Certificates. From July 1, 1982 banks were allowed to provide finance for meeting the working capital needs
of trade and industry on a selective basis under the technique of Musharaka.
As from April 1, 1985 all finances to all entities including individuals began to be made in one of the
specified interest-free modes. From July 1, 1985, all commercial banking in Pak Rupees was made interest-
free. From that date, no bank in Pakistan was allowed to accept any interest-bearing deposits and all
existing deposits in a bank were treated to be on the basis 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 these accounts.
However, foreign currency deposits in Pakistan and on-lending of foreign loans continued as before. The
State Bank of Pakistan had specified 12 modes of non-interest financing classified in three broad categories.
However, in any particular case, the mode of financing to be adopted was left to the mutual option of the
banks and their clients.
The procedure adopted by banks in Pakistan since July 1 1985, based largely on ‘mark-up’ technique with
or without ‘buy-back arrangement’, was, however, declared un-Islamic by the Federal Shariat Court (FSC)
in November 1991. However, appeals were made in the Shariat Appellate Bench (SAB) of the Supreme
Court of Pakistan. The SAB delivered its judgment on December 23, 1999 rejecting the appeals and
directing that laws involving interest would cease to have effect finally by June 30, 2001. In the judgment,
the Court concluded that the present financial system had to be subjected to radical changes to bring it into
conformity with the Shariah. It also directed the Government to set up, within specified time frame, a
Commission for Transformation of the financial system and two Task Forces to plan and implement the
process of the transformation.
The Commission for Transformation of Financial System (CTFS) was constituted in January 2000 in the
State Bank of Pakistan under the Chairmanship of Mr. I.A. Hanfi, a former Governor State Bank of Pakistan.
A Task Force was set up in the Ministry of Finance to suggest the ways to eliminate interest from
Government financial transactions. Another Task Force was set up in the Ministry of Law to suggest
amendments in legal framework to implement the Court’s Judgment. The CTFS constituted a Committee for
Development of Financial Instruments and Standardized Documents in the State Bank to prepare model
agreements and financial instruments for new system.
The CTFS in its Report identified a number of prior actions, which were needed to be taken to prepare the
ground for transformation of the financial system. It also identified major Shariah compliant modes of
financing, their essentials, draft seminal law captioned ‘Islamization of Financial Transactions Ordinance,
2001’, model agreements for major modes of financing, and guidelines for conversion of products and
services of banks and financial institutions. The Commission also dealt with major products of banks and
financial institutions, both for assets and liabilities side, like letters of credit or guarantee, bills of exchange,