therefore the Trading Corporation of Pakistan were shifted to mark-up basis. Simultaneously, necessary amendments were made within the related laws permitting the depository financial institution to supply finance against Participation Term Certificates and also extend advances against promissory notes supported by PTCs and Mudaraba Certificates. From Dominion Day , 1982 banks were allowed to supply finance for meeting the capital needs of trade and industry on a selective basis under the technique of Musharaka.
As from April 1, 1985 all finances to all or any entities including individuals began to be made in one among the required interest-free modes. From Dominion Day , 1985, all commercial banking in Pak Rupees was made interestfree. From that date, no bank in Pakistan was allowed to simply accept any interest-bearing deposits and every one existing deposits during a bank were treated to get on the idea of profit and loss sharing. Deposits in current accounts continued to be accepted but no interest or share in profit or loss was allowed to those accounts. However, foreign currency deposits in Pakistan and on-lending of foreign loans continued as before.

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