ISLAMIC AND CONVENTIONAL BANKING IN PAKISTAN: LEGAL CONFLICTS, HARMONIZATION, AND BUSINESS IMPLICATIONS

Abstract

Pakistan has a dual banking system with Islamic banks and conventional banks exposing a complicated scenario of the legal framework, religious values, and business realities. This study critically analyses the statutory framework that administers the two systems showing inherent contradictions as well as those areas where there is a necessity of harmonization and where there is such an effort. Although, Islamic banking in Pakistan has its foundation on the Shariah law that forbids interest (riba) and encourages profit and loss sharing and ethical investment whereas conventional banking has its base on the secular financial models that rely on interest system driven transactions and risk management procedures.

As proposed in this paper, coexistence of these two contradictory systems in legal extents produces roughness amidst regulatory practice, a judicial approach, and commerce uniformity. The most important of these legal tools, “The State Bank of Pakistan Act”, “The Banking Companies Ordinance 1962” and “The Shariah Governance Framework”, are scrutinized to determine whether they manage to narrow or expand this gap. Much attention is devoted to the decisions of the Federal Shariat Court and the mandate to Islamize the economy together with its politics that tend to conflict with the actual realities of a global financial system.

In complementing the legal analysis, this paper has integrated in them the business-side of the coin to reflect how each banking model performs in terms of market behavior, customer trust, financial performance, and risk management. Academic research and case evidence on profitability, service quality and product innovation between Islamic and conventional banks are the sources of empirical understanding. Malaysia and Gulf Cooperation Council (GCC) countries present some comparative learning about regulatory reconciliations and institutional forms of adaption.

Through the results, it is clear that there is no coexistent legal and regulatory system to harmonize the dual system in Pakistan, although the Islamic banking system has developed so well. The legal fragmentation is a source of inefficiency and confusion to the investors, regulators and even consumers. In terms of business information, they reveal that although the Islamic banks are becoming more popular due to the interest of the people to use religion and ethical operations, the conventional banks continue to dominate in and undergo technology innovations.

The paper concludes with concrete legal and policy recommendations aimed at aligning Islamic banking regulations with business competitiveness and international best practices. It proposes the development of a unified legal framework, enhanced judicial capacity for financial jurisprudence, and mandatory Shariah compliance audits. Ultimately, this interdisciplinary approach bridges doctrinal law and business studies to provide a more integrative understanding of Pakistan’s commercial banking future.