Timeline

1947: The inception of Pakistan as the first Islamic Republic created in the name of Islam. 1980: Council for Islamic Ideology presents report on the elimination of Interest genuinely 1985: Commercial banks transformed their nomenclature stating all Rupee Saving Accounts as interest-free 1991: Procedure adopted by banks in 1985 was declared un-Islamic by the Federal Shariat Court (FSC).

 1999: The Shariat Appellate Bench of the Supreme Court of Pakistan rejects the appeals and directs all laws on interest banking to cease. The government sets up a high level commission, task forces and committees to institute and promote Islamic banking on parallel basis with conventional system. 2001: State Bank of Pakistan sets criteria for establishment of Islamic commercial banks in private sector and subsidiaries and stand-alone branches by existing commercial banks to conduct Islamic banking in the country. 2004: The State Bank establishes a dedicated Islamic Banking Department (IBD) by merging the Islamic Economics Division of the Research Department with the Islamic Banking Division of the Banking Policy Department

Legal History
Revolutionary Riba judgment of Pakistan: Dr. M. Islam Khaki & Others vs. Syed Muhammad Hashim & Others, P.L.D. 2000 (Supreme Court 225), the Supreme Court of Pakistan in 1999 defined Riba as : Any amount, big or small, over the principal, in a contract of loan or debt, is Riba, prohibited by the Holy Quran, regardless of whether the loan is taken for the purpose of consumption or for some production activity.

 Council of Islamic Ideology (CII) created in 1962. Efforts for economy wide elimination of Riba in Pakistan started during 1970s In June 1980 the CII published a report on Elimination of Riba. This report highlights various prospects of Islamic banking and finance in Pakistan. Following the report, in early 1980s, Pakistan took a number of practical steps to eliminate Riba from its financial economy. Eg. elimination of interest from the operations of Specialized Financial Institutions (July, 1979 to July, 1985) and the commercial banks (January, 1981 to July, 1985)

 Commercial banks transformed their nomenclature during January 1981 to June 1985; from July 1, 1985 all commercial banking in Pak Rupees was made interest-free
Banking and other relevant laws viz. State Bank of Pakistan Act, Banking Companies Ordinance, Recovery Laws, Negotiable instruments Act, Companies Ordinance, etc. were amended to facilitate Riba free banking system. Judiciary in Pakistan in a series of cases declared:
Financial interest (Riba) of any kind as un-Islamic [Irshad H. Khan v. Parveen Ajaz, P.L.D. 1987 (Kar 466)]; Collection of Riba is un-Islamic [Habib Bank v. Muhammad Hussain, P.LD. 1987 (Kar 616)]; Riba was not in the public interest [Shahbazad Chaudhry v. Services I. T. Ltd, P.L.D. 1988 (Lah 1)] Provisions in the Negotiable Instruments Act 1881 that provided for fixed interest rates were un-Islamic [Aijaz Haroon v. Imam Durrani, P.L.D. 1989 (Kar 304)].

 Since 1984, Islamic Banking has become a popular notion in Pakistan.

Riba-free banking system was introduced in Pakistan as a part of the process of Islamization of financial markets. Many of the Islamic modes of financing practised in Pakistani Banking System were challenged in the court of law in early 1990s claiming to be not consistent with pure Islamic precepts.

In November 1991, such procedure adopted by banks was declared un-Islamic by the Federal Shariat Court (FSC).

 Government and some banks/DFIs preferred appeals to the Shariat Appellate Bench (SAB) of the Supreme Court of Pakistan. On December 23, 1999, the SAB adjudged the application of some of the most commonly used of these Islamic modes of financing under the Riba-free banking system to be inconsistent with the injunctions of Islam.
Shariat Appellate Bench (SAB) of the Supreme Court of Pakistan in that judgment consequently ordered the total transformation of the entire existing financial system of Pakistan, both banking and nonbanking, to one conforming to Shariah.

 Interestingly; On June 24, 2002, the Supreme Court of Pakistan upon a review petition, quashed its earlier judgment of December 23, 1999 on Riba and further remitted the cases to the FSC for fresh determination[United Bank Limited v. M/S Farooq Brothers etc., Supreme Court of Pakistan Order announced at Islamabad on June 24, 202]

The government of Pakistan as a matter of policy, announced its willingness to promote Islamic financial system in the country [Paras. 53-54, Budget Speech, Minister for Finance & Economic Affairs, 2001-2002; Para. 90, Budget Speech, Minister for Finance & Economic Affairs, 2002-2003]

 Steps taken in this regard

December 2001, the State Bank of Pakistan issued the detailed criteria for establishment of Islamic commercial banks in the private sector Issuance of license to model Islamic bank: Meezan Bank (Dec 2002) Capacity building: Islamic Banking Department has been created within the State Bank of Pakistan, National Institute of Banking and Finance of State Bank (NIBAF) has started training of State Bank of Pakistan personnel in Islamic Finance & courses of Institute of Bankers Pakistan were revised to include topics on Islamic economics, banking and finance. Revising Regulations: Eg. in order to allow existing banks to open subsidiaries for Islamic banking, section 23 of Banking Companies Ordinance 1962 has been amended Setting up research cell: Committee was set up in the Institute of Chartered Accountants Pakistan (ICAP) for development/review and adoption of accounting standards for Islamic modes of financing. Issuance of Islamic bond : The government issued Ijara Sukuk (government bond) based on Shariah Institutional reform : The government constituted Shariah Board of the State Bank of Pakistan to supervise the Islamization of the financial system of Pakistan.

Presently
Government of Pakistan decided at the initial stage to promote Islamic banking on parallel basis with conventional system. It aims today at achieving an entire Islamic Financial System for Pakistan in near future. The Ministry of Finance sought the technical assistance from the IMF for the Islamic transformation of financial system. State Bank of Pakistan has become one of the founding members of Islamic Financial Services Board (2002) along with Bahrain Monetary Agency, Bank Indonesia, Bank Markazi Jomhouri Islami Iran, Central Bank of Kuwait, Bank Negara Malaysia, State Bank of Pakistan, Saudi Arabian Monetary Agency, Bank of Sudan and Islamic Development Bank.

"We must work our destiny in our own way and present to the works an economic system based on true Islamic concept of equality of manhood and social justice"
Quaid-e-Azam Mohammed Ali Jinnah Opening Ceremony of The State Bank of Pakistan on July 1, 1948