Islamic banking in Pakistan is mostly a rebrand

Why this conversation, and why now

The episode opens with Muzamil flagging the obvious. Pakistan’s government has committed to converting the entire banking system to Islamic banking by 2028, and listeners keep asking him to push deeper than the slogans. He is upfront about his own view: the current form of Islamic banking in Pakistan is, in practice, a rebrand. “I do not believe that the current form of Islamic banking is moving the needle toward what the Islamic philosophy actually wanted,” he says in the opening. “In my view, they are just rebranding the same problem statement.”

He is also clear about what he is not saying. He does not think the push itself is bad. Within whatever framework the government has, the people involved are trying to make it as Islamic as they can. The problem is that nobody in Pakistan has yet sat across from him and broken it down practically. That is the gap this conversation tries to fill, with Qanit Khalilullah as the guest.

Qanit introduces himself with the sort of CV that Muzamil values on the show: a chartered accountant from Karachi (qualified in 1997), a decade at Unilever Pakistan as head of internal audit, then EVP Finance at Ufone and PTCL after moving to Islamabad in 2008. The Islamic finance work is what he has been building toward for several years — first on zakat as a replacement for the existing taxation maze, and more recently on full-reserve banking as the structural fix. He writes for News International and has now started his own consulting practice.

The Islamic objective is circulation, not accumulation

Muzamil pushes early for a targeted answer. What, in one sentence, is the Islamic economic system actually trying to do? Is it about productivity? Sustainable growth? Something else?

Qanit’s answer goes back to a single verse he keeps returning to throughout the conversation. The Quranic objective, he says, is that wealth should not circulate only among the rich. That is the floor. Everything else — the ban on riba, the ban on exploitation, the design of zakat — sits on top of that one structural ambition.

He then makes the argument that modern economics is, slowly, arriving at the same place. If the bottom forty percent of a country cannot afford to demand goods, the economy cannot grow sustainably. The moment you transfer money to the poor, they spend it — on food, on skill-building, on education, on health. That spending lifts the supply side too, because the same people become more productive. The whole investment and employment cycle starts moving. “Fourteen hundred years ago,” Qanit says, “the Prophet, peace be upon him, did this. But today’s economy is telling you the same thing — that without this, sustainable growth is not possible.”

Muzamil reframes it cleanly: hoarding is the enemy. The point of zakat is not that the poor are eternally helpless wards of the state. The point is that capital should not sit dead. Economic activity should be maximised. Eventually, jobs in the market will be plentiful enough that handouts are not needed — which is exactly what happened in the early period Qanit refers to, when there were more people giving zakat than receiving it.

Zakat at 2.5% and what it could actually raise

This is where the conversation gets unusually specific for a Pakistani podcast on the subject. Qanit walks through the arithmetic. Pakistan’s GDP is roughly a hundred trillion rupees. The wealth-to-GDP ratio in most economies sits between four and five. That puts national wealth somewhere around four to five hundred trillion. A 2.5% zakat on individual wealth, in his estimate, brings in roughly 2,500 billion rupees a year — about two and a half trillion.

That is not a charity number. That is a fiscal instrument. And, Qanit is keen to point out, it is far less prone to the fraud that plagues the current Pakistani tax base — the flying invoices, the input-output manipulations, the parallel layers of income tax, super tax, WWF, WPPF, dividend tax. A 2.5% wealth zakat is hard to dodge because wealth, unlike income, is observable.

He references global discourse to anchor the point. Thomas Piketty’s Capital in the Twenty-First Century makes the case for a worldwide wealth tax. Bernie Sanders and Elizabeth Warren campaigned on US wealth tax proposals. The American economy itself, between roughly 1950 and 1980, ran a top marginal income-tax rate near 90% — and that, he notes, was the period of its strongest and most broadly-shared growth. The Islamic framework, in his telling, is not a step backwards. It is the same direction that the rest of the world is now arguing toward, only with fourteen centuries of head start.

Ushr, agriculture, and a cleaner sales tax

The second pillar Qanit walks Muzamil through is ushr — the production-side levy. The structure is straightforward. If you produce something with your own effort, your seed, your labour, your cost — you owe 5% (nisf-ushr). If the produce comes essentially for free, watered by rain rather than by your own irrigation, you owe 10%. The classical example is agriculture: a hundred kilos of wheat means five or ten kilos go to the poor.

Qanit then cites Yusuf al-Qaradawi’s view that the same logic should extend by analogy (qiyas) to the industrial sector. A factory producing cars is doing the same act, structurally, as a farmer producing wheat. Apply 5% on the production side, scrap the GST chaos, and you have a much cleaner system. He is direct about the comparison: Pakistan currently runs an 18% sales tax on the industrial sector. Replace it with a 5% production-side ushr and you simultaneously simplify the system, kill the fraud layer, and bring rates down.

Muzamil presses on the retail side. If ushr is on production, what happens to retailers? Qanit concedes the point — retailers will still owe zakat on their wealth and their inventory, and probably some form of income-based contribution on top, but he is honest that the exact rate is a subject of live debate within Islamic economics. Muzamil makes a point that lands here, and that he comes back to throughout the show: nobody is expected to have every answer. The Malaysian system, he notes, has scholars who are practical economists — in Pakistan, the spiritual scholar and the secular economist talk past each other, and the conversation about Islamic banking suffers for it. “I am not trying to put you on a spot,” he tells Qanit. “I am just trying to brainstorm.”

A small government, by design

The conversation then drifts into one of its sharper sections — what an Islamic state actually does. Muzamil walks Qanit through the modern debate. On one side are the libertarians who want the state to do only defence, courts, and money. On the other are the social democrats who want state-run health and education. Where does the Islamic prescription sit?

Qanit’s answer is closer to the libertarian end than most listeners would expect. The model he describes — and explicitly endorses — has the state running defence, law and order, courts, and money. Most of what currently sits inside Pakistani ministries goes out. Education is delivered through vouchers to private schools, with the state monitoring quality. Health is delivered through health cards. Pakistan Steel Mills should not be run by the government. The Punjab government is already running voucher-style models in education, he points out, and they are working.

The reason this is not a libertarian conclusion in disguise is that the freed-up fiscal space goes somewhere very specific: direct cash transfers to the poor. Muzamil pushes Qanit through the numbers. Eight crore Pakistanis — roughly twelve million families at 6.5 members per family — would be on something resembling an expanded Ehsaas or Benazir Income Support payment. The household receives the cash directly. The husband is still free, and still motivated, to go and earn more. Productivity is not zero, because the transfer is a floor, not a ceiling.

Muzamil pushes on the obvious objection: if the state guarantees 60,000 rupees of subsistence, why would anyone take a job that pays less? Qanit’s response is honest and worth recording in full. The labour market in Pakistan today is not paying 60,000 rupees at the bottom because the private sector has spent the last two decades compressing wages and inflating executive pay. “The CEOs of Habib Bank, of Meezan Bank — they are probably on crores per year,” he says. The cash floor would force private employers to pay properly, or lose workers. The market would set the actual price of labour for the first time.

Why price control is un-Islamic

One short but striking exchange happens halfway through. Muzamil asks whether there is any Islamic literature that supports price control — the gandam, the wheat, the everything-else price controls that successive Pakistani governments love. As far as his own research goes, the answer is no.

Qanit confirms it. The dominant Islamic position is squarely against price fixing. The Hanafi school carves out a narrow exception: if there is genuine hoarding and a clear public-interest case, the state can intervene to break the hoard. But the default is that prices are set by the market. Pakistan’s habit of fixing wheat prices, sugar prices, dairy prices is, in this framing, not just inefficient. It is un-Islamic.

Muzamil’s reading is sharper: it also keeps the economy from ever stabilising. The state cannot let prices clear, and so the producer rationally exits, and so the next shortage is built in.

The current banking system is the problem

The longest stretch of the conversation — and the one Muzamil flags as the reason for the unusually long runtime — is on full-reserve banking. The framing he opens with is brutal. “We are an Islamic country running an Islamic system, and yet we want fiat currency, we want to print it at will, we want to use interest rates to control the resulting inflation, and we want to give that interest rate an Arabic name so it looks Islamic, and on top of that we want a whole banking system to wrap around it.”

Qanit’s response is to start with the structure of money creation itself. The point he keeps returning to — and he is careful to say this is not his own invention; it is in published papers from the Bank of England and the European Central Bank — is that the vast majority of money in a modern economy is not created by the central bank. It is created by private banks, through the fractional-reserve mechanism. When you deposit a hundred rupees, the bank keeps five and lends ninety-five. The system can multiply a hundred into roughly two thousand. That is where money supply growth, and therefore inflation, actually comes from.

He walks through the Pakistani numbers. From roughly 2022 to 2024, interest rates ran from 7% up to 22%. Bank deposit rates rose from 5-6% to 17%. Each round of high interest fed money back into accounts, fed inflation, and stacked more debt onto the household sector. Pakistan’s domestic debt now sits around 47 trillion rupees. American household debt was effectively zero in the 1950s and 1960s; it is now roughly 50% of GDP. The pattern is structural, not Pakistani.

The Islamic banking sector, he notes pointedly, is not exempt from any of this. Its contracts are all benchmarked to KIBOR — the State Bank’s discount rate. The Arabic naming is real; the underlying mechanism is identical.

What full-reserve banking would actually do

Qanit’s proposal — drawing on Milton Friedman, the Chicago school, and what he calls “100% money” — is to split a bank into two legally separate businesses. The first is a money-warehouse. Your deposits sit there at 100% reserve, held against sovereign currency in your bank’s account at the State Bank. Bank runs become structurally impossible, because every rupee you can demand is already there. The bank earns a small fee on these accounts — perhaps 1% on deposits — for running the payment rails.

The second business is investment. If you want a return, you move money into the investment arm explicitly and you take the risk that comes with it. The bank deploys that capital through profit-and-loss sharing, equity, or rental — all of which already sit within standard Islamic contract templates. No artificial benchmarking to a discount rate. No deposit insurance fiction. No regulator pretending the system is safe when the leverage is twenty-to-one.

He walks through the transition. The State Bank takes the existing treasury bills and bonds off private bank balance sheets and lifts them onto its own. With one stroke, most of Pakistan’s domestic debt — roughly 70-80% of which is held by the banking sector — is wiped from the government’s books. The banks then get a short-term loan from the State Bank to bring their reserves up to 100%. From that point forward, money creation runs through the central bank, calibrated to long-run GDP growth — roughly 4-5% a year for Pakistan, which would mean about 2,000 billion rupees of new settlement money annually. That alone, Qanit notes, is roughly 15-20% of current tax collection. A meaningful resource.

Where Muzamil pushes back

The conversation does not turn into agreement-theatre. Muzamil pushes back on a specific point and he keeps pushing. If you take money-printing power away from private banks and hand it to the State Bank, you have not solved anything — you have just moved the magic-money button into the hands of a government that, by his reading, makes silly policy decisions with some regularity. “You are still letting the government make magic money,” he says, “except now you do not even have a State Bank vote to control it.”

Qanit’s answer is that the rule binds the central bank to GDP growth, not to political need. Inflation in his system is possible — if money supply runs at 15% and growth is at 5%, you get 10% inflation — but it is inflation without debt accumulation behind it. The depositor’s money is structurally protected. Boom-bust cycles, on his account, lose their fuel.

Muzamil presses again on the investment side. If money is locked at 100% reserve in the warehouse account, the only way real businesses get capital is through the investment arm — and Pakistani savers are not going to volunteer for risk en masse. Qanit concedes there will be a low-risk middle layer, structured around rentals and ijara-style contracts, which is exactly where existing Islamic banking templates already sit. Most of the savings can in fact be intermediated this way.

The exchange ends, as the best ones do, with neither side fully convinced and both sides clearer on the actual point of disagreement.

What Muzamil closes on

By the end of the conversation, Muzamil is direct with the audience about why he ran the episode long. The point he wants listeners to leave with is that almost nothing in this conversation is exotic. Wealth tax is being debated globally. Universal basic income is being debated globally. Full-reserve banking is being debated in Chicago and at the Bank of England. The Islamic frame is not a primitive alternative to modern economics — it is, in many places, the same conclusion arrived at fourteen centuries earlier.

His closing prompt to the audience is whether a redesigned taxation system, built around zakat and ushr, and a redesigned banking system, built on full reserves, is actually implementable. He invites the debate in the comments. The framing he leaves with — that Pakistan, by reflex, waits for the West to import every new idea, and that this is precisely why the Islamic banking conversation in Pakistan has been so shallow — is the line that anchors the whole episode.

“If true to its core,” Muzamil says, “the philosophy of what we were trying to do, and what we actually need — an Islamic economic system, an Islamic banking system — then the potential solutions Qanit Bhai has laid out today, both on taxation and on banking, are worth a proper debate.”

He thanks Qanit. He cues the audience. And he closes what is, by his own admission, probably the longest episode of Thought Behind Things to date.