Page 31 - CMA Journal (Mar-Apr 2025)

Focus Section

Focus Section

The Role of Shariah Audit and Compliance

in Shaping an Islamic Economy in Pakistan

The integration of Islamic principles into Pakistan's economy decades. The State
has been a key aspect of the country's socio-economic and Bank of Pakistan (SBP)
political framework since gaining independence in 1947. As has been instrumental
the first Islamic Republic, Pakistan has consistently aimed to in promoting Islamic
align its financial and economic systems with Islamic banking, with more
teachings. This effort has included various legal, financial, than 20% of the coun-
and policy initiatives focused on eliminating interest (riba), try's banking sector
promoting Islamic banking, and fostering an economy now operating under
based on justice, equity, and risk-sharing. However, despite Shariah-compliant
numerous attempts, the complete implementation of an principles. Leading
Islamic economic system remains challenging due to legal institutions such as
intricacies, financial limitations, and global economic factors. Meezan Bank, Bank
Islami, and Al Baraka Imtiaz Bashir, FCMA
The roots of Pakistan’s economic Islamization can be
traced back to the vision of its founder, Quaid-e-Azam Bank offer interest-free Senior Instructor of Commerce
Muhammad Ali Jinnah, who advocated for social justice financial products Government Graduate College
and economic fairness in accordance with Islamic based on contracts like of Commerce, Multan
principles. However, significant progress in this direction Murabaha (cost-plus
was made during General Zia-ul-Haq’s administration financing), Ijarah (leasing), and Mudaraba (profit-shar-
(1977–1988), which introduced extensive reforms to ing). Additionally, the introduction of Sukuk (Islamic
restructure the economy based on Islamic guidelines. bonds) has provided an alternative to traditional debt
During his tenure, interest-based banking was gradually instruments, enabling the government and businesses to
replaced with profit-and-loss sharing (PLS) models, while raise capital without relying on interest-based transac-
zakat (charitable tax) and ushr (agricultural tax) were tions. However, despite these advancements, the Islamic
institutionalized. Additionally, the Council of Islamic financial sector continues to face challenges, including
Ideology (CII) and the Federal Shariat Court (FSC) played regulatory inconsistencies, a lack of standardization, and
pivotal roles in formulating policies aimed at eliminating limited consumer awareness.
interest from the financial system. From a policy standpoint, successive governments have
worked to further Islamize the economy while
From a legal standpoint, the process of Islamization
encountered numerous challenges. In 1991, the Federal addressing modern economic demands. The Ministry of
Shariat Court (FSC) ruled that interest (riba) was Finance and the State Bank of Pakistan remain
unconstitutional and mandated its removal from the committed to developing strategies that expand Islamic
economy. However, legal disputes and resistance from finance and integrate it into the broader financial system.
financial institutions led to significant delays in its Initiatives such as the Pakistan Islamic Banking Strategy
implementation. In 1999, the Supreme Court of Pakistan 2020 aim to boost market share, strengthen regulatory
upheld the FSC’s decision, reaffirming the prohibition of frameworks, and raise public awareness. Additionally, the
riba. Despite these legal rulings, the transition to an implementation of Shariah governance frameworks
Islamic financial system remained slow due to the ensures adherence to Islamic principles, while academic
complexities of replacing conventional banking institutions have introduced programs to train
structures. To address this, the government and the State professionals in Islamic economics.
Bank of Pakistan (SBP) have introduced regulations to Despite these efforts, several challenges persist. The
promote Islamic banking while allowing conventional parallel existence of conventional and Islamic financial
banks to operate alongside it. systems introduces complexities, while Pakistan's
international financial commitments necessitate
Pakistan's financial sector has experienced remarkable
growth in Islamic banking and finance over the past two engagement with interest-based institutions such as the
International Monetary Fund (IMF) and the World Bank.
ICMA’s Chartered Management Accountant, Mar-Apr 2025 29