On Thursday, a full bench of the Federal Shariat Court -- a constitutional body examining the country's law as per Islam-- declared the interest-based banking system "illegal", and asked the government to amend laws to provide a sharia-based financial system by December 2027.
The bench, comprising Chief Justice Muhammad Noor Meskanzai, Justice Dr Syed Muhammad Anwar, and Justice Khadim Hussain M Shaikh, also declared the entire Interest Act 1839, facilitating interest on banking loans, unlawful.
The verdict has been delivered after two decades of court hearings and on the day when the International Monetary Fund began negotiations with Pakistan, which is seeking loans to assist its crisis-hit economy.
"Almost two decades have elapsed but the governments have not taken any decisions against the interest system," Justice Dr. Syed Muhammad Anwar said.
He added that the Islamic banking system is risk-free and against exploitation. The court has asked the government to amend the country's laws to reflect the teachings of the Quran and Sunnah.
From June, all the prevailing laws that consist of the word "interest" will be considered null and void, the order read.
The court has also directed the government to make all the loans from international institutions, including the IMF and World Bank, interest-free.
The judgement has also mentioned the ambitious China-Pakistan Economic Corridor projects, ordering the government to follow Shariah laws while finalising agreements with China.
The bench also expressed its disagreement over the federal government's reply contemplating loans without interest will negatively impact the economy.
The case dates back to 2002, when the top court agreed to suspend its 1999 order favouring the country's interest-free banking and revert to the Federal Shariat Court to review the decision.
A report prepared by global financial market data provider Rifinitive in December 2020 estimated that Global Islamic Finance assets would reach $3.69 trillion by 2024.
The top five developed countries concerning Islamic Finance are Malaysia, Indonesia, Bahrain, the UAE, and Saudi Arabia.