Financial Transactions and Islamic Ethos: Application and Implications in Pakistan

Abstract

Islamic finance, grounded in Sharīʿah principles such as the prohibition of riba (interest), gharar (excessive uncertainty), and maisir (gambling), offers an ethical and asset-backed alternative to conventional banking systems. Globally, this sector faces persistent challenges, including regulatory ambiguities, scarcity of specialized talent, and skepticism about the authenticity and novelty of its financial products. In Pakistan, these issues are further accentuated by the dual presence of conventional and Islamic banks, slow policy harmonization, and doubts regarding the realization of a fully riba-free financial architecture by 2028, as mandated by constitutional and judicial orders. By mid-2024, the Islamic banking sector demonstrated significant momentum—controlling PKR 7.8 trillion in assets and comprising nearly 23% of national banking industry holdings. This article critically examines how Sharīʿah-compliant financial instruments—murābaḥah, mushārakah, muḍārabah, ijārah, and ṣukūk—are applied in Pakistan and assesses their economic, social, and regulatory implications in the ongoing transition toward a riba-free system. Employing a systematic literature review of 35 peer-reviewed sources published between 2013 and 2025, the study addresses the core research question: How effectively are these instruments advancing financial inclusion, economic development, and Sharīʿah-compliance within Pakistan’s unique policy context? The analysis identifies sectoral progress, persistent obstacles, and reform priorities, concluding that enhanced Sharīʿah governance, adoption of technology-driven solutions, and broad-based financial literacy initiatives are essential for the sector’s credible expansion. These findings situate Pakistan’s experience within global Islamic finance discourse, providing actionable insights for scholars and policy-makers on fostering inclusive and sustainable financial systems built on Islamic economic principles.