With the passage of the 26th Constitutional Amendment Bill, 2024, Pakistan has set an ambitious deadline to eliminate Riba (interest) from its financial system by January 1, 2028. This landmark legislation reinforces the Federal Shariat Court’s earlier ruling that an Islamic economy must be free of interest-based transactions. While the move is being hailed as a historic step, it also raises critical questions about the practicality of transforming a financial system deeply entrenched in interest-based mechanisms.
The newly enacted amendment formalizes a long-standing aspiration rooted in Pakistan’s early years as an Islamic republic. The Holy Quran explicitly prohibits Riba, and the Prophet Muhammad (Peace Be Upon Him) strongly condemned its practice. In 2022, the Federal Shariat Court set a five-year deadline for implementing a Riba-free financial framework. The 26th Amendment extends this deadline to 2028, giving constitutional weight to what had previously been a judicial mandate. However, the challenge lies not just in legal enforcement but in reimagining the financial architecture itself.
For decades, attempts to “Islamize” Pakistan’s financial system have faced criticism for merely rebranding conventional banking practices. Islamic banks, while expanding in market share, often replicate the risk-averse and profit-seeking behavior of conventional banks. Products labeled as Shariah-compliant frequently mirror the structures of their interest-based counterparts, leading to skepticism about their authenticity. The larger issue lies in the systemic reliance on interest-driven models, particularly in government borrowing and credit allocation.
One of the most significant hurdles in achieving a Riba-free economy is the sovereign-bank nexus. Commercial banks in Pakistan profit heavily by lending to the government at high interest rates, leaving limited credit available for the private sector. Small and medium enterprises, agriculture, and large-scale manufacturing—key pillars of the economy—struggle to access affordable financing. High policy rates, which recently reached 22 percent, exacerbate this issue, making borrowing unaffordable for ordinary entrepreneurs. Even within Islamic banking, these constraints persist, highlighting the limitations of current models.
In this context, financial technology-based innovations, particularly Decentralized Finance (DeFi), emerge as a potential solution. DeFi is a blockchain-based ecosystem that facilitates peer-to-peer lending, borrowing, and trading of assets without traditional financial intermediaries. At its core, DeFi operates through smart contracts—self-executing agreements that distribute risks and rewards based on predefined rules. By eliminating intermediaries, DeFi reduces overheads and offers greater transparency, aligning with Islamic principles of equity, risk-sharing, and asset-backed financing.
Global markets have already demonstrated the potential of DeFi to reduce dependence on interest-based structures. Platforms like Aave and Compound facilitate millions of dollars in daily transactions without the need for face-to-face interactions or traditional banking intermediaries. While the technology is neutral, it can be tailored to function without conventional interest. Instead of earning through compounding interest, DeFi protocols can profit through fees, shared-risk arrangements, or asset-based transactions—all compliant with Islamic finance principles.
DeFi’s peer-to-peer architecture addresses several inefficiencies in Pakistan’s current financial system. Traditional bank loans often require excessive collateral, lengthy credit checks, and prohibitively high-interest rates for small borrowers. DeFi, in contrast, allows borrowers to pledge digital assets as collateral and secure funding directly from lenders, with all transactions executed through smart contracts. This model significantly lowers overhead costs and eliminates the labyrinth of bureaucratic approvals.
Moreover, DeFi platforms can democratize access to finance by enabling small farmers or entrepreneurs to secure cost-plus financing (similar to Murabahah in Islamic finance) directly from global savers. By leveraging blockchain’s transparency, DeFi ensures that contractual terms are clear and enforceable, reducing the risks of exploitation or hidden charges. For a country like Pakistan, where financial inclusion remains a challenge, this technology could bridge the gap for unbanked and underbanked populations.
The potential benefits of DeFi extend beyond individual borrowers. By shifting toward asset-backed and risk-sharing models, DeFi could mitigate Pakistan’s chronic inflation problem, which is often linked to excessive money creation and government borrowing. A diversified credit market, driven by DeFi, could reduce reliance on interest-rate hikes as a tool for controlling inflation, fostering a more stable economic environment.
However, transitioning to a DeFi-driven financial system is not without challenges. Pakistan’s digital infrastructure needs significant upgrades to support blockchain-based solutions. Secure internet access, user-friendly mobile applications, and widespread financial literacy are prerequisites for successful implementation. Education campaigns will be essential to familiarize citizens with digital wallets, smart contracts, and risk management in a blockchain ecosystem.
Regulation is another critical factor. Governments worldwide are grappling with the complexities of overseeing decentralized financial systems. For Pakistan, a gradual, sandboxed approach—where pilot projects operate under defined limits—could allow policymakers to refine regulatory frameworks without stifling innovation. The State Bank of Pakistan (SBP) has already shown interest in digital Islamic banking, granting approvals for fully digital retail Islamic banks. Collaborative efforts between Shariah scholars, regulators, and financial technology experts will be crucial in ensuring that DeFi solutions adhere to Islamic principles while safeguarding consumer interests.
One way to address the volatility associated with cryptocurrencies in DeFi is by using stablecoins or tokenized real assets. These digital tokens, pegged to tangible assets like gold, real estate, or government Sukuk, align with Islamic finance’s requirement for asset-backed transactions. Additionally, public-private partnerships can drive the development of localized DeFi platforms with interfaces in Urdu and regional languages, making the technology accessible to a broader audience.
As policymakers and scholars deliberate on the next steps, it is evident that legal prohibitions on Riba alone will not suffice. The journey toward a truly Riba-free economy requires innovative solutions that address systemic inefficiencies and widen access to ethical financing. DeFi, with its potential for transparency, inclusivity, and alignment with Islamic principles, offers a promising roadmap.
The 26th Constitutional Amendment Bill is a historic milestone, but its success will depend on how effectively Pakistan leverages modern technology to reshape its financial system. DeFi stands out as a revolutionary tool that could help bridge the gap between the ideals of an Islamic economy and the practical realities of today’s financial challenges. By embracing this technology under robust regulatory oversight, Pakistan can take a significant step toward a more equitable and Riba-free economic future.
