The thesis describes historical background and steps taken by the Govt. of Pakistan for Islamization of economy. The purpose of this research is to develop A MODEL OF RIBA FREE ECONOMY IN PAKISTAN-SECTORAL ANALYSIS. This research is more inclined towards Islamic way of life needs to find out the principles, Qur‟anic and Hadith support. A brief review has been made about Riba to start with. To establish footing for the research, review of literature was made. The Islamic banking system in Pakistan has also been introduced. The concept of takaful (Islamic insurance) has been explained. As Riba free banking was introduced from 1999, therefore the data was taken from 1999 to 2012. To give empirical evidence two Stage Least Square (2SLS) techniques to estimate structural equations has been used. As the data was time series, so we checked for stationarity through unit root tests. The focus of our research and model has been on the possible impact of Riba free economy on savings, investments, growth rate and its pattern, allocative efficiency and the overall stability of the Islamic economic system. This research recommends that a Riba free economy in Pakistan will have positive effects on the economy. The results of the model show that consumption, investment and GDP are positively related and statistically significant in a Riba free economy in case of Pakistan.