Chapter 6: Issues in Legalistic Islamic Banking Operating Parallel with the Conventional Banking: The Case of Pakistan

This chapter investigates the operational challenges confronting Pakistan’s Islamic banking sector within a dual financial system. While grounded in ethical principles and sharīʿah compliance, the industry faces significant structural and regulatory obstacles, including parallel regulatory systems, liquidity constraints, and increasing product similarity with conventional banking. The study traces Pakistan’s financial Islamisation journey, from the unsuccessful non-interest-based initiative of the 1980s to the current dual banking model implemented since 2002. The analysis focuses on contentious financial instruments such as running mushārakah, currency salam transactions, and structured tawarruq arrangements, along with the State Bank of Pakistan’s mudārabah-based financing facility and open market operations for Islamic liquidity management. The research evaluates these mechanisms against the core objectives of Islamic finance, while also examining their socio-economic implications, particularly regarding profit distribution fairness and inadequate financing for small businesses and agricultural sectors.