With the passage of the 26th Constitutional Amendment Bill, 2024, Pakistan has set an ambitious deadline of eliminating Riba (interest) from its financial landscape by January 1, 2028. The measure formalises what the Federal Shariat Court had already underscored that an Islamic economy must be free of interest-based transactions.
Yet, as central authorities and religious scholars rally around this legislative milestone, the most pressing question remains: what comes next? One can glance at our banking system, beholden to large-scale government borrowing and high policy rates, and wonder whether current models, even those packaged as “Islamic”, are enough to foster a truly equitable, Riba-free environment.
It is in this backdrop that financial technology-based innovations in the form of Decentralised Finance (DeFI) emerge as potential game-changers. Far from a futuristic gimmick, DeFi has already proven capable of reducing dependence on conventional interest-driven structures in numerous markets worldwide. For Pakistan, it may just offer the viable roadmap we need.
The clamour for eliminating Riba dates back to the country’s early years. Multiple verses in the Holy Quran explicitly forbid interest, and the Prophet Muhammad (Peace Be Upon Him) strongly condemned its practice. More recently, the Federal Shariat Court’s ruling in 2022 gave a five-year deadline for implementing an Islamic banking system. The newly enacted 26th Amendment extends this timeline to January 2028, adding constitutional heft to what had previously been a judicial mandate.
Yet, this is not the first time such reforms have been proposed. Past attempts at “Islamising” finance often stumbled, mainly because they continued to replicate conventional banking, layering new terminology over interest-based mechanisms. While Islamic banks expanded modestly, critics questioned whether products labelled as Shariah-compliant were substantively different from their conventional counterparts. The real problem, it seems, lies in the financial architecture itself: whether it is foreign lenders or domestic banking behemoths, the prime model of money-making remains interest-driven.
Much of the blame for our perpetual credit crunch falls on what economists call the sovereign bank nexus. Commercial banks profit handsomely by lending to the government at lucrative interest rates and with minimal risk. Consequently, credit to the private sector, especially small and medium enterprises, is crowded out.
This dynamic has been exacerbated by soaring policy rates, reaching 22 percent in recent memory, making loans nearly impossible for ordinary entrepreneurs. Meanwhile, large-scale manufacturing and agriculture, the backbone of any healthy economy, remain starved of affordable capital. Even within the Islamic banking domain, the sector, while growing, continues to face similar constraints.
Products intended to circumvent interest often end up mirroring the same risk-averse and profit-seeking priorities that define conventional banks. The result is a system that still skews credit towards top-tier borrowers or the government itself. For a truly Riba-free environment, we need to break this cycle of government-centric lending and narrow the gap between savers and borrowers in a way that is transparent, ethical, and mutually beneficial.
Enter DeFi, a block chain-based ecosystem that facilitates lending, borrowing, and trading of assets without traditional financial intermediaries. At its heart, DeFi uses smart contracts, i.e., self-executing agreements that automatically distribute risk and rewards based on predefined rules.
This approach has already caught on in global markets, where platforms like Aave and Compound allow millions of dollars to flow daily between users who never meet face-to-face. One might ask: what makes DeFi inherently more “Islamic”? The technology is neutral, but it can be designed to function without “interest” as we commonly know it. Instead of earning from compounding interest payments, lenders in many DeFi protocols profit through fees, shared risk-based arrangements, or asset-based transactions.
The terms are transparent: the block chain ledger is publicly auditable, and smart contracts auto-enforce the rules without partiality. If structured to adhere to Islamic principles, i.e., focusing on equity, asset-backing, and risk-sharing, DeFi can bypass the hallmark pitfalls of conventional interest-based banking.
Central to DeFi’s appeal is its peer-to-peer architecture. Today, bank loans often require collateral far exceeding the principal, lengthy credit checks, and (for smaller borrowers) near-prohibitive interest rates. Through DeFi, a borrower can pledge digital assets as collateral, while the lender directly funds the loan, all executed by smart contracts. The overheads drop drastically: there is no labyrinth of bureaucratic approvals or hidden charges.
Moreover, if the system is built on profit-share or cost-plus contracts, it aligns well with the Islamic ethos of fairness and mutual benefit. Additionally, DeFi platforms operate around the clock and can, in theory, open up financing opportunities for Pakistan’s vast unbanked or underbanked population. Imagine small farmers securing cost-plus financing (akin to Murabahah in Islamic finance) directly from a global pool of savers all verified by blockchain.
This structure could reinvigorate sectors currently deprived of capital. The cost advantage is also notable: if managed properly, transaction fees on DeFi can be lower than conventional banking spreads, as many “middlemen” roles are automated.
Pakistan’s chronic inflation problem is linked to excessive money creation, heavy reliance on government borrowing, and currency devaluations. In a Riba-based system, these burdens often spiral: higher policy rates attempt to control inflation, but they also make borrowing more expensive, stifling private sector growth.
While DeFi alone cannot magically solve inflation, it does encourage real-asset backing and risk-sharing, reducing the impetus for governments (and private banks) to rely on repeated rounds of interest-rate hikes. If significant portions of lending shift to asset-backed DeFi models, the link between printing money (or crowding out private credit) and fueling inflation could weaken. At a minimum, DeFi injects more diversity into the credit market, lowering the dominance of conventional lending.
Of course, pivoting to DeFi is not without challenges. Block chain-based solutions require robust digital infrastructure and higher-than-average financial literacy. Pakistan will need secure internet access, user-friendly mobile applications, and education campaigns so that everyday citizens can navigate the world of digital wallets and smart contracts.
Some worry about the volatility of cryptocurrencies, but it is worth noting that many DeFi platforms accept stablecoins (crypto-assets pegged to real-world currencies) or can be structured around tokenised real assets, reducing price volatility risk. Then there is the issue of regulation. Governments worldwide are grappling with how to oversee decentralised financial systems.
In Pakistan’s context, the State Bank of Pakistan (SBP) has already signalled a move towards digital Islamic banking, granting in-principle approval for fully digital retail Islamic banks. A gradual, sandboxed approach where regulators allow pilot projects to operate under defined limits could help policymakers fine-tune oversight without stifling innovation.
Shariah scholars, regulators, and financial technology experts must collaborate to draft frameworks ensuring DeFi’s compliance with Islamic principles as well as consumer protection standards. One of DeFi’s most potent advantages is transparency. Every transaction is recorded on a public ledger. Unlike opaque bank statements or complex derivative products, users can track loans from inception to settlement.
Such radical transparency can help rebuild trust in a financial system that many feel has become a playground for the wealthy and connected. This is doubly beneficial in an Islamic context. Islamic jurisprudence (fiqh) mandates clear contractual terms and full disclosure to protect parties from hidden exploitation.
The automatic execution of smart contracts, combined with the open-source nature of blockchains, naturally lends itself to these expectations. When everyone can see how profits and losses are distributed, the suspicion that “Islamic finance” is simply conventional finance with different labels is far less likely to arise.
The SBP and the Securities and Exchange Commission of Pakistan (SECP) could set up dedicated sandboxes for DeFi experiments under Shariah supervision. This controlled environment would test feasibility, consumer protection measures, and compliance with Islamic finance standards.
Public-Private Collaboration: Universities and financial technology start-ups can collaborate to develop user-friendly DeFi interfaces in Urdu and regional languages, ensuring that technology does not remain the domain of an elite few. Digital Literacy Drives: Government and private institutions should spearhead digital literacy campaigns, teaching citizens how to use secure digital wallets, avoid scams, and understand risk management in a blockchain setting.
Asset-Backed Tokens: Rather than dealing in volatile cryptocurrencies, DeFi platforms in Pakistan could lean on stable, asset-backed tokens (for example, tokens pegged to gold, real estate, or government Sukuk), aligning with Islamic principles that demand tangible underlying value.
Gradual Integration: Conventional and Islamic banks could incorporate DeFi solutions as part of their product offerings for instance, letting customers choose a blockchain-based Musharakah or Murabahah contract that ensures transparent profit-sharing.
Will the transition to a completely Riba-free economy by 2028 be seamless? Almost certainly not. Structural changes require time, and the interplay of global finance, domestic policy, and technological readiness is never straightforward. Yet, it would be short-sighted to dismiss new technologies that could dramatically reshape our financial system’s moral and practical foundations.
DeFi does not come with a built-in guarantee of ethical compliance; technology, after all, is only as good as its implementation. But if guided by solid regulatory oversight and grounded in Islamic values of equity and risk-sharing, DeFi could be the impetus that finally severs the knot between money and exploitative interest.
As policymakers and scholars gather to interpret the new legislation, it is worth recalling that mere legal prohibitions on Riba will not suffice unless accompanied by genuine innovations in credit distribution. If we are serious about forging an economic system in line with Islamic ideals one that widens access to finance and fosters real-economy growth then we need to explore every avenue of possibility. Rightnow, DeFi stands out as a revolutionary vehicle for turning that rhetoric into reality.
(The writer is a development economist and senior blockchain developer)
Copyright Business Recorder, 2025