P L d 2000 s c 225 (Riba prohibition stayed)

 

 

 

(X) The West Pakistan Money-Lenders’ Ordinance, 1960

 

(XI) The West Pakistan Money-Lenders’ Rules, 1965.

 

(XII) The Punjab Money-Lenders’ Ordinance, 1960.

 

(XIII) The Sindh Money-Lenders’ Ordinance, 1960.

 

(XIV) The N.-W.F.P. Money-Lenders’ Ordinance, 1960.

 

(XV)    The Balochistan Money-Lenders’ Ordinance, 1960.

 

 

 

These laws pertaining to money-lending and money-lenders have been dealt with in paragraphs 329 to 331 of the impugned judgment. These laws, it was rightly observed, being alien to Islamic Injunctions and the concept of Islamic social justice, can have no place on the statute book of the land and these laws or the rules framed thereunder were rightly declared to be repugnant to the Injunctions of Islam.

 

 

 

(XVI) Agricultural Development Bank Rules, 1961

 

 

 

Paragraphs 332 to 336 of the impugned judgment deal with the vires of Rule 17 of the Agricultural Development Bank Rules, 1961 and the provisions of sub-rules (1), (2) and (3) on the question of interest have been declared .to be repugnant to the Injunctions of Islam and have been directed to be deleted. Sub-rules (1) (2) and 3 of Rule 17 read as  under:---

 

 

 

“Rule 17. Interest, fees, commission_and incidentals. ---(1) Loans shall be granted by the Bank at such rate or rates of interest as the Board may from time-to-time specify.

 

 

 

(2) In specifying the rate or rates of interest under sub-rule (1), the Board may also specify a higher rate of interest which the Bank shall charge in the event of default of repayment of loan or any instalment thereof, not being a default due to any natural calamity.

 

 

 

(3) In addition to interest, the Bank may also charge such commission and incidental charges as the Board may from time to time specify.”

 

 

 

Obviously the levy, charging and recovery of interest cannot be allowed to continue in view of the Shariah prohibition. These rules should, therefore, be suitably amended on lines indicated in this judgment.

 

 

 

(XVII) Banking Companies Ordinance, 1962

 

 

 

The learned Federal Shariat Court has declared section 25(2) of the Banking Companies Ordinance, 1962 (hereinafter referred to as ‘Banking Ordinance’) repugnant to the Injunctions of Islam to the extent of interest and mark-up. The section empowers the State Bank of Pakistan to give certain directions to Banking Companies, including a direction about the rates of interest, charges or mark-up to be applied on advances, or prohibiting the giving of loans to any borrower on the basis of interest.

 

 

 

So far as the provision of interest in this section is concerned, it is against the Injunctions of Islam in the light of the detailed discussion already undertaken about Riba. However, the learned Federal Shariat Court has also directed to delete the word “mark-up” from this section, keeping in view the distorted method in which the concept is applied in the banks today. We have already held in the preceding paragraphs that the way ‘mark-up’ is applied at present is nothing but Riba, hence prohibited. But at the same time we have held that the concept of a real sale, based on mark-up, is not impermissible in its origin, subject to the conditions mentioned in judgments specially in paras. 191 and 219 of the judgment of Mr, Justice Muhammad Taqi Usmani. The major condition for the permissibility of a mark-up transaction is that it should not be charged on lending or advancing money. It must be based on the genuine sale of a commodity with all its substantive consequences. But section 9 of the Banking Ordinance prohibits a bank from trading. It is provided in section 9 that:

 

 

 

“Except as authorized under section 7, no Banking Company shall directly or indirectly deal in the buying or selling or battering of goods or engage in any trade or buy, sell or barter goods for others, otherwise than in connection with bills of exchange received for collection or negotiation.”

 

 

 

When the word ‘mark-up’ used in section 25 is read in juxtaposition with section 9, it is certainly repugnant to the Injunctions of Islam, because a valid mark-up transaction cannot be imagined without a genuine sale effected by the bank. Therefore, the provision of mark-up and the provision of section 9 cannot stand together. Either of the two must be struck down.

 

 

 

We are conscious of the fact that the transaction of a sale of Murabaha based on mark-up, even after fulfilling its necessary conditions is not an ideal mode for the extensive use of Islamic banks. Still, the banks will have to resort to this transaction in certain cases, especially in the initial phase of transformation. It is, therefore, more necessary to strike down section 9 as it stands at present, instead of striking down the transaction of `mark-up’ totally, because provisions of section 9 are an obstacle in the way of a true Islamic banking. These not only invalidate the transaction of Murabaha or Bai’ Mu’ajjal according to Shariah, but also hamper the natural function of. leasing, hire-purchase, Musharaka or Mudaraba transactions. Section 9 was, in fact designed in the context of interest-based banking in which the banks deal in money and papers only, while a true Islamic financing is always backed by real assets, and this is the basic distinctive feature of Islamic banking which can rid the economy from many evils of the interest-based banking already detailed before. The concept of Islamic banking cannot be translated into reality unless it is realized that the hanks are not meant only to deal in money and papers, but their financing is based on and firmly related with real business activities. The elimination of interest can neither be effective nor feasible without lifting the bar imposed on the banks by section 9 of the Banking Ordinance. We are of the firm view that the correct, just and practicable decision about the concept of mark-up provided in section 25 is not possible unless the bar imposed by section 9 is relaxed.

 

 

 

Although the learned Federal Shariat Court has not touched upon section 9, yet the principle laid down by this Court in the case of Province of the Punjab v. Amin Jan Naeem and 4 others (PLD 1994 SC 141 at 156) is as follows:-

 

 

 

“We have held in a number of cases that where a proper and just settlement of the issues involved in a law under challenge is not possible without striking another provision of the same law, the Court has the jurisdiction to hit that provision also. Reference may be made to the case of Qazalbash Waqf v. The Land Commissioner, Punjab (PLD 1990 SC 99, para. 187, p. 280) where sections 60-A of the Punjab Tenancy Act, 1887 has been struck down without an appeal from the public”. (Para. 30)

 

 

 

In the light of the principle laid down in the above case, we are satisfied that a just decision about the `mark-up’ envisaged in section 25 of the Banking Ordinance is not possible without striking down section 9. It is therefore, held that the word ‘mark-up’ in section 25 may be retained, however, section 9 of the same Ordinance is repugnant to the Injunctions of Islam in so far as it prohibits banks from purchase and sale of goods and other trading activities necessary for adopting the Islamic modes of financing like Bai’ Mu’ajja1 and Murabaha based on mark-tip, leasing, hire-purchase and Musharaka in their true and genuine forms. Section 9 shall be substituted to accommodate all the Islamic modes of financing with their necessary requirements.

 

 

 

(XVIII) Banking Companies Rules, 1963

 

 

 

Relevant part of Rule 9 reads as under:---

 

 

 

“R.9.Intrest on deposits.----(1)

 

 

 

(2) Interest on foreign approved securities shall on realization be credited, if so desired by the Banking Company concerned, as soon as possible, to an account at the place where the office of the National Bank of Pakistan holding the securities under sub-rule (1) of rule 5 is located, subject to the usual charges; and, in other cases, such interest shall be remitted by the office of the National Bank of Pakistan to the principal office of the State Bank at the prevailing rate of exchange after deducting the usual charges:

 

 

 

(3) The principal office of the State Bank shall credit, as soon as possible, the current account of the company maintained with it with the interest realized on rupee securities, subject to the usual charges, and with the amounts, if any, remitted from abroad by the office of the National Bank of Pakistan under sub-rule (2).”

 

 

 

Sub-rule (2) provides for crediting of interest on foreign approved securities on realization while sub-rule (3) relates to crediting of interest realized on rupee securities. In paragraph 342 of the impugned judgment it is stated that in the face of the detailed discussion held, sub-rules (2) and (3) of rule 9 in- so far as they pertain to interest are held to be repugnant to the Injunctions of Islam as laid down in the Holy Qur’an and Sunnah of the Holy Prophet (p.b.u.h.). The retention of interest on foreign approved securities already realized need not be refused. The amount so received is to be credited to Baitul Mal and can be used for discharging the foreign debt and meeting out the other liabilities. Such a transitory and provisional course of action is allowed by Shariah. Same way, the interest received on Rupee securities already issued and held can be similarly dealt with. However, in future such transactions which involve interest shall not be permitted.

 

 

 

(XIX) The Banks (Nationalization) Payment of Compensation Rules, 1974

 

 

 

Rule 9 which provides for reckoning of interest froth the date of acquisition of the shares and’ its annual payment and the procedure of payment of interest have been dealt with in paragraph 343 to paragraph 350 and these provisions referring to interest have been held to be repugnant to the Injunctions of Islam. We are of the view that instead of merely deleting the word “interest” from the various clauses of Rule 9, a new rule should be framed on the lines indicated to this judgment ensuring effective enforcement of prohibition of interest in future. However, the return or the profit relatable to the shares shall be managed through Shariah Compliant modes.

 

 

 

(XX)    The Banking Companies (Recovery of Loans) Ordinance, 1979

 

 

 

Section 8 of the Ordinance had come under scrutiny in paragraphs 351 to 354 of the impugned judgment and whole of section 8(2)(a) relating to interest and section 8(2)(b) relating to mark-up have been held repugnant to the Shariah injunctions. These provisions should be dealt with on the lines indicated in this judgment while discussing the relevant provisions of Code of Civil Procedure.

 

 

 

We have held in paras. above that the framing of the laws and economic and monetary policies is the function of concerned organs and institutions of the State and not of this Court but as the Government has insisted in its application that guidelines be provided in respect of the issues raised and as the economists, religious scholars etc. have expressed their opinion with respect to these issues and with ‘respect to the infrastructure needed to successfully practice Islamic economic system, we hereby proceed to record guidelines for the consideration of the concerned quarters.

 

 

 

The scholars, economists, and auditors to name a. few of them Dr. Muhammad Umer Chhapra, Dr. Shahid Husan Siddiqui, Mr. Ibrahim Sidat, Syed Muhammad Hussain, Mr.Iqbal Khan and Mr.Faheem Ahmad of Vital Information Services (Pvt.) Limited, were unanimous in the submission that elimination of Gharar, deceit and fraud is necessary by providing effective and necessary legal framework in order to ensure success of any economic system. It was added that the small investors who invested either in the stock markets or in bank deposits have been losers for the reasons that their savings have been eroded partially or fully because of presence of Gharar and speculative characteristics of our stock markets. A reduction of nearly Rs. 300 billion in the market capitalization has gone unheeded. Similarly, defaults on bank loans amounting to approximately Rs.300 billion restricted these institutions to offer a reasonable return on deposits of small investors. It was added that loopholes in the economic system allow defaulters to get away without any resistance and as such stringent measures/regulations are required to check speculative activities in the stock markets as also by formulating and administering monetary policy by an independent body which is competent and powerful enough to seek compliance of the monetary policy including borrowing activity prescribed under the laws/regulations to be framed and enacted in terms of the Constitutional mandate of Article 79 of the Constitution. Dr. Muhammad Umar Chhapra, a renowned Muslim economist, laid stress on the recovery of the defaulted loans within a reasonable time, which according to him, should not be more than one month, by enacting proper laws and creating adjudicatory process, efficient and competent to secure recovery from the defaulters within the prescribed time frame, if the success of the Islamic economic system is to be ensured. He was of the view that if the cases of default of the financial institutions are allowed to linger on for months and years, the availability of funds for the economic activity cannot be ensured and the whole system would collapse. He, therefore, suggested that measures will have to be adopted to ensure elimination of deceit so as to meet the moral hazards likely to arise in the actual working of the Islamic banking system as well as to ensure transparency and regulation of the economic system on sound and practicable norms. Mr. Faheem Ahmad particularly referred to the laws, prudent regulations and other measures being adopted by the United States for the purposes of elimination of Gharar, deceit and fraud. It was pointed out that the monetary policy is administered in America by the Federal Reserve (FED of the USA similar to the central bank of a country which is an autonomous body outside the influence of President, Congress and Courts in USA, to regulate supply of money and credit in the economy. The Freedom of Information Act, 1966 (FOIA - 1966) enjoins all US Government Agencies to disclose records upon request. The right so conferred has also been made enforceable through Court. All agencies of the Government are required to disclose their records upon receiving written request for the same except for such records as are protected from disclosure by the nine exemptions and three exclusions provided for in the Act itself. The Privacy Act of 1974 prescribes safeguards for the protection of records the Government collects and maintains on United States citizens and lawfully admitted permanent residents.’ Security Exchange Commission of the United Statesmaintains public and non-public records such as registration statements and reports filed by regulated companies and individuals. The laws provide for regulating trading and commerce to eliminate fraud, manipulation and dissemination of false information to ensure just and equitable trading. It is also provided that short sales must be made on an ‘uptick’ to regulate the use of credit for trading, including insider trading. The beneficial owners of 10 per cent. or more are considered `insiders’ and to prevent unfair use of information by insiders, profits realized from security transactions within a period of 6 months are forfeited to the corporation.

 

 

 

In United States even for members of bureaucracy i.e. employees of the Executive Branch, standards of ethical conduct have been provided by the Ethics in Government Act, 1978 and the Regulations issued by the U.S. Office of Government Ethics. These Regulations provide that Public--Service is public trust, requiring employees to place loyalty to the Constitution, the laws and ethical principles above personal gain; and that employees shall not hold financial interests that conflict with conscientious performance of duty; employees shall not knowingly make unauthorised commitments or promises of any kind purporting to bind the Government and shall not use public office for private gain; they shall not engage in outside employment or activities that conflict with official duties and responsibilities. A gift even of the value of 20 Dollars in a given situation is not to be accepted. The senior employees after leaving service are prohibited for a period of one year in certain situations, even if they were not paid for their work from contacting their former department or Agency to seek official action on any matter or assisting a foreign Government or foreign political party. In this manner for a period of one year after leaving Government job, employment with the foreign or local employer is sought to be prohibited. The ethical standards, thus, are designed to protect national interests and to ensure transparency and fair dealing. Such-like prudential measures of good governance, fair dealings and transparency arc conspicuously absent in our laws as in our land, senior employees exchange places frequently i.e. from the employment of Federal Government to foreign Agencies e.g. World Bank and International Monetary Fund and vice versa and the people keep on watching the change of places silently but ask questions to themselves as to whom these experts are supposed to serve, Pakistan or foreign Agencies.

 

 

 

The laws in Pakistan on these subjects do exist but these need to be made comprehensive and also to be implemented in true spirit. It may further be pointed out that effort to eliminate only Riba. in isolation from Banking system would be more harmful than helpful due to intricate inter dependence of different vital economic sectors, and that the efficient course will be to first identify and strengthen the existing critical economic sectors falling under Shariah, thus, isolating Riba based system for its proper treatment. It was argued that the economy in this way will be strengthened and a strong foundation will be laid to promote Riba-free economy. An important fall out of this approach will cause the major savings of citizens to be channeled into Shariah Compliant sectors. This situation, it was emphasized, will automatically put pressure on our Riba-based Banking system to innovate itself into Islamic system to attract depositors investing in parallel Shariah-based sectors. It was explained that the reason for the under-development of Shariah-based instruments in our Banking system is due to inefficient and unregulated parallel major Shariah compliant (stock markets) economic sectors in existence.

 

 

 

Four major engines of economy identified by the economists which fueled the West’s economic growth are following:---

 

 

 

(i) Banking/Financial Sector;

 

(ii) Share market;

 

(iii) Debt/Bond Market; and,

 

(iv) Government Borrowing/Lending.

 

 

 

The following statistics were cited to illustrate the most important sectors among the abovementioned areas:---

 

 

 

“USA               Malaysia                       Pakistan

 

 

 

GDP                                                    8 trI                  72 bn                           60 bn

 

 

 

Share Market                                       10 trl                100 bn                         6 bn

 

 

 

Debt Market                                        10 trl                22 bn                           40 m

 

 

 

All figures are approx. and in US$; Debt Market figures are for corporate borrowings only. “

 

 

 

The above figures demonstrate the importance of regulated public participation in most important sectors which have given a solid foundation to these economies and created better distribution of wealth among the masses. It is to be noted that creation of large middle class is also a touchstone of Islamic Financial model to fight concentration of wealth in few hands.

 

 

 

The other pertinent thing to be noted is that the total value of capital market is much bigger than the GDP. So, even if we, in Pakistan, are successful in creating an Islamic-based judicious regulations, at least for Capital Markets, we can hope for a quick change for the better as these reforms would be effective to check corruption in all the sectors. The disinter mediation will also trigger competition within our banking sector towards promoting Islamic products. The regulatory framework to control unlawful conduct including Gharar is designed to maximize Justice and fairplay at all levels of investors’ interaction. The regulatory agencies eliminated Gharar by bringing as much transparency/fairplay as possible in all public dealings. The disclosure requirements are so elaborate that speculative activities are minimized. This is achieved, inter alia, through the following measures:---

 

 

 

(1) Individual’s Credit History

 

 

 

No individual is allowed to get utilities connections, open any bank account, or obtain a loan unless his credit report received from a credit bureau is clean. These bureaus are non-government entities and by paying a nominal fee any organization can access the databases for requisite information.

 

 

 

(2) Industries’ Rating

 

 

 

Four rating agencies namely, (i) Standard and Poor’s (ii) Moody’s (iii) DCR, and (iv) Fitch-IBCA are referred to by the Financial Institutions and Lending Institutions for reporting about credit ratings of the borrowers before extending loans, whether the borrower is a corporate body or other institution. The Security Exchange Commission, USA grants them licence and monitors their quality of work. In Pakistan to regulate the business of credit rating companies, the Credit Rating Companies Rules, 1995 were framed by the Federal Government under section 33 of the Securities and Exchange Ordinance, 1969, but these rules have not been usefully applied whereas in USA individuals, Corporations, Banks and Financial Institutions and even the municipalities are all rated by the Credit Companies and their credit rating is relied upon by the investors before investing into the bonds or other instruments floated or offered for investment to the public. These ratings are instituted on the philosophy of right to know.

 

 

 

Even in England various statutes provide for prudential regulations and disclosure of necessary information. The Financial Services Act, 1986 and the regulations framed thereunder provide protection for the investors with the “securitisation” of the investment industry in order to provide a system intended to make effective and to enhance London’s position as a financial centre. The Serious Fraud Office (S.F.O.) was established as an integral part of the criminal justice system. The S.F.O. is responsible for investigation and prosecution of some of the biggest cases of fraud in British history. The S.F.O. is an independent Government Agency headed by a Z Director who exercises his powers under the superintendence of the Attorney-General, maintains liaison with Government departments and regulatory bodies such as the Department of Trade and Industries, Bank of England, International Stock Exchange, Securities and Investment Board, etc. These and other organizations report to the S.F.O. allegations of serious and complex abuse and misuse of powers and white-collar crimes.