Islamic banking is known as a banking system based on the principles of Islamic Shariah. In Pakistan, the steps for transformation of conventional banking and financial system into Islamic system were initiated in 1980s. Pakistan was among the few countries of 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 learnt from the earlier efforts, Islamic banking in Pakistan was re- launched 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, 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 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 the IFPD include; providing an enabling legal and regulatory framework for Islamic banking, ensuring speedy adoption of prudential standards issued by Islamic Financial Services Board (IFSB), fast tracking adoption of Shariah standards issued by Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), undertaking focused research initiatives by conducting empirical and theoretical studies on emerging trends in Islamic banking locally and globally, publishing special reports and data on Islamic banking, strengthening Shariah Governance Framework for Islamic Banking Institutions (IBIs) in line with International best practices, etc. IFPD works closely with SBP's other departments on different matters related to Islamic banking like licensing of Islamic Banking Institutions (IBIs), conversion of conventional banking branches into Islamic banking branches, etc. Further, the department also acts as secretariat to SBP's Shariah Advisory Committee (SAC).