Islamic banking is known as a banking system based on the principles of Islamic Shariah. In Pakistan, the steps for the transformation of conventional banking and financial system into Islamic system were initiated in the 1980s. Pakistan was among the few countries in the world that had been trying to implement interest-free banking at a national level. In the early 1980s, numerous measures were taken to introduce interest-free banking, and different banking and other relevant laws were amended to facilitate an interest-free banking system in the country. Considering lessons learned from the earlier efforts, Islamic banking in Pakistan was relaunched in 2001, when it was decided to promote Islamic banking in a gradual manner and as a parallel and compatible system in line with the best international practices. Consequently, the Islamic Banking Department (IBD) was established at the State Bank of Pakistan (SBP) with a mandate of developing and strengthening the regulatory and Shariah compliance framework for Islamic banking and taking initiatives for the promotion of the industry as a parallel and viable banking system.

Keeping in view the extensiveness of the transformation task, SBP has modified its institutional arrangement for better prioritization of objectives and enhanced focus. For this purpose, a dedicated Islamic Finance Group has been established at SBP in December 2022, which comprises of two departments: Islamic Finance Policy Department (IFPD) and Islamic Finance Development Department (IFDD). The primary objectives of IFDD include; managing seminars or workshops to create market awareness about Islamic banking, planning and executing capacity building sessions for stakeholders, monitoring banks' Islamic banking transformation plans, facilitating the development of innovative products such as asset light Sukuk structures, etc. and strategic collaboration with domestic or international stakeholders in the area of Islamic finance. The department is also responsible for strengthening the Islamic money market by addressing the liquidity management challenges of the Islamic banking industry.

This department also acts as a secretariat to the Steering Committee, constituted by the Government of Pakistan, to provide strategic guidance regarding the implementation of the Federal Shariat Court's judgement on riba. Under this committee, a committee for the transformation of conventional banking into Islamic banking, along with several working groups and work streams have also been constituted to steer the transformation journey towards Islamic banking.