Few developments in Pakistan’s financial sector have grown as rapidly, or generated as much debate, as Islamic banking. Today, Islamic banks serve millions of customers and account for almost 30 per cent of the country’s banking industry. Yet questions remain: is Islamic banking genuinely different from conventional banking, or merely a change of terminology?
Having spent much of my professional life involved in the development of Islamic banking, I believe these questions deserve thoughtful answers rather than slogans. Healthy criticism strengthens any system, but criticism should be based on an accurate understanding of how Islamic banking actually works.
One reason the criticism of Islamic banking evolves is that people often evaluate it based on its similarities to the conventional banking system and jump to the conclusion that both systems are the same because they look similar.
Islamic banking was never intended to create a financial system in which every commercial outcome differs from that of the conventional financial system. Its objective is to ensure that financial transactions are concluded through contracts and arrangements that comply with Shariah principles. Even in commercial law, transactions are not judged solely by their commercial outcomes, but by the nature of the rights, obligations, and risk relationships they create.
Just as a landlord is entitled to rent regardless of a tenant’s business profitability, a lease-based Islamic financing arrangement has its own commercial and legal logic
A distinction needs to be made between the commercial outcomes of transactions and the underlying nature of those transactions. Once this distinction is appreciated, many of the questions that frequently arise about Islamic banking can be understood in a clearer and more balanced context.
One common objection is that Islamic banking is supposed to be based entirely on profit-and-loss sharing, yet most financing today is conducted through sale- and lease-based modes. This criticism arises from a misunderstanding of the objectives of Islamic finance. From the very beginning, the goal was not to reinvent banking. Rather, it was to ensure that financial transactions comply with Shariah principles. While profit-and-loss sharing modes such as Musharakah and Mudarabah remain important, Islamic law also recognises trade, leasing and partnership arrangements as legitimate means of conducting business.
A bank that finances an asset through Murabaha or leases equipment through Ijarah is not claiming to be a venture capitalist sharing every gain and loss of the customer’s business. The nature of the contract determines the rights and obligations of each party. Just as a landlord is entitled to rent regardless of a tenant’s business profitability, a lease-based Islamic financing arrangement has its own commercial and legal logic.
Another criticism is that Islamic banks merely complete paperwork, with no real transaction taking place. This allegation overlooks the extensive legal, regulatory and operational structures surrounding Islamic banking. If the underlying transactions were fictitious, it would imply that banks, auditors, regulators, lawyers, courts and Shariah scholars are all collectively engaged in deception. The documentation in Islamic banking reflects real sales, purchases, leases, and partnership transactions that create legally enforceable rights and obligations.
The debate over the Karachi interbank offered rate, Secured Overnight Financing Rate, and other benchmarks is also frequently misunderstood. A benchmark is merely a reference point used to determine pricing. It does not define the nature of the transaction itself.
What determines permissibility is the underlying contract and process, not the benchmark used for pricing. For example, a rental transaction with a rental rate of 10pc is permissible, while a loan transaction with a profit rate of 10pc is impermissible, because it is permissible to charge rent but impermissible to charge profit on a loan, regardless of the similarity of rates between the two transactions.
Some critics argue that Islamic banks do not provide adequate returns to depositors. In reality, profit distribution is among the most closely regulated aspects of Islamic banking. Depositors participate in the returns generated by the underlying asset pool, and the system is subject to detailed regulatory oversight designed to ensure fairness and transparency.
Islamic banking has also contributed meaningfully to financial inclusion. Many individuals who were previously reluctant to engage with conventional banking have entered the formal financial system through Islamic banking channels. This has broadened access to savings, payments, financing and investment opportunities.
Perhaps the strongest evidence of public confidence is its continued growth. Millions of customers, thousands of businesses and an increasing number of institutions use Islamic banking services every day. The rapid conversion of conventional banking operations to Islamic banking further demonstrates growing acceptance.
None of this means that Islamic banking should be complacent. There remains room for improvement in product development, customer understanding, financial inclusion and support for underserved sectors, particularly small and medium enterprises. But the central question remains simple: if customers can obtain banking products and services that meet their financial needs while remaining aligned with their religious values, why would they not choose them?
The writer is the Founder of Meezan Bank Limited. He was the President & CEO from the inception of the bank in 1997 till December 2025.
Published in Dawn, The Business and Finance Weekly, June 22nd, 2026
