From Constitutional Prohibition to Regulatory Architecture: Riba Regulation in Pakistan and Malaysia and the Design of a Transition Law for Islamic Banking

Abstract

Pakistan and Malaysia both see Shariah compliance as important for Islamic banking but they have created very different legal systems to control riba. Pakistans system is based on a promise in the constitution to remove riba the rulings from the Federal Shariat Court and rules from the State Bank of Pakistan. Malaysias system is based on laws, a special Shariah Advisory Council at Bank Negara Malaysia and clear guidelines for how things should be done. This article uses that difference to make a case, for change. It looks at riba not as a religious rule but as an issue involving the order of laws, who is responsible how courts should handle it, who needs to be held accountable and how changes should be made. Using methods that look at the ideas and how things work the article examines Pakistans court system Malaysias rules about Shariah compliance and the guidelines set by both regulators. The article says that Pakistan has a constitution but less strong laws that go along with it. Malaysia on the hand has clearer ways to make sure things follow Shariah rules. Malaysia also has ways to report when things do not follow Shariah and has good teamwork between courts and regulators. The article says Pakistan should not just copy what Malaysia does. Instead Pakistan should take the parts of Malaysias system and make them fit for Pakistan. This should be done through a law about stopping interest and building an Islamic financial system. This law should explain what interest is make it required by law to follow Shariah rules create a group to handle Shariah finance set up a way for courts to refer to this group write down how to deal with cases where Shariah rules are not followed protect people who use financial services and plan a step-, by-step change before the 2028 deadline set by the constitution.