By Zaffar Abbas In Islamabad

Pakistan's Supreme Court has reversed its own ruling that outlawed charging interest on bank transactions as un-Islamic.

The case has been referred back for further deliberation

The Islamic or Shariat bench of Pakistan's Supreme Court in 1999 ordered the government to abolish the interest charges, known as "riba".

The u-turn comes just six days ahead of the deadline set by the Supreme Court for financial institutions in the country to adopt the Islamic system of banking.

A number of financial institutions had warned the government the new system was not viable and some of the foreign banks hinted they might have to shut down their operations in the country.

Financial appeal

The court's original ruling more than two years ago clearly stated that all forms of interest charged during the financial transactions falls into the category of riba, which according to the Islamic teachings, is forbidden.

An appeal by Pakistani banks for the court to review its earlier decision was backed by the government, which claimed the initial ruling was flawed and that modern banking was not against Islamic principles.

The government also argued interest-free banking would create a financial anarchy in the country.

The country's Conservative Islamic Lobby was outraged and some religious groups sent their own lawyers to defend the earlier ruling.

Despite the court's u-turn, it has sent the case back to the Federal Shariat Court to start fresh hearings.

Analysts expect this may take several more years, giving the government some breathing space to carry on with its policies to try to revive the country's faltering economy.