Pakistan Will Keep Paying Interest on Old Loans Even After 2028 Shariah Compliance Deadline

Pakistan will continue paying trillions of rupees in interest on existing debt even after January 1, 2028, despite a constitutional requirement to eliminate interest from the country’s financial system by that date.

According to the government’s strategy for transitioning to an interest-free financial system, only new government borrowing after December 31, 2027 will gradually shift to Shariah-compliant financing. Existing conventional loans will continue under their original terms until they mature.

The plan follows the 26th Constitutional Amendment, passed in October 2024, which amended Article 38(f) of the Constitution and requires Pakistan to eliminate interest from its financial system by January 1, 2028.

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A report by a national daily said the federal government remains bound by existing debt agreements, particularly external loans, which cannot be unilaterally changed. Domestic banks, even after converting to Islamic banking, will continue receiving interest on government loans issued before the 2028 deadline until those loans mature.

The federal budget for FY2026-27 allocates more than Rs. 8 trillion for interest payments, with over 70 percent of those payments going to domestic banks.

Under the government’s roadmap, all conventional public debt outstanding on December 31, 2027, will be replaced with Shariah compliant financing only as each loan reaches maturity. Until then, interest payments will continue according to the original contracts.

Officials acknowledged that the policy could face legal scrutiny after the constitutional deadline, particularly regarding interest payments on domestic debt.

They said courts may ultimately be asked to determine whether continuing to honor existing interest bearing contracts conflicts with the amended Constitution.

The Finance Ministry’s strategy also requires domestic banks to complete their transition to Islamic banking after December 2027 while protecting the contractual rights and returns associated with loans issued before the constitutional deadline.