Journal of Islamic Business and Management

Challenges of Transforming Riba-based Government Debt in Pakistan to Sharī´ah-Compliant Instruments

Riaz Riazuddin
Published Online: December 2011
DOI: 10.1111/jibm

Substantial progress was made in Pakistan during the first decade of twenty first century towards the transformation of financial activities to sharī´ah compliance. This was based on earlier work of many scholars spread over several decades after the inception of Pakistan. The parallel approach adopted in the country has the potential to reach the ideal, if and only if, concerted efforts from key national institutions continue to move forward. Progress has been much slower in respect of Islamisation of government debt obligations, although the sharī´ah-complaint instruments have been used successfully by the private sector to mobilize resources through musharaka based TFCs. This paper identifies the causes for slower growth and the benefits of overcoming the challenges which are: eliminating the domestic debt held by the central bank; acquirement of sharī´ah compliant debt obligations by SBP to conduct monetary policy; challenges relating to the issuance of Government of Pakistan (GoP) Ijara sukuk - limited availability of non-encumbered government assets; creating appropriate non-interest-based benchmarks for linking sharī´ah-compliant returns and gradually transforming the mindset of investors towards broader acceptability of sharī´ah-compliant products through publicity campaigns. The paper suggests that an asset survey be undertaken by the government to identify and document the assets for enabling future sukuk issuances. Some other suggestions are also offered to speed up the process of transformation towards sharī´ah compliance


GoP; Ijarah; sukuk; Sharī´ah-Compliant Instruments; Definition of Riba; Central Bank Balance Sheet; Ibn Khaldun; Inflation Targeting.