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

 

Having discussed nature, classifications of Riba and the impact of 1p its prohibition on trade and business, as well as the wisdom in the p prohibition of Riba, question of inflation which is set up as a formidable p problem in the context of the elimination of Riba may be analysed.

 

 

 

The question of inflation is, undoubtedly, an extremely important question and poses a challenge to the scholars of Islam as well as to the economists and financial experts. There is no denying the fact that the value of the paper-currency has a trend of continuous decrease in inflationary situations. If a debtor who has borrowed a particular amount of paper currency repays the same amount to his creditor after a substantial time, the creditor suffers the effects of inflation. If he demands his debtor to pay more in order to compensate him for the loss of value he has suffered, the question arises whether this demand would be treated as a demand of ‘Ribs’? If the required increase is Riba, then what-is the remedy to the problem?

 

 

 

A section of our scholars and bankers is of the view that such increase is not to be treated as Riba. According to this view, the introduction of paper currency has led to persistent inflation in the modern world, thereby continuously eroding the real value or purchasing power of money. There are other causes of inflation also. In an inflationary situation, compensation for depreciation of money over a period of time in a situation of inflation should, according to this view, be justified. If compensation is not given in such a situation it would be tantamount to penalizing creditors or savers, including those with small means. Mr.Sartaj Aziz in the statement submitted to this Court recording his views as an economist and not in the capacity of Finance Minister, suggested that a clear consensus on the subject of indexation is necessary to clarify that any compensation paid for the loss of value is not `Riba’. It was also pointed out that the concept of compensatory cost as provided in section 35 of C.P.C. has not been held by the Federal Shariat Court to be contrary to tote Injunctions of Islam. On the other hand, there is another view which does not favour interest or indexation as the possible solutions to the problem of inflation. According to this view, the real cause of erosion in the value of money is to be sought in the wrong monetary and economic policies which result in crude deviations from a state of price stabilization. There can be no two opinions that one of the major objectives of Islamic monetary policy is stabilization of the value of money. In the Islamic context money is primarily a medium of exchange and a measure of value. It is also a measure for deferred payment and as such its value has to be protected. According to this latter view there is no substance in the thesis that interest is a reward for erosion of the value of money. The discussion in economics relating to the nominal rate of interest and the real rate of interest must not confuse us, because the rationale for interest is one thing and the phenomenon of inflation and various ways to reduce, if not to mitigate, the evil consequences of inflation, is a different matter altogether. In his written statement submitted to this Court, Prof., Khurshid Ahmad argued that challenge should not be mixed up with the problem of inflation which is many-dimensional and must be addressed to separately in its own right. According to him it is illogical to argue in favour of interest on the basis of inflation. Indexation is one of the many ways suggested to fight some of the effects of inflation but the results of such a policy are mixed and inconclusive, if not adverse. In fact, a lot-of empirical evidence about movements in interest rates and rates of inflation leads to conflicting hypotheses. Prof. Khurshid Ahmad considers it difficult to find out a positive correlation between the two in all parts of the world and even in the same country over a long-period/time horizon. That is why under a regime of inflation even negative rates of interest have prevailed over certain time periods. The trends that emerge from empirical and econometric studies remain inconclusive if not erratic. The remedy for erosion in the value of money lies in a monetary policy aimed at price-stabilization and not in retaining interest under any title or pretext.

 

 

 

The examination of the question of inflation undertaken hereunder is based mostly on the material placed by a number of experts in response to the questionnaire circulated by this Court. It is not the domain of this Bench to frame fiscal policies for the country, the discussion, therefore, contains the views expressed in the material referred to us and the views urged during hearing for the guidance of those whose duty is to frame monetary and fiscal policies and then implement the same in the best interest of the country.

 

 

 

Although the problem of inflation is a world-wide phenomenon, yet there is hardly anything to be termed as a consensus on its definition. The term has always been highly controversial among the economists and has undergone several changes during the last three quarters of the century. In the context of our discussion, however, we can use the term `inflation’ in the sense of unreasonable, uncontrolled price-rise caused by excessive increase in the quantity of money resulting in the rapid loss of the purchasing power of money. It may be pointed out here that the problem of inflation is peculiar to the fiat money or the paper currency. Standard money or full-bodied money never had this problem in such proportion. The term `money’ is defined as something capable of storing the value, serving as a dependable standard for deferred payments and an easy and quick medium of exchange. But inflation virtually robs the fiat money of its two former characteristics, namely, the store of value and a standard for deferred payment. Inflation goes on to reduce the chances of securing growth and progress in the field of economic activity. An inflated economy soon loses its stamina to compete with other developing and developed economies operating in the world market and the balance of trade is greatly disturbed and the exchange rate starts suffering from rapid depreciation.

 

 

 

Briefly speaking, following are considered to be the causes of inflation:--

 

 

 

(1)        Monetary expansion i.e. the increasing supply of money;

 

 

 

(2)        Deficit financing;

 

 

 

(3)        Too much bank financing;

 

 

 

(4)        Increased and uninvested foreign remittances;

 

 

 

(5)        Increasing and uncontrolled urbanization in a society;

 

 

 

(6)        Rising disequilibrium between demand and supply of goods;

 

 

 

(7)        Scarcity of supply (due to natural causes);

 

 

 

(8)        Scarcity of supply (due to temporary causes);

 

 

 

(9)        Rising costs on account of excessive wages etc.;

 

 

 

(10)      Rising costs due to heavy taxes;

 

 

 

(11)      Rising costs due to exorbitant rates of profits;

 

 

 

(12)      Devaluation of currency;

 

 

 

(13)      Impact of the international market;

 

(14)      Inefficient use of resources.

 

 

 

            Inflation in the sense of galloping rise of prices at the hands of unhealthy economic or market tendencies is not something to be tolerated under Shariah. Undoubtedly, this kind of price-hike causes hardships and creates difficulties for the people. Therefore, it must be eliminated at source under the principle of Al-darar yuzal i.e. hardship or damage must be eliminated, as well as under the principle of Al-Mashaqqah TWO al-Taisir i.e. hardship invites convenience. Apart from these general principles, there are some verses in the, Qur’an which require a Muslim Government to take steps for the stabilization of prices. It says “observe the balance equitably with justice and do not let the balance fall short.” (55:9).

 

 

 

The question of inflation has close relationship with the question of prices and their control with a view to ensure that they do not go beyond the reasonable limit. Rapid and sharp fluctuation in the prices is not approved under the Shariah. Although the Shariah does not allow price control mechanism as a rule, as long as the prices are determined in the open market under the normal application of the law of demand and supply, but in exceptional cases where the freedom in the open market is misused and prices are raised in an unnatural way, the State is under an obligation to control them and ensure that the public (including the consumer, the producer and the middle-man) does not suffer at the hands of each other. The Fiqh literature has taken notice of the devaluation of money and quite a substantial discussion is found in our classical books on this subject. Paper currency was not prevalent in those days and, therefore, we do not find sufficient mention thereof in our Fiqh books. However, token money was in vogue and the jurists have discussed the consequences of their devaluation or total demonetization. In case of devaluation, there is an absolute unanimity that in all deferred payments the question of the devaluation of the coins (token money) will be ignored and the same amount or quantity of money will have to be paid as was originally agreed in total disregard of the difference of value of the token money at the time of loaning and at the time of making payment. In case of complete demonetization, according to a group of jurists, its value at the time of demonetization will be paid. Some modern Muslim scholars have tried to make out a case for indexation to meet the challenges of inflation on the basis of this last-mentioned ruling of our jurists. But a deeper study of this ruling and the arguments on which it is based will show that it cannot serve as an acceptable basis for indexation. But before we dilate upon the Shariah position about indexation let us briefly touch upon the history and techniques of indexation as are prevalent in different countries.

 

 

 

Indexation as a regular economic device to make up the deficiency caused to a person due to inflation was first adopted in UK in the early decades of the present century. But it  was used to benefit the workers in their wages. It seems that the initial apparent success to meet the problem (mind that it was in the field of wages) involved other countries to follow suit in the coming decades. By the seventies the practice became popular in almost the entire Europe and America as well as some eastern countries. But the history of indexing capital is also not very old. It dates back to mid-twentieth century. Finland was, perhaps, the first country which made an experiment in trying indexation of capital (bonds, deposits etc.) as a solution to overcome inflation. This experiment gradually moved forward over a long period of more than a decade. It seemed that the financial planners were moving very cautiously keeping into consideration the process of trial and error. But in spite of this cautious and careful movement in this way, Finland soon had to give up indexation obviously because of its unfavourable results.

 

 

 

There are many forms and techniques of indexation developed in the countries which have adopted this method. Some have indexed only the wages, pensions and various forms of social security payments. Some other countries have indexed different forms of investments and capitals. Yet, in some other countries debts, debentures and securities have been indexed. Then there are innumerable ways of indexing a particular amount of money in different situations. The primary and basic motive of indexation was to restore two important failings caused to fiat money by inflation, namely, its failure to serve as a store of value and its failure to serve as a dependable standard for deferred payments. Indexation as a mean to meet the challenges of inflation captured the imagination of scholars and financial experts in the beginning. Soon it called the attention of the Governments and policy planners in many countries. But it seems that they were soon disenchanted with its projected usefulness in responding to the problems in a positive and lasting manner and several countries soon gave up this practice.

 

 

 

Modern western economists have a strong tendency to accept inflation as something natural or as a necessary evil which is only a concomitant of economic growth and technological development. Instead of admitting their failure to counter it they have now started to justify it on many counts. But in spite of their efforts to justify inflation up to a certain limit they could not agree as to what is that reasonable limit beyond which inflation was to be arrested. There is still a wide difference of opinion about the reasonable limit of price rise. The idea of indexation is, in fact, an acknowledgement on the part of economists of their failure to counter inflationary tendencies. Indexation is an effort to institutionalize inflation and to ensure its perpetuation in the national economy of a people.

 

 

 

Indexation has been claimed to constitute a positive contributory factor for the growth of savings in an economy hit by inflation as it would ensure the preservation, though partially in some cases, of the original value of the fiat money at the time of savings and deposits. But a deeper examination of this claim shows the weakness of the entire argument. Even, if it is accepted as a favourable factor in the increase of savings, it cannot be accepted as a valid argument in terms of Shariah. For, merely the growth of savings at the cost of perpetrating a Riba-based practice which also involves other objectionable elements cannot provide a sound basis for allowing this practice.

 

 

 

The Council of Islamic Ideology had examined indexation as one of the possible alternatives to interest and came to the conclusion that it could not be accepted as a valid mode to face the problem of inflation. It rejected indexation both on grounds of Shariah as well as on purely economic grounds. For example, the Council observed, indexation of bank advances would place the agricultural sector in a disadvantageous position compared to sectors where price rise was equal to or more than the rise in the general price level, because the, increase in the prices of agricultural products was less than the rise in the general price level. However indexation of wages and salaries paid to the employees does not create a big problem and may be justified under Shariah with some minor adjustments. But the question of indexing bank deposits, advances and investment loans certainly constitutes a big problem. It involves several elements which render it objectionable under Shariah and has been assailed on various counts.

 

 

 

We may point out that discussion here pertains to the indexation of loans, advances and various forms of credit only, and the arguments advanced by some scholars to support indexation as a valid and lawful device to meet the consequences of inflation were briefly as under:--

 

 

 

(i)         The indemnification of damages caused to any body by a person without any fault or failure on the part of the former is one of the basic principles of the civil law of Islam. All mutual dealings and commercial transactions between the parties take place on the basis of a set of principles laid down by the Shariah. There are several legal maxims throwing light on the question how to remove or indemnify a damage. These principles and maxims are based on a well-known Hadith: La darar wa la dirar i.e. “ no damage and no counter damage”. Some Islamic economists have based their agreement in favour of indexation on this Hadith arguing that inflation is a damage because it steals away the purchasing power of one’s money and decreases its value and, therefore, it must be indemnified under this Hadith and, it is asserted, that the only way to indemnify the damage is to adopt the principle of indexation. Although this argument appears to be a strong one in favour of indexation but, as we shall see later, if we examine it more closely it becomes evident that instead of supporting the indexation, it goes against it.

 

 

 

(ii)        Inflation and indexation are entirely new phenomena and were completely unknown to our early jurists. Therefore, the principles developed by them to respond to their economic and monetary requirements cannot be expected to meet the challenges of the modern world. As such, we need a new Ijtihad in respect of inflation and indexation problems and, therefore, we have to develop some mechanism to make up the lost purchasing power of money and give some relief to the lender.

 

 

 

(iii) Some people argue that the Qur’anic verse “and establish the weight with justice and do not cut the scale. short,” requires that the weight (a term which these scholars try to equate with the purchasing power) of people’s money should not be cut short. But a deeper examination of the verse proves just the opposite. Establishment of weight with justice require, that the interests of both, the creditor and the debtor, be protected. If the tilt is visibly in favour of one of them it would be contrary to the purport of the verse.

 

 

 

These arguments have been discussed alongwith scores of others not only in Pakistan by the Council of Islamic Ideology but by other Muslim scholars outside Pakistan on several forums but the overwhelming majority of Muslim scholars could not convince itself of the permissibility of indexation under the Shariah, mainly on following grounds.

 

 

 

The most important argument against indexation is that it places the burden caused by the inflation upon someone who is not responsible to create it. Inflation in third world countries is mostly caused by various policies of the Governments, such as deficit financing, unnecessary monetary expansion, devaluation of currencies etc. In such a situation, it would be contrary to the Islamic principles of justice to place its burden on someone who is not responsible to create it. The Qur’an clearly lays down La Taziru Waziratun Wizra Ukhra  i.e. no bearer of a burden shall bear the burden of another. (Qur’an 35:18; 53:38).

 

 

 

However, basic argument of the Council of Islamic Ideology in rejecting indexation as a valid mechanism to overcome inflation was that it involves Riba because the basic principle laid down by the Shariah in this regard is that in the borrowing and loaning of fungible things the same quantity and or number of units should be returned as was borrowed or loaned even though the price of the commodity may have changed in the meantime. While discussing the Shariah position about indexation we should not forget that the success of indexation in achieving its two basic objectives for which it was introduced has been highly disputed. Indexation has failed to deliver the fruits on both the counts: it could not secure a fool-proof guarantee to protect the character of money as a store of value as well as a dependable standard for deferred payments. In any case, indexation as such represents a defeatist tendency on the part of its advocates and shows that inflation has been acknowledged as an inevitable evil and that more serious efforts to control it have been given up. This simply means a perpetuation of inflationary tendencies in the national economy.

 

 

 

Moreover, indexation would lead to three significant and inescapable results which are objectionable from the Shariah point of view:

 

 

 

(i)         It would become extremely difficult to draw a definite dividing line beyond which the plea of purchasing power should not be used. This will give rise to innumerable disputes and will place dark clouds of uncertainty over all the transactions based on deferred payments - a situation called Gharar in Shariah and is disallowed.

 

 

 

(ii)        There will be much more disputes on the question of converting the purchasing power clauses of various contracts and agreements into actual monetary terms. This is again Gharar and renders transactions invalid.

 

 

 

(iii)       There will be a big scope for gambling and speculations about the future value of money.

 

 

 

Partial indexation (for example, indexation of wages etc.) can protect the living standard of those to whom it is applied but only at the expense of those whose wages and incomes have not been protected. It only implies the assumption that some income is more respectable than the rest and hence should be subject to lesser risks of change than the rest. This is in flagrant violation of the Shariah which upholds absolute justice and equality.

 

 

 

The tendency of the Shariah is to provide support and protection to the poor debtor. The Qur’an exhorts the creditors to give respite to a debtor incapable of making repayment till such time when he is in a position to pay. But in the system of indexation the whole burden caused by the depreciation of the value of money has been placed on the shoulders of the debtor. He has to bear the burden of something he is not responsible to bring about. This is contrary to the Qur’anic principle that no souls will be required to bear the load (i.e. liability) of the deeds ,of others. Inflation is always a continuous process and is also beyond the control of the individuals. A paper money gets inflated wherever it may happen to be. If it is hoarded in the cellars of the capitalist it is not free from being subject to inflation. Now, if he gives it on loan to anybody, why the debtor alone should be responsible to make up the loss caused by inflation?

 

 

 

The entire thinking and philosophy working behind the concept of indexation is Riba-based economic thinking. In Islam; the transactions for productive and investment purposes would be based on Musharakah and Mudarabah in which no question of indexation arises. Indexation is only an effort to secure additional money over and above the principal amount, without putting any labour or running any risk, merely in the name of protecting the purchasing power. The Riba-based mentality also tries to secure additional money without any labour or risk. Indexation places additional burden of indemnifying the loss of purchasing power of money on one of the following:

 

 

 

(i) the Public Exchequer;

 

 

 

(ii) the employer;

 

 

 

(iii) the borrower;

 

 

 

(iv) the debtor;

 

 

 

(v) the banker.

 

 

 

Now, in all these cases, any party on whose shoulder this additional burden is placed will always be at a disadvantageous position as compared to others. In case the burden is placed on the Public Exchequer, it would mean that all deferred payments shall be subsidized by Government a situation which is not the intention of even the advocates of indexation. In case of others, this will be contrary to many norms and principles enunciated by the Shariah for a free and just commercial dealing between the parties. The tendency of the Shariah is to lessen the burden as far as possible. It requires that least possible burden should be placed on the individuals by minimizing the regulatory laws, simplifying the procedures and avoiding unnecessary technicalities. The basket-price system, with all its variations proposed by the exponents of indexation, will place the common man in such a difficult position that the objectives of the Shariah will have to be compromised.