Strategic Directions for Developing an Islamic Banking System

Islamic banking generally referred to as interest free banking has been gaining popularity in the recent past. The main pillar of Islamic finance is prohibition of interest. Unlike conventional banking where interest is an integral part of the banking system, Islamic banking avoids interest in all bank transactions [Samad and Hassan (1999)]. The banking system in Pakistan is undergoing a transition from conventional model of banking to the new concept of Islamic banking, based on principles of Islamic economics. The new system should not only eliminate interestbased transactions but also introduce the concept of “Zakah” a contribution to the poor [Molla, et al. (1988)]. The prohibition of Riba is based on the arguments of social justice and equality.