Interest-free banking in Pakistan

A circular of the State Bank of Pakistan requires all finances provided by Pakistani banks to be based on prescribed Islamic financing methods after January 1, 1985. After July1, 1985 banks will only be allowed to accept deposits on a non-interest bearing profit and loss sharing basis. The categories of profit and loss sharing financing are lending, trade-related, and investment-type financing. Banks will only be allowed to extend interest-free loans and loans based on compassion. Modes for each category of financing are specified. The principal methods of financing are investment-type methods and include musharaka , equity participation and purchase of shares, purchase of participation term certificates, and mudaraba certificates. To protect against default, banks rely on securities and legislative measures. The major problem is the efficacy of the remedies banks have against defaulters. The switch to an interest-free system has raised questions about the effect of the syst