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

 

 

 

Table 2

 

 

 

Distribution of Income from Interest and Profit

 

among Households in Pakistan (1996-97)

 

 

 

%o of Total @                         Income Group                          Interest Income Profit

 

Income     Household                                        

 

26.57   54.65                           Lowest                                                 7.53                 6.91

 

24.33   24.26                           Low                                                     18.55               16.85

 

49.10   21.09                           Middle + High                                      73.91               76.28

 

 

 

Source: Computed from the Income and Household Survey 199697.

 

 

 

@ Column based on the 1990-91 Survey

 

 

 

It was contended that the point is that Islamic reform does not aim at abolishing interest income but to convert it into profit income; which reform, if implemented, would then leave the distribution of income between income classes unchanged. To reverse the perverse flow of income the remedy is a more equitable distribution of wealth holdings`, ‘through an effective tax-cum-subsidy scheme in which the interest and profit incomes are taxed, the former at a higher rate than the latter; and the tax proceeds used to compensate the losers in the market place.

 

 

 

Mr. Naqvi concluded that Musharika and Mudharaba instruments should be sparingly used on rational grounds, both by the consumers and the banks and that it would do incalculable harm, if modern banking were made to fit in the Procrustean bed of anachronistic ideas and practices. He pleaded that nothing should be done to do away with the present mark-up system, which is Islamically legitimate. The small saving schemes must be left as they are till a more satisfactory solution is found, and Government borrowing from the banking system on a fixed return basis may be declared as not interest, as in Iran, alternatively, the indexation system as is proposed by him may be tried. He added that this Court may focus attention on building fences around the present Islamic banking system by punishing dishonesty, by making loan default a social crime, by making honouring of voluntarily agreed contracts mandatory, by promoting respect for private property rights where their exercise does not conflict with similar rights of others only, then Islamic values are effectively internalized that Islamic Banking, based on the PLS principle, will have any chance of becoming operational, even on a restricted basis.

 

.

 

Mr. Iqbal Ahmed Khan, Managing Director, Global Islamic Finance HSBC Investment Bank Plc, London, a foreign expert, appeared to express his views. He provided a global perspective on the ethical, indigenous and equitable form of finance, which stands around US $90 billion and is growing at the rate of 15 per cent. per annum. According to him Islamic Finance Industry is spread across 65 countries with the total population with around 1.3 billion; that it is a trend, which is broadening the ownership base, creating more stakeholders and therefore bringing the hope of stability in the Muslim countries; that in a broad sense Islamic finance today provides a moral version of modern capitalism. In order` to create a macro economic context he provided the Bench with World Bank statistic which measured the world economy in terms of the goods and services for the year 1997 to be around $7 trillion while the financial flows were well in excess of $500 trillion. He clarified that the Islamic finance industry was embedded in the commercial value producing real economy; that the rise of financial, capitalism is pinning Wall Street against main street; that today 80 % of the wealth is concentrated in the hands of 20 % of the world’ people. Commenting on this disparity of wealth distribution, he said that the invisible had has not worked very well and quoting a reverend Bishop he urged that the rich seem to be getting richer, the poor poorer and we are not getting any holier. Looking at the world with a detached, view from another world one can find majority of economic and social activity to be creating pockets of affluence in the sea of ever-increasing poverty: On the increasing polarization in the world economy he quoted Larry Summers the US Assistant Treasury Secretary who said that the world economy is linked with the US economy; that the health of the US economy is dependent on the consumer spending in the USA; that consumer spending is reliant upon the performance of the US stock market; the stock market;  fate is linked to the performance of around 50 blue chip companies listed in New York Stock Exchange, which according to him is an evidence of the polarization in the world economy. On philosophical foundation and core concept of Islamic finance he pointed out that the foundation of the Islamic finance is firmly rooted in the principles derived from the Holy Qur’an and the Sunnah of the Holy Prophet (p.b.u.h.), the two original sources, which have been kept intact for more than 14 centuries; and when taken together the Qur’an and Sunnah of the Holy Prophet (p.b.u.h.) or the basis of Shariah law, which govern the Islamic finance, the Shariah law wants to ensure that Muslims invest their funds in a socially responsible manner; and at the centre of Shariah law are concepts of man’s vicegerency and trusteeship, concept of Amanah (fiduciary trust) and Adl (fairness). Addressing the Bench he said that this indigenous and equitable form of finance has gained increasing relevance in the last two decades in its home market - the OIC world; that Islamic finance is an emerging product in emerging market, which is gradually evolving along with the market in which it operates. He deliberated on the value creation potential of Islamic finance, the value paradigm of Islamic finance was outlined in the Shariah code which talks about the moral transparency, individual responsibility corporate governance, reliance on market mechanism, a commitment to economic and social justice, a partnership of capital and enterprise, a care for environment as some of the core values. He gave the Bench a brief historical overview of the evolution of Islamic finance, stating that the first modern experiment with Islamic banking was undertaken in Egypt in early 1960s, the pioneering in Egypt took the form of savings banks based on the principle of profit sharing in the town of Mit Ghamar; and it was not until the mid 1970s that the industry gained its initial momentum which fact was evidenced by the launching/establishment of Islamic Development Bank in 1975 by the Organization of the Islamic Countries and Pakistan has played an important role in the creation thereof as a founder member. In fact, according to him, Pakistan’s finance Minister chairs the Board of Governors of the Islamic Development Bank and the Bank is primarily inter-Governmental bank which primarily provides fund and infrastructure and developmental project., in member countries. The launching of Islamic Development Bank led to the creation of Islamic financial institutions in the Gulf cooperation council countries which include Dubai Islamic Bank, 1976, Kuwait Finance House. 1977, Faysal Islamic Bank in Egypt and Bahrain Islamic Bank in 1979. h was pointed out that in Far East. Malaysia, the Muslims Pilgrims Saving Cooperation was set up m 1963 which later became the well known Tabong Haji 1969 which in turn led to the creation of Bank Islam Malaysia Bhd in 1982. Since then a number of Islamic financial institutions have emerged in Muslim countries such as Saudi Arabia, UAE, Qatar, Turkey, Pakistan, Indonesia, and Brunei which institutions have taken the form of commercial banks, investment banks, investment companies, Takaful companies (Insurance). Amongst the major Islamic financial institutions there are Al-Rajehi, Kuwait Finance House, DMI Group, AI Barakah, Abu Dhabi Islamic Bank, Dubai Islamic Bank etc. Summing up the history and evolution of Islamic Finance, he informed the Bench that the industry today stands at 90 billion dollars and is growing at 15 per cent. per annum; that the biggest growths are taking place in countries where there are large vibrant middle classes. Taking Kuwait and Saudi Arabia as a case in point, he stated that Kuwait today has an estimated share of around 40 to 45 per cent. while in Saudi Arabia, admittedly a larger market, the share of Islamic finance was around 20 per cent. According to him most of new institutions being created today are predominantly focused on investment banking; that during the 1990s Islamic financial institutions have become increasingly innovative as more complex instruments and structures have been developed to meet the demand of modern day business; that the use of instruments such as Istesnaa’, Ijarah, Bai Salam, are becoming more widespread and we are witnessing tenure, starching as Islamic financial institutions moved towards cash flow based project finance with average life extending seven years and Islamic trenches being created in big ticket deal such as the Equate project in Kuwait and a number of infrastructure project in Turkey. These activities have already landed the Islamic financial institutions in the league tables of Euro money as arrangers and providers of finance. He added that, there has been a tremendous improvement in the documentation capabilities of Islamic project finance issues being addressed much more clearly; that equity has also opened up as an asset class and they are ‘fortifying the portfolios of Islamic financial institutions while we are seeing the promise of private equity being fulfilled through international Musharakas. He emphasized that the trend of Islamic finance is broadening owner base, creating more stake holders and therefore bringing the hope of stability to Muslim countries He went on to talk about the manner in which the Islamic finance as an industry was evolving alongwith the framework in the countries in which it operate He also emphasized the importance of the supporting Macro economic and legal framework. In order to take Islamic finance forward it was important that comprehensive reforms are brought about in the monetary, fiscal  and judicial framework of Muslim countries and that the importance of establishing of `missing links’ such Islamic common market and Islamic Dinar. He referred to the Islamic Drnar to state that today it exists only as a translation currency linked to the SDRs.

 

 

 

Mr. Siddiqul Farooq, Chairman House Building Finance Corporation (HBFC) appeared to state that the society is not well settled to adopt the Islamic Banking system at this juncture, the implementation of which would only create negative impression about Islam than bringing positive results; that all segments of the society and institutions, including the Courts, politicians, religious scholars and bureaucracy have to play their role to establish a true Islamic society in Pakistan; that till now we could not even create a proper ,lunar calendar due to which we celebrate three Eids every year. According to him loan under the Modaraba could trot be effective at this stage where society has lost most of the Islamic moral values and every person who would get loan under Modaraba would never admit about the profit and would always come with a loss. He suggested to adopt the Islamic values in letter and spirit but for the time being also keep in view the exceptions which Islam had allowed in certain circumstances. He referred to the famine during Hazrat Umar Farooq (r.a.)’s time where the punishment for theft had been suspended. He argued that Pakistan was facing an exceptional situation in the shape of inflation and the HBFC has reduced the interest rate almost by two per cent. on the loans it extended as the inflation rate fell and would keep doing the same gradually if inflation rate further declines. He submitted the documents before the Court relating to amendments effected in the laws of the corporation in the light of the HBFC cases in Courts and profits earned by it before 1979 and from 1979 to 1987, 1988-89 and thereafter. The documents produced also included details of the credit liras payable to State Bank, profit paid to State Bank and balance sheet of the Corporation besides relevant record from 1979 to December 31, 1997. He implored that harvesting was not possible without proper cultivation of land as seeds sown in water cannot yield, legislation without a solid base would bear no fruit rather it would be counterproductive. He pleaded that Holy Prophet (p.b.u.h.) first raised a team of his companions and enforced Islamic laws after spade work for acceptability of Islamic system in the society. The other submissions made by him with, respect to the specific provisions of the House Building Finance Act, 1952, will be dealt with while dealing with Shariat Appeals No.24 of 1992 to 35 of 1992 under the aforesaid Act of 1952.

 

 

 

Syed Riazul Hassan Gilani, representing the Government argued that Riba-al-Fazal was covered by the Muslim Personal Law and therefore, Article 203 of the Constitution has excluded the jurisdiction of the Shariat Court. He stated that the term “Islamic Banking” was misnomer as bank had no religion; that in spite of all sympathies with the sentiment behind Islamic Banking, the term Islamic Banking was a misnomer; that Bank is an instrument which can neither be Muslim nor non-Muslim. Neither all the transactions or modern banking are un-Islamic nor all the transactions of Islamic banks were purely Islamic. He categorised the Riba into categories as: Riba al Jahilia (pre-Islamic system of usury) which he said was extremely oppressive; Riba al Qur’an, the compound interest-based system which was prohibited by the Holy Qur’an; Riba Al Nasiya (profit motivated lending) and Riba al-Fadl (soft-interest loans). He argued that the system of Riba al Jahilia and Riba al Nasiya are not relevant in the present case and he would confine himself to Riba al Qur’an and Riba al-Fadl in his arguments. It was asserted that definition of Riba al Qur’an was definite and undisputed among the Muslim jurists and Muslim sects and it should not remain part of our banking and legal system even for a moment as the. prohibition of Riba al Qur’an is applicable to the Muslims and non-Muslims of an Islamic State. He stated that Riba al-Fadl was Makrooh (reprehensible) but not Haram (prohibited) and that some other kinds of Riba like “Najsh” are also Makrooh. It was introduced by Shariah so that the doors of Riba al Qur’an be closed. It is applicable to Muslim citizens of an Islamic State and not to non-Muslim citizens. He was of the view that if Riba al-Fadl was prohibited at the State level, it would allow the non-Muslims to monopolise the banking system of the country. Riba al-Fadl, according to him, did not strike down the established practice of the society and required the Government to regulate it in public interest. It was argued that Islamic jurisprudence provided for punishment of defaulters and if he could be jailed for breaking his promises why he could not be fined; that a defaulter with bona fide reasons could expect a lenient treatment under Injunctions of Riba al Qur’an; that Indekation in public interest did not fall under the mischief of Riba and he had precedents to show that it was not repugnant to Islamic Injunctions; that overall rationale and objective of prohibition of Riba was to eliminate practice of loans and money-lending from the Islamic society as far as possible; that money lending with or without pre-determined profits fell under the category of Riba al-Fadl. It was contended that Riba was not only applicable on loans but also purchases; that there was similarity in the prohibition of alcohol and Riba as use of alcohol in the society was prohibited gradually and same was the case of Riba. He produced a chart of Qur’anic verses showing a comparison of prohibition of Riba and ban on alcohol. It was stated that it was wrongly attributed to Hazrat Umer Farooq (r.a.) that he had said that verses banning Riba were the last and the Holy Prophet (p.b.u.h.) could not explain it due to early death. It was urged that at least two years before the death of Holy Prophet (p.b.u.h.) the verses banning Riba had been revealed and Riba had been enforced in 8 Hijra and the Holy Prophet (p.b.u.h.) died in 10 Hijra. It was further urged that Holy Prophet (p.b.u.h.) had declared “Muzarbat” as one kind of Riba, and recommending some body for some post with the intent to get something for the recommendation was another kind of Riba. Syed Riazul Hassan Gilani further contended that Holy Prophet (p.b.u.h.) had established loan free society with the idea that debt leads to servitude; that the fate of those countries which took loans for development is before us; that Riba al Qur’an (compound interest-based system) was Haram and should not be kept for a moment in Islamic State; that the definition of both forms of Riba al Qur’an and Riba al-Fadl have separate mechanism of enforcement; that any transaction which had an element of “Zulm” was contrary to the injunctions of Islam; that saying of the Holy Prophet (p.b.u.h.) was no less than Qur’an as the matters of Shariat were equally binding on us as of Qur’an; that Riba al Jahilia (pre-Islamic system of usury) was started at the time of default of the loan and if lender and the lendee agreed on a time frame for the payment of loan and if the deadline for the repayment was not met, the lender would fix Riba. According to him when the Riba al Qur’an was enforced, the Riba al Jahilia would automatically be eliminated and the same remained enforced in all the Muslim States. Riba al Qur’an remains abolished by the State decree of the Holy Prophet (p.b.u.h.) and it remained abolished throughout the Muslim history till the time of Aurangzeb Alamgir, the last powerful Mughal Emperor and when the sub-continent was subjugated by the Britain, it allowed advancement of loans on the basis of interest. The permission led to perpetuation of Zulm and people were under virtual slavery of the Hindu Banyias. According to him loan of Banyia fell both in the category of Riba al Qur’an and Riba al-Fadl. He asserted that the propositions of law derived from the text relating to Riba al-Fadl are from the cry beginning disputed amongst the Muslim jurists and the Muslim sects because the Hole Prophet (p.b.u.h.), to save the Ummah from hardship, did not enforce Riba al-Fadl in the form of a definite ruling and only the mode of exchange of six commodities was illustrated; that the enforcement of prohibition of Riba al-Fadl is not the obligation of the State as its implementation is responsibility of individual Muslim and this was not enforced in the form of a State decree/a proposition of law by the Holy Prophet, Khulfai Rashedeen and the Muslim Rulers in the Muslim History; that Riba al-Fadl does not strike down “Mash-al-Tarajeeh” i.e. the established practice of the society; that only Hajat (facility/need) rather than Zaroorat (necessity) is entitled to exception in the domain of Riba al-Fadl; that the State may in the public interest regulate Riba al-Fadl; that the saying “Qule Qarze jer manfaatu fahowa Riba” is not a Hadith but a principle derived from the provision of Riba al-Fadl; that the predetermined profit on loan was considered Makrooh by Imam Abu Hanifah and other great jurists as it falls under Riba al-Fadl; that the penalty or fine imposed on wilful defaulter is not Riba and a defaulter can also be put behind the bar till he pays the debt while only a bona fide defaulter is/should be entitled to lenient treatment contemplated in Riba al Qur’an; that the over all rationale and objective of prohibition of Riba is to eliminate loan in the Muslim society as far as possible and a loan with or without predetermined profit falls under Riba al-Fadl while bona fide need (Hajat) is exception to the Rule; that Riba al-Fadl is covered by the term Muslim Personal Law used in Article 203 of the Constitution - thus subject of Riba al-Fadl is not within the jurisdiction of Federal Shariat Court; that in spite of all the sympathies with the sentiments behind Islamic Banking, the term. Islamic Banking is a misnomer, Bank is an instrument which can neither be Muslim nor non-Muslim, neither all transactions of modern Banking are un-Islamic nor all the transactions of Islamic Banking are Islamic and all the attention of Islamic Banking is diverted towards Riba al-Fadl, whereas due attention is not paid to Riba al Qur’an. Arguing his case, it was asserted by Syed Riazul Hassan Gilani that in Islam the real meaning of “Qarz” was lending money to someone without any interest. He also quoted a Hadith of the Holy Prophet (p.h.u.h.) in which the Holy Prophet (p.b.u.h.) had stated that he saw in the heavens written that who lends Qarz receives 18 times more “Sawab” as compared to the Sawab blessed on one who pay “Sadqa” and gets 10 times of it only. He also told the Court the views of Ulema of the sub-continent about the banking institutions established by the British. One requirement for getting correct “Fatwa” from the Ulema should be to ask questions by the persons seeking Fatwa, in clear terms since Ulema were not experts of sciences. He added that there were three kinds of Ijtehad including Tehrir-e-Munaja, Tanqia-e-Munaqa and Tehrik-e-Munaja. He referred to the Fatwa of Hazrat Ahmad Raza Barelvi about the banking system which he had given to a specific question by a man about the profit being offered to him by the bank on his deposits. The Maulana in response said though interest was Haram but he could receive the enhanced money believing that he was not getting interest. This Fatwa was given in the background, Gillani explained, when banks were not national institutions rather British institutions and the Maulana had no sympathy with the banks. He said except Sir- Syed Ahmed Khan, no scholar of the sub-continent gave any importance to the British institutions. Sir Syed was of the view that if the Muslims distanced themselves from the banking system, it would only benefit the Hindus.

 

 

 

At this stage Syed Riaz ul Hassan Gilani, learned counsel for the federal Government sought adjournment of the case after summer vacation since he could not close his arguments and he had only covered one-fourth of it, besides he had to go to Lahore to look after his ailing father and was also planning to proceed on Umra. The Court rejected his plea reminding the assurance he gave to the Court to conclude the arguments as well as the professional duty that he owes to the Court to appear and assist the Court irrespective of amount of fee that he claims from the Government. The hearing was, however, adjourned to the following week. Syed Riazul Hassan Gillani did not appear to conclude his arguments despite specific order of the Court. The Court after waiting for an hour adjourned the matter to the ensuing day in order to give him another chance to appear and complete his submissions. The Federation’s counsel, however, did not turn up on such day as well. Attorney-General, Chaudhry Muhammad Farooq who was also asked to appear on the next day did not appear. Chaudhry Akhtar Ali, Federation’s Advocate-on-Record, however, made a statement before the Court that the Attorney-General had nothing to say in the case. The Advocate-on-Record for the Federation said that Mr.Gillani was not available and the Attorney-General had no submission to make in the case. The Court, in the circumstances, was constrained to conclude the hearing. It was observed that the Federation’s counsel is at liberty to file his submissions in writing within fifteen days. Learned Additional Advocate-General Punjab, Rana Muhammad Arif, who was present in the. Court room stated that he intended to argue the matter after the completion of arguments by the counsel of the Federation and when the Court asked him to start his arguments, he showed his inability to start his arguments immediately stating that he was of the view that the counsel for the Federation would get some time for the completion of his arguments. In the circumstances, the learned Additional Advocates-General of the N.-W.F.P. and Punjab were directed to submit their arguments, if they wanted to, in writing. The representative of the Government of N.-W.F.P. later submitted a brief note reiterating the pleas noted above.