RECONCILING LAW AND FAITH: REGULATORY HURDLES IN PAKISTAN'S ISLAMIC BANKING FRAMEWORK

Abstract

In spite of the fact that Islamic banking in Pakistan is conforming to the country's Islamic identity, Islamic banking implementation has met hurdles in the form of legal challenges. The biggest issue is the dual banking system; Islamic banks coexist with other conventional banks, which adds many complexities to regulation. Because there is no overarching legal framework specifically for Islamic finance, this is found in conflict with existing laws applicable to interest-based banking. Moreover, the absence of industry-standardized Shariah compliance mechanisms has been highlighted as a potential source of irregularity and lack of credibility. There is also a problem of insufficient judicial expertise in Islamic jurisprudence in interpreting Islamic financial contracts like Murabaha and Musharakah, which often lead to legal disputes. In addition, Islamic banking structures are generally not catered for in tax laws and financial regulations. To address these challenges, Pakistan will require robust legislative reforms, specialized training of legal professionals, and a centralized Shariah regulatory authority to provide consistency and build trust in Islamic banking.