The government’s strategy to transition Pakistan towards an interest-free financial system after December 2027 indicates that trillions of rupees in interest obligations will continue to be paid even after January 1, 2028.
Nearly half of the federal budget is allocated to interest payments, while interest payments on domestic debt are also expected to continue.
According to official sources, the government will gradually shift new borrowing towards Shariah-compliant financial instruments after December 2027. However, conventional loans obtained before the deadline will continue to be repaid under their original interest-based agreements.
Sources said the government has limited control over external debt, while domestic banks may continue receiving significant interest payments on existing government loans even after transitioning to Islamic banking.
The government has allocated more than Rs8 trillion for interest payments in the 2026-27 federal budget. More than 70% of total interest payments reportedly go to domestic banks.
Under the official strategy, all conventional government debt existing until December 31, 2027, will be converted into Shariah-compliant financing instruments only after reaching maturity.
Until then, the government will continue repayments under the original contractual terms.
The 26th Constitutional Amendment, approved in October 2024, amended Article 38(f) of the Constitution and made the complete elimination of interest from Pakistan’s financial system by January 1, 2028, a constitutional requirement.
The government maintains that it is legally bound to honour its contractual commitments. However, sources said interest payments on domestic debt could face judicial interpretation due to a potential conflict with the constitutional amendment.
Under the official strategy, domestic banks will be required to transition to Islamic banking after December 2027. However, the Finance Ministry’s policy protects interest-based transactions and financial interests linked to agreements made before 2028.
Sources said a clear roadmap exists for shifting future government borrowing to interest-free financial instruments. However, the policy will not apply to existing loans.
Interest payments on existing debt will continue until the loans mature, after which they will be replaced with Shariah-compliant financing arrangements.
