Pakistan's Supreme Court in December 1999 ruled that the government must transform and replace the existing interest-based system with an Islamic banking and financial system by 2001.
In order to implement the Supreme Court decision, the government formed a commission headed by a former governor of the central state bank of Pakistan, I. A. Hanfi, with a task to formulate an action plan for the implementation of the proposed Islamic financial system.
"The commission has held four meetings since coming into being in January. We will meet again in July to review and formulate the schedule for the implementation," Hanfi said.
He said the process of formulating the implementation plan should not be done in haste. The commission was already behind its schedule in submitting the report, as originally the plan was to be ready by March.
"Various committees appointed by the commission to look into various areas of Islamisation of the financial sector, internal and external, are working hard to place a practical system capable of replacing the existing system," Hanfi said.
Although the commission aims to formalise the plan and implementation strategy in its forthcoming meeting in July, insiders say it is not possible. "We do not expect to submit the firm schedule and modalities by July," an insider said, adding that it might take until September or even later.
Chief economic advisor to the central bank Ashraf Janjua said the government could seek more time in case the commission fails to complete its task on time. Doing away with the interest-based financial system and enforcement of the Islamic financial system was always a demand by Pakistan's right wing religious parties. The system is part of the belief of Moslems who are in majority in Pakistan and many say they want it to be implemented quickly.
"This is our belief that interest is prohibited in Islam and we all are forced to commit sin by doing transactions under the existing interest-based system", said Mohammad Suleman, a trader.
The Islamic financial system is based on justice and profit and loss sharing that ensures that there was no exploitation, a jamaat-i-Islami leader said. But there are certain elements that believe that the present system is not un-Islamic and see major problems if the current system is changed.
"We see major problems in dealing with foreign loans and foreign government funding as no country or international financial institution recognizes the Islamic system," Abul Rehman, a local businessman said.
"The Islamic system can work, we can do business on profit and loss sharing basis. Financing can also be done through the proposed system," Jahangir Siddiqi, chairman of a leading brokerage house, said.
"We may be facing a problem in dealing with the International Monetary Fund (IMF), World Bank or other international financial institutions and the foreign governments," chief economic advisor Asharaf janjua admitted.
"We would try to convince them to work with us on profit and loss sharing basis. If they do not agree, we would fulfill our foreign commitments and obligations," he said.
But he expressed confidence that once the alternate system is in place Pakistan would be the first country in the world to have truly Islamic financial system. The major problem is that no Islamic country has tried this before, although Iran, Sudan and Malaysia have introduced partial measures in this regard. In Pakistan also certain financing modes have been introduced but they are not fully in conformity with the requirement of Islamic system, he added. "We have discussed it with legal experts and they are of the view that this transformation could be done. As a foreign banker I do not see any problem in carrying out business in Pakistan," Nadeem Hussain, Pakistan's Citibank chief, said.
The commission is examining all financial papers and modes before finalising its firm strategy, chairman of the commission Hanfi said.
"I am confident that domestic business transactions could be transformed into a Islamic financial system soon," Hanfi said, but he gave no deadline.