SBP to complete Shariah-compliant monetary policy framework before 2028-INP

By Abdul Ghani

The State Bank of Pakistan (SBP) is set to complete the transition to a Shariah-compliant monetary policy framework before January 2028 as part of the country's broader strategy to establish a Riba-free financial system while preserving financial stability and the central bank's mandate of maintaining price stability.

According to the Post-2027 Financial System in Pakistan strategy paper, available with Wealth Pakistan, the central bank has already made significant progress in aligning its monetary operations with Shariah principles, with additional reforms planned to complete the transition before the constitutional deadline for eliminating Riba.

The strategy states that the SBP will continue to formulate and implement monetary policy with the primary objective of maintaining price stability, but the policy framework will increasingly rely on Shariah-compliant monetary instruments and operations instead of conventional interest-based mechanisms.

According to the document, the central bank has already introduced Shariah-compliant Open Market Operations (OMOs) to inject liquidity into the banking system. A Shariah-compliant standing facility for liquidity support is also available and operational, while additional facilities for liquidity absorption and placement will become operational as sufficient sovereign Sukuk become available in the market.

The strategy explains that the availability of a wider range of government-issued Sukuk will play a crucial role in enabling the SBP to conduct monetary operations under the new framework. These instruments will allow the central bank to inject or absorb liquidity while supporting effective monetary management in accordance with Shariah principles.

The document notes that a comprehensive review of the SBP's monetary policy formulation and implementation framework is currently underway to assess its conformity with Shariah principles. According to the initial assessment, the existing framework is already largely compatible with Islamic finance, with only a limited number of operational changes required to complete the transition. The review is scheduled to be completed by December 2027.

Beyond monetary policy, the strategy also envisages a review of the broader regulatory and supervisory framework governing Pakistan's financial sector. It states that the existing framework is comprehensive and broadly aligned with international standards, while regulators have already identified amendments needed to ensure full conformity with Shariah principles. Most of the regulatory structure already complies with Islamic finance requirements, and the remaining amendments are expected to be notified after consultation well before December 2027.

The strategy stresses that Pakistan's financial regulations will continue to remain aligned with internationally recognised prudential, governance and risk management standards issued by global standard-setting bodies, including the Basel Committee on Banking Supervision (BCBS), Financial Stability Board (FSB), International Accounting Standards Board (IASB), International Organization of Securities Commissions (IOSCO), International Association of Insurance Supervisors (IAIS), Islamic Financial Services Board (IFSB) and the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI).

The document also outlines measures to strengthen Shariah-compliant financial safety nets that support stability within the banking system. It notes that a Shariah-compliant lender-of-last-resort facility is already available for Islamic banks, while an Islamic deposit protection scheme is operational to safeguard eligible deposits held with Islamic banking institutions. The strategy further states that Pakistan's financial institution resolution and recovery framework will also be updated to ensure consistency with the post-2027 financial system.

In addition, the strategy addresses one of the industry's operational concerns by outlining progress on the treatment of retained earnings for conventional banks planning to transform into Islamic institutions. A dedicated SBP workstream comprising central bank officials, Shariah scholars and banking industry experts has developed several Shariah-compliant options that would allow transforming banks to retain their accumulated earnings on their balance sheets after conversion. Some of these options have already received approval from the SBP's Shariah Advisory Committee, while the remaining proposals are expected to be approved in due course.

According to the strategy paper, these reforms are intended to ensure that Pakistan's monetary policy framework, regulatory architecture and financial safety mechanisms continue to support macroeconomic stability while facilitating a smooth transition to a fully Shariah-compliant financial system after 2027.

Credit: INP-WealthPk