The economic policies proposed under the banner of "Islamisation" in Pakistan include executive decrees on Zakāt (poor-due), Ushr (tithe), judicial changes that helped to halt land redistribution to the poor, and perhaps most importantly, elimination of riba (defined by activists as interest charged on loans and securities). Perhaps the foremost exponent of Islamisation among Pakistan's rulers—General Muhammad Zia-ul-Haq—advanced a programme in 1978 to bring (according to Zia and his supporters) Pakistan law in line with the principles of Sharia law.

Conceived in late 1977 and carried out during his reign, the programme came in response to an upsurge in Islamic activism, and the problems and controversies associated with the policies of Zia's predecessor, Prime Minister Zulfikar Ali Bhutto. Zia's stated intention was to "eradicate the scourge of interest" on loans and securities, and create an "interest-free economy". On January 1, 1980, approximately 7,000 interest-free counters were opened at all the nationalized commercial banks, making Pakistan the first country in the Muslim world with Islamic banking.

However, in spite of the public support allegedly demonstrated for it (and other Islamisation policies) by the 1984 Islamisation referendum and the programme's initial gains and success, it failed to achieve international targets and to meet commercial interactions with other major international banks. Islamic activists were also displeased that Zia's ordinances and proclamations did not ban interest paying accounts.

Zia's successors were not as active in their pursuit of Islamisation. While conservative Prime minister Nawaz Sharif publicly supported Islamisation, his economic policies focused on privatization and economic liberalization.See: Privatization in Pakistan and Economic liberalisation in Pakistan Many Pakistani economists and business people worry that attempting to impose an Islamic economy on Pakistan would have "devastating economic, political, and social consequences for the country", though others (such as governor of the State Bank of Pakistan, Ishrat Husain), have termed fears of Islamlisation "absurd" and based on Western stereotypes. Islamisation has continued through the efforts of the Islamic courts Zia created, including activists on the Shariat Appellate Bench of the Supreme Court, although it was given a setback when the government of Pervez Musharraf came to power and pressured a number of activist judges to retire.

History and background

As a state created specifically for Muslims, Pakistan has long had Islamic activists advocating for more thorough Islamisation of that country, and specifically for the elimination of riba (defined as interest on loans). But the country has also had Islamic modernists and secularists in positions of influence and "generations of Muslim usage and custom supported by the fatwa of respected ulema that held low rates of interest to be acceptable, non-usurious, and not riba", according to economist Feisal Khan.Khan, Islamic Banking in Pakistan, 2015: p.79 Even Allama Iqbal "the Thinker of Pakistan" (Mufakkir-e-Pakistan) "cited approvingly" the fact that Muslim princely states in India did not restrict modern banking or "attempt to impose some sort of `Islamic` concept of interest-free financial transactions."Khan, Islamic Banking in Pakistan, 2015: p.80 Consequently enthusiasm for Islamisation has waxed and waned throughout Pakistan's history. It has been strong when "religious elements are in ascendancy", such as during partition, the 1977 Nizam-e-Mustafa movement, and during the rise in fundamentalist after 2000. At other times "only lip service" is paid to the issue.Asi, Anwar, "Towards Islamic banking system", 2002 Maududi and other Islamist hoped to make Pakistan "a new Medina" which would become "the leader of the Islamic world in the twentieth century, a laboratory where experiments in Islamic modernity would be successfully conducted en route' to ushering a new Islamic renaissance".

Ashraf Qureishi and Abul A'la Maududi, two of the pioneer theoreticians of Islamic banking, who preached that interest was riba, forbidden to Muslim, and "laid the foundations of current" Islamic Banking and Finance in the 1940, were from South Asia. (Maududi moved to Pakistan where he became an influential Islamist leader.)Khan, Islamic Banking in Pakistan, 2015: pp.2, 60-64 According to Feisal Khan, "South Asians in general and Pakistanis in particular are `over-represented`" among Islamic Banking "theorist and practitioners," and Pakistanis are "found in Islamic banks and financial firms throughout the [Persian] Gulf at all levels, from tellers to the boardroom."Khan, Islamic Banking in Pakistan, 2015: p.2

Article 28 of Pakistan's 1956 Constitution called for the elimination of riba "as early as possible". The 1962 Constitution provided in the principles of policy that "usury" should be abolished. Similar provisions were found in the 1973 Constitution. In 1969 the state-sponsored advisory body known as the Council of Islamic Ideology (CII), declared that Pakistan's banking system was "fundamentally based upon riba", and unanimously called for its elimination.

The mid and late 1970s were a time of Islamic revivalism throughout parts of the Muslim world, including Pakistan. Zia's predecessor, leftist Prime Minister Zulfikar Ali Bhutto faced economic problems of stagflation and opposition to his programme of nationalization and land reform. In 1976 and 1977, vigorous opposition to Bhutto's policies united under the revivalist banner of Nizam-e-Mustafa ("Rule of the prophet") and preached that establishing an Islamic state based on sharia law would bring a return to the justice and success of the early days of Islam when the Islamic prophet Muhammad ruled Muslims. In an effort to stem the tide of street Islamization, Bhutto also called for Islamisation and banned the drinking and selling of wine by Muslims, nightclubs and horse racing. Confrontation between Bhutto's PPP and the opposition Pakistan National Alliance, street protests, loss of life and property, all preceded the military overthrow of Zulfikar Ali Bhutto by Zia in 1977. On coming to power, Zia committed himself to enforcing Nizam-e-Mustafa, a significant turn from Pakistan's predominantly secular law, inherited from the British.

Less than two years after the coup, Pakistan's Shia neighbor, Iran, saw a very unexpected Islamic revolution overthrow its well-financed pro-Western, secular monarchy. The new self-proclaimed revolutionary Islamic Republic of Iran believed in the necessity of Islamic sharia law for Islam to survive and prosper, and in the need to spread this doctrine to other Muslim states. Part of the Islamic revival revolution, created a new conflict in the Islamic world by pitting revolutionary Shia Iran against its doctrinal and geopolitical rival the conservative Wahhabi Kingdom of Saudi Arabia, for leadership of the Islamic world. As a poor, predominantly Sunni country, Pakistan has been closely tied to the petroleum-exporting Saudi Arabia which has employed many Pakistani guest workers. This competition for influence affected many things in Muslim countries, including economic policies.

Timeline of riba and banking

1956 - first constitution of Pakistan states that the state was to "eliminate riba as early as possible" (article 29(f)), but does not define riba.Khan, Islamic Banking in Pakistan, 2015: p.40 1969 - the Council on Islamic Ideology recommends that riba be abolished and the banking system be overhauled, recommendation is ignored by the government. 1971 - the Council on Islamic Ideology recommends that riba be abolished and the banking system be overhauled, recommendation is also ignored by the government. 1979, July - interest is eliminated from three financial institutions by order of General Zia. Effective 1 July 1979, General Zia declared that the affairs of the National Investment Trust, the House Building Finance Corporation, and the Investment Corporation of Pakistan were to be run on an interest-free basis through the adoption of profit-loss sharing (PLS). 1980, detailed Report on the Elimination of Interest from the Economy 1980, is issued by the Central Institute of Islamic Research at the request of ruling General Zia-ul-Haq. Calls for a complete elimination of interest in Pakistan's economy over a five-year period.Khan, Islamic Banking in Pakistan, 2015: p.78 1991, November - "monumental decision" by Federal Shariat Court of Pakistan overturning 20 federal and provincial financial laws as repugnant to Islam, forbids riba absolutely without exceptions. Tanzil-ur-Rehman having been brought out of retirement and appointed chief justice of the FSC, rules the financial Islamisation of Zia inadequate. 1999 - decision upheld by Shariah Appellate Bench finding financial Islamisation of Zia inadequate.Khan, Islamic Banking in Pakistan, 2015: p.7 After much stalling by the government and bureaucracy, the Faisal case was upheld by the Shariah Appellate Bench of the Supreme court (SAB) in the Aslam Khaki decision, with detailed orders to start the interest free economy. 1999 - SAB gives Pakistan government an additional year to Islamise. Pleading that implementation of the judgment would "create enormous problems" for the domestic, western-style banking and the economy, as well as Pakistan's "official and private business and financial dealings with the outside world", the government was given an additional year to Islamise by the Bench. 2002, May 24 - SAB is reconstituted by new President General Pervez Musharraf. With one Islamist removed and two new ulema judges added by order of Musharraf.Khan, Islamic Banking in Pakistan, 2015: p.123 2002 June 24 - decision by reconstituted SAB to "set aside" 1999 ruling banning all interest on bank loans. 1999 case is sent back to Federal Shariat Court (FSC) for "definitive finding on all the issues ..."Khan, Islamic Banking in Pakistan, 2015: p.124 2002 - "Reboot" of Islamic Banking. State Bank of Pakistan declares that banks and "windows" made "Islamic" as part of General Zia's 1979 Islamisation are not truly Islamic, but conventional. No new conventional banks are to be allowed in Pakistan.Khan, Islamic Banking in Pakistan, 2015: p.96 Banks (such as Meezan Bank and Al Baraka Bank) are converted into "full-fledged" Islamic commercial banks,Khan, Islamic Banking in Pakistan, 2015: pp.127-134 following global Shariah-compliance standardsKhan, Islamic Banking in Pakistan, 2015: pp.159 with Shariah Boards,Khan, Islamic Banking in Pakistan, 2015: pp.97 but also following conventional global banking norms such as the Basel Accords.

Policies and difficulties

Despite its success in initial first five years, the programme was fractured in many obvious reasons, and the stagflation again began to bite the country's resources, as well as many technical and scientific problems arise in the new economic system that the military government and Zia-ul-Haq himself was unable to solve. The newly elected, but technocratic government of Prime minister Mohammad Khan Junejo refused to pass the new and more stricter version of Sharia bill. Zia abruptly dismissed the government on May 29, 1988, and the dissolved parliament the next day, alleging a slow pace of Islamization, corruption, deterioration of law and order, and mismanagement of the economy.

Banning Riba, building Islamic banking General Zia declared that effective 1 July 1979 the affairs of the National Investment Trust, the House Building Finance Corporation, and the Investment Corporation of Pakistan were to be run on an interest-free basis through the adoption of profit and loss sharing finance (PLS). On January 1, 1980, he appeared on national television and announced the introduction of a "Profit and Loss Sharing System", according to which account holders were to share the losses and profits of the bank.