Caliphate, Economy, Featured

Islamic Monetary Policy in light of Pakistan’s ban on riba (interest)

The Federal Shariat Court (FSC) of Pakistan announced on April 28th 2022 that the current interest-based banking system is against sharia, and directed the government to implement an interest (riba)-free banking system by December 2027.[1] In fact, the first petition for the abolition of the interest-based banking system was filed in the FSC on June 30, 1990 and it has taken 32 years for a final verdict to be issued![2]

It is well-established in Islam that riba is against sharia because of the numerous clear-cut verses of the Holy Quran such as, “O believers! Fear Allah, and give up outstanding interest if you are ˹true˺ believers. If you do not, then beware of a war with Allah and His Messenger!”[3] and “But Allah has permitted trading and forbidden interest.”[4]

While most Muslims support a ban on riba, very few understand the alternatives to the existing economic system of banking and monetary transactions. The alternatives that emerge focus on offering interest-free loans through complex financial products, where the recipient still pays more than the capital. Those with savings accounts don’t receive interest, but profit on their money by investment schemes implemented by the ‘Islamic’ banks.

Islamabad Chamber of Commerce & Industry (ICCI) President Shakeel Munir said that being a Muslim, the ruling on riba-free banking was a welcome decision for everybody, “But the fact is that Pakistan is under an IMF programme and this is not an easy decision to implement,” he said.[5]

The global banking system is based on interest and all Muslim countries deal in interest even if their constitutions say otherwise. According to article 8 of the Saudi constitution it states, “Governance in the Kingdom of Saudi Arabia is based on justice, shura (consultation) and equality according to Islamic Sharia,”[6] yet, last year Saudi Arabia loaned Pakistan $3billion at an annual interest rate of 4%![7]

The Prophet Muhammad ﷺ said: “There will come a time when there will be no one left who does not consume riba, and whoever does not consume it will nevertheless be affected by its residue.”[8]

The ghubaar (dust or residue) mentioned in the hadith is because riba-based banking is one part of macroeconomics and cannot be detached from the other parts of the economy. Banning riba, but continuing with a fiat-based currency, which is also against the sharia, will lead to a dysfunctional economy. If the ruling system is not based on sharia, then this will also have an impact on the economy. This is why all systems within a state must be based on sharia, in harmony with the concepts, criteria and convictions of society, and this is what the Islamic Khilafah system provides.

What follows is an extract from the book ‘Comparative Economics – Islam’s Panacea to maladies of Capitalism,’ by Faruq ibn Qaysr which mentions six advantages of removing riba from an economy. These advantages would only apply as part of a wider Islamic monetary policy which includes implementing a gold and silver-based currency.


It is worth recalling that in contrast to the fiat currency, a gold standard is naturally more rigid. Thus Islamic monetary policy is restricted, insofar as it would seek to influence the supply of money through a fixed number of tools. This is not to say that the state is unable to influence the economy. On the contrary, in order to alter the money supply, it would merely need to buy/sell specie, invest/divest in mining/minting industries, etc.

As for contemporary monetary policy, Islam has categorically forbidden the use of interest. In fact, it is impermissible for one to loan out money on condition that the borrower has to pay the principal and more (interest). This is supported by many textual evidences. The following verse, delineates this particular issue and the severity of dealing with usury in an Islamic economy. Allah (Most High) says in the Holy Quran:

Those who consume interest will stand ˹on Judgment Day˺ like those driven to madness by Satan’s touch. That is because they say, “Trade is no different than interest.” But Allah has permitted trading and forbidden interest. Whoever refrains—after having received warning from their Lord—may keep their previous gains, and their case is left to Allah. As for those who persist, it is they who will be the residents of the Fire. They will be there forever.[9]

This should be the starting point for the Muslim; rather than appraising the rational advantages and disadvantages of interest as an economic policy/variable, we should first appreciate what Islam has decreed. That being said, to remove interest from the equation is to remove many issues within the greater economy.

  1. Firstly, it would greatly reduce the burden on debtors, which would ultimately prevent many defaults.
  2. Secondly, replacing interest-based agreements with definitive interest-free contracts would allow agents (such as investors, consumers, producers, etc) to make improved economic decisions due to a lack of short run volatility and greater long run clarity.
  3. Thirdly, the removal of interest would chain economic profit to real growth so as to not misconstrue performance.
  4. Fourthly, it would avert the cyclical effort to stabilise interest and inflation, which tends to complicate the market with uncertainty. In fact, due to the adoption of a classical gold standard, agents needn’t worry about the interest rate nor prices, for the former is non-existent and the latter is easy to maintain at a low level due to the nature of a commodity backed currency.
  5. Fifthly, with the abolition of interest, Islam would secure both present and future with a natural rate of economic activity as opposed to accelerated consumption and production in the present.
  6. Finally, both investors and households would also have a lower propensity to save, thus allowing for a greater circular flow of income and subsequently higher levels of growth.

As for adjusting the money supply through quantitative easing, reserve requirements and the repurchase rate; these policies would not exist under Islam, as it is the bimetallic standard that restricts credit manipulation. Here, the lack of monetary policy is not indicative of a weaker economic system, rather a stronger one. Through such a currency (whose benefits have already been discussed), the associated effects of the fiat are eradicated along with the failed policies that seek to influence its supply.

To conclude, capitalist monetary policy is an ineffective tool to cure the economy in the long run. This is because it is a means to treat the symptoms of an issue as opposed to its root cause. It can therefore be said, that the laissez-faire system, through the use of monetary policy, is only capable of delaying its own demise. In contrast, Islam, unlike capitalism, is an effective and sustainable economic system that has the capacity to resolve all of the aforementioned monetary issues.[10]


[1] Dawn Newspaper, ‘The Federal Shariat Court declares interest-based banking system against Sharia,’

[2] Ibid

[3] Holy Qur’an, Chapter Al-Baqara, verse 278-279

[4] Holy Qur’an, Chapter Al-Baqara, verse 275

[5] Dawn Newspaper, ‘Businesses weigh options after court decision on Riba-free banking,’

[6] The Embassy of the Kingdom of Saudi Arabia, Washington DC,

[7] Reuters, ‘Pakistan receives $3 billion loan from Saudi Arabia,’

[8] Sunan an-Nasa’i 4455,

[9] Holy Qur’an, Chapter Al-Baqara, verse 275

[10] Faruq ibn Qaysr, ‘Comparative Economics – Islam’s Panacea to maladies of Capitalism,’ pp.84