Performance, Islamization, and Trust: Pakistan’s Evolving Banking Sector

Abstract

Out of the global Muslim population of 1.6 billion, just 14% utilize banking services. In Pakistan, only 21% of adults had bank accounts as of December 2017. While there are multiple factors behind the low bank account penetration in Muslim-majority nations, religion plays a pivotal role. The Federal Shariat Court of Pakistan (SCP) issued a directive in 2022 instructing the Government of Pakistan to begin removing interest (Riba or usury) from its economic apparatus by December 2027 to Islamize the country. Well before this judgment, the conventional banking industry was opposed to wealth concentration. To illustrate, in 1974, the government claimed that 22 influential families, possessing 66% of the country’s industrial wealth and 87% of its banking and insurance, held dominion over Pakistan’s industry. Under such unfavorable circumstances, is it possible for Pakistan to boost its financial inclusivity and hence economic development by getting people to trust the interest-based banking system? If so, how can trust theories explain this?