Since 1 January 1981, interest-free (Islamic) banking and interest-free insurance was introduced in Pakistan to Islamize the economic system. Interest had been eliminated and profit or loss sharing system was introduced. According to this system the account holder became the partner with the bank in its profit or loss and shares it according to his investment in the bank.
The bank invests the money, deposited by the clients, in different industrial and commercial projects and the account holder is informed of the profit or loss bank has accrued on its various industrial & commercial concerns. Accordingly account holder shares profit & loss with bank at the end of the year.
This partnership technically is called Mudarba which forms the conceptual basis of interest free banking. However the old system of interest in banking system is also at work.