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

 

 

 

(1)        Receiving the Savings of the people as deposits;           

 

 

 

(2)        Advancing loans and finances on credit;

 

 

 

(3)        Opening Letters of Credit;       

 

 

 

(4)        Issuance of Security Loans;

 

 

 

(5)        Issuance of negotiable instruments;

 

 

 

(6)        Discounting of securities and other negotiable instruments;

 

 

 

(7)        Provision of Safe Deposits for the security of valuables, important documents etc.;

 

 

 

(8)        Transfer of money;

 

 

 

(9)        Sale and Purchase of Foreign Exchange;

 

 

 

(10)      Opening of Current Accounts;

 

 

 

(11) Issuance of Traveller Cheques;

 

 

 

(12)      Sale of shares;

 

 

 

(13)      Issuance of Dividends and Proceeds of Debenture;

 

 

 

(14)      Issuance of National Currency (performed by the Central Bank of the country only).

 

 

 

It is neither possible nor required for the present discussion to discuss and pass any verdict on the permissibility or otherwise of all these functions from the stand point of Shariah. But it must be emphasized that these are extremely important functions and any disruption in the performance of any of these functions may land the country into serious difficulty and may even place national economy into jeopardy. However, some of these functions are being performed in such a way and through such. modalities which are violative of the Shariah and must be. adjusted to the dictates of the Shariah to remove their repugnance from the Law of Allah. The objective for which these functions are performed are not only allowed under the Shariah but also promote its objectives. Banks facilitate safe transfer of money from one place to another. In the present day context banks and banking institutions are the quickest, easiest and fastest mean of transfer of money from one corner of the globe to the other, which is, undoubtedly, a great facility available to the people. This objective is absolutely in conformity with the Shariah. The second objective is the facilitation of production and development of industry, agriculture and commerce through providing finance and investments. Almost all the major developmental, agricultural and industrial projects are financed by the banks which thus contribute to the development of the country and ameliorate the standard of life. There can be no objection from the perspective of the Shariah to that objective also. The third objective of the bank is to coordinate and streamline the use of available capital through appropriate allocation of resources to the enterprise and projects needed by the society. No objection can be raised to this objective as well.

 

 

 

The problem only arises when we go to the modalities adopted by the banks and the details of their operations. If the needs do not justify means then the lofty objectives of the banks cannot and should not be taken to justify the practices and modalities developed by the banks to realize their objectives. The most important of these practices which falls under the core of our discussion in the context of this judgment is the nature of deposits received by the banks and the nature of credit or loans advanced to the entrepreneurs and businessmen. Savings and deposits being the most important and the main source of capital coming to the bank, it is of utmost importance that Islamic position of these savings and deposits is determined. It is mainly for the purpose of security and safety that the overwhelming majority of savers place their savings in the banks. The ratio of those who put their deposits for the sake of any return is comparatively limited. Those who deposit their savings for the sake of return either put their money in schemes like Defence Saving Certificates, Khas Deposit Certificates or place them in term deposits. The majority of Savings-Deposit holders in any case, are those who do not expect any return on their savings. The question which occupies a significant position in this discussion is whether bank deposits are really Amanat as these are claimed to be or they are Wadiah or and (loan) or investment in terms of Mudarabah and Musharkah as many people claim them to be. The identification of their nature is necessary because the Shariah has given different principles to regulate each of these kinds of deposits. Let us, therefore, keep in mind that bank deposits also fall under various categories which include (i) Current Accounts; (ii) Fixed Deposits; (iii) Savings Accounts; (iv) Special Accounts; (v) Term Deposits etc.

 

 

 

There are different rules to regulate these accounts but there are two important aspects which are common to all these kinds of deposits. Firstly, as soon as a sum of money comes to any of these deposits it become a property of the banks for all practical purposes. From that moment onwards the bank has exclusive control over that money and the account holder has nothing to do with that particular amount of money. The bank invests it, uses it and spends it according to its own decisions and policies. The account holders or the savers neither have any right to object to the use of that money nor they have any say in the formulation of the policies and the making of any decision by the bank. Secondly, the money deposited by the savers and the account holders is reasonably guaranteed and the bank is under an obligation to pay it back according to the conditions and rules applicable to particular kind of deposits to the savers irrespective of the loss, if any, or the volume of loss incurred by the bank. In case of any loss, it has to be incurred exclusively by the bank. However, the ‘profit’ is to be shared by the bank as well as by the depositor. This being the nature of bank deposits, when we examine them in the light of the Islamic principles, we come to the conclusion that these can neither be considered as Amanat nor Wadiah because in both the situations the role of the bank should not be more than that of a trustee and the depositee; it should have no right to use, invest or spend it. The principle of Amanat requires that Amin should only protect and keep it in safe custody and should have no authority to dispose of that money. Moreover, there is no question of any profit or increase on the _Amanat or the Wadiah. It cannot be considered to be a Qurd (loan) either because while a borrower is allowed to use, to invest or to spend the borrowed money, neither he is under an obligation to pay any increase over and above the borrowed money nor a creditor (in this case the account holder or the depositer) is allowed to receive any increase. Such increase is not only disallowed by the Qur’anic verse 279 of al-Baqarah but is also hit by the well-known dictum unanimously accepted by the companions of the Holy Prophet (s.a.a.w.) and the subsequent jurists that any additional benefit accruing to a loan is Riba. Thus, we are left only with the last option, namely, that bank accounts are investments within the meaning of Ra’s alMal of a Mudarabah or Musharkah. If that be the case then banking operations will have to be in accordance with the principles that regulate the v Mudarabah, Musharkah and other Islamic modes of financing.

 

 

 

Now the position of Government Bonds, treasury bills and other securities and debentures which are put to sale or purchase in open market operations, may be taken. Government bonds and securities, in many cases, represent a debt, loan or a deferred payment. The Shariah has expressly prohibited the sale or purchase of a debt for another debt. Thus, the sale or purchase of a debt in lieu of a deferred payment will not be allowed under Shariah as it will be hit by the well-known Hadith reported by many compilers of the Hadith in which the Holy Prophet, peace be upon him, has prohibited the sale of debt with debt or the sale of Al-Kali bil-Kali. This Hadith has been reported by Dar Qutni on the authority of Ibn Umar. According to Hakim, this Hadith is a sound one according to the standard set by Imam Muslim. Another version has been reported by Tabarani on the authority of Rafi Ibn Khadij which has also been declared to be sound by Hakim. This later version has also been reported by Hibban, Baihaqi, Tirmizi and Nasai. Hakim has also reported from earlier authorities the explanation of the term sale of Kali for Kali. According to this explanation it is the sale of deferred payment (Nasiah) for another deferred payment (Nasiah). Baihaqi has also reported on the authority of Imam Nafi, a disciple of Abdullah ibn Umar, saying that it is the sale of debt for debt. Imam Shawkani has recorded on the authority of Imam Ahmad ibn Hanbal that there is a complete unanimity among the Muslims that the sale of a debt for debt is not allowed. This view has been endorsed by Imam Abu Hanifa, Imam Malik, Imam Shafi’e, Imam Awzai and Imam Sufyan Thawri (see for details, Imam Shawkani, Nayl al-Awtar, Beirut, 1973, Vol. V, pp. 254255). In view of this discussion the open market operations involving the sale of debt for debt will not be allowed under Shariah. Either such deferred payments should be sold or purchased on the basis of cash payment or, if cash payment is not possible, it may be through other Shariah compatible modes, for example, only those instruments be sold which represent a tangible asset or those in a tangible property. Another possible Shariah compatible mode may be through the principal of Hawalah in which the responsibility of paying the debt is transferred from the debtor to some other person. Hawalah has been defined as the transfer of liability from the debtor to the one who volunteers to undertake the liability. There is a unanimity among the jurists of Islam that once the Hawalah is complete, i.e., once the liability is transferred the original debtor stands absolved of all responsibility and liability. The Hawalah institution gets legitimacy from the Hadith as well as from the consensus of the jurists. As soon as the concerned parties agree, the process of Hawalah is complete. It may be pointed out here that the Hawalah should not be confused with the contract of sale because according to the jurists the Hawalah is a peculiar kind of transaction and is different from the institution of sale not only in its basic elements but also in its implications.

 

 

 

It may be pointed out here that the sale of debt for cash or in lieu of urgent delivery of the corresponding commodity is allowed by Imam Malik and Imam Shafi’e to a party other than the original creditor. In view of this opinion, the discounting of bills or the sale and purchase of bonds and debentures will be restricted to the cash payment and to the parties different from the original creditors. With these considerations the open market operations may be restructured in the light of the law of Hawalah.

 

 

 

Another but most important function performed by the banks is the provision of loans extended by them to possible entrepreneurs and businessmen. These loans are to a very large extent, if not totally exclusively, advanced on the basis of interest whose payment along with the repayment of the principal is secured and guaranteed against a collateral; the interest is charged in accordance with the prevalent rate. This prevalent rate is charged keeping in view the Bank Rate, LIBOR as well as the time frame in which the repayment is to be made. Although there are different kinds of loans advanced under a variety of conditions, the above ingredient are common to all kinds of loans. These kinds or classes of loans are mostly to facilitate the operation rather than changing the nature of the deal. For example, the conditions required of individual borrowers are different from those imposed on companies big enterprises and the Governments. Moreover, the performance of the party also has a role in affecting the nature of contracts and other requirements. However, the basic nature of the loan and its ingredients are not changed. It is not, therefore, relevant for our purpose to go into the details of these conditions and classification of loans. Such loans are offered in the form of cash, opening of letters of credit, discounting of instruments etc. The interest charged on all these kinds of loans is to be paid by the borrower irrespective of the fate or the outcome or the duration of the loans and irrespective of the success or failure of enterprise for which the loan was advanced. Obviously, the interest or increase charged on these loans fall under the category of Riba and is prohibited. Some modern scholars, particularly Dr. Fazalur Rahman, Late Mr. Justice Qadeeruddin Ahmad, Maulana Muhammad Jafar Shah Phulwarwi and lately Dr. Muhammad Sayyid Tantavi have tried to distinguish bank interest from Riba on the grounds that the objectives of bank loans are different from the objectives of loans advanced during the pre-Islamic period. We have examined this argument at length. The gist of the argument is that the Arabs were not aware of productive or commercial loans. They only knew consumption loans on which the increase was considered to be Riba and was prohibited. The second foundation of the argument is that the interest charged on production or commercial loans does riot constitute injustice referred to in the Qur’an in the context of Riha (Chapter-II verses 278-279). However, it is difficult to agree with both these premises as discussed in paras. above. Some scholars have tried to consider that this transaction was a simple contract of Mushrakah and tried to equate bank interest with the profit accruing from Musharakah. This equation turns out to be different when the basic principles of Musharakah are applied to a bank transaction. While, on the one hand, an investor in a Musharakah enjoys ownership title in the assets of the company and it is with reference to those assets that he is entitled to receive his share in the profit. Secondly, the capital as well as the assets of the Musharakah are considered to be a. trust in the control of the managing partners/entrepreneur and in case of any genuine loss or any damage by an act of God it is to be shared proportionately by all the investors. Thirdly, and the most importantly, the ratio of profit is to be determined with reference to the success or failure of the enterprise. It has nothing to do with the time or duration of the loan. While, on the other hand, the interest is charged without any reference to the failure or success of the enterprise and is always determined with reference to the time and duration of the loan. In the light of these glaring dissimilarities between the two, the bank interest cannot be equated with profit accruing to a Musharakah.

 

 

 

Some contemporary scholars tend ,to consider this transaction to be a sale and treat the increase as equivalent to the profit accruing to the buyer in an agreement of sale. Although this contention is obviously faulty on the face of it to be discussed, yet it may be noted that it does not meet any ingredient of contract of sale. Firstly, there is no commodity on either side and it is a `sale’ of cash for cash. As such it is subject to the laws applicable to Sarf contract where exchange of gold, silver, coins or cash takes place. According to the clear and express instructions of the Sunnah the delivery of both the price/commodities should be equal for equal and hand to hand. The Ahadith dealing with the Riba al-Fadl are primarily to foreclose the door for this very kind of transaction. Even if it is accepted for the sake of argument that it is a kind of sale, it will be prohibited under the Shariah, as it involves both kinds of Riba, namely Riba al-Nasiah in view of the deferred payment on the part of the borrower, and Riba al-Fadl on the part of buyer because of the increase over and above the amount payable.

 

 

 

The true and legal position of bank loans under Islamic Shariah is that they are contracts of loans (Qard) because all the basic elements of and are found in these contracts. It has been held to be a and (loan) not only by almost all the contemporary Islamic scholars but also by the up holders and expert of this system  even in the Western World. ,The repayment is guaranteed like a Qard, it is supported by a mortgage or a collateral like a Qard, the authority of the taker is to use, spend, invest or dispose it of is unlimited like a Qard the lender has no concern with the purpose or the objectives for which it is taken. Finally, the success or failure .of the enterprise of the purpose for which the loan was taken is absolutely irrelevant in both the cases. In view of all these obvious and significant facts it is not correct to claim that the lending transaction, undertaken by the banks are in the nature of trust, deposit, Musharakah or sale. It is in the nature of loan (Qard) pure and simple and has to be subjected to the restrictions placed by the Shariah on lending and borrowing of money and other fungible items. The most important of these principles is that the loan is to be returned exactly in the same quantity in which it was taken. Any increase over and above the amount borrowed is Riba irrespective of the pretext on which the increase is claimed. This principle is clearly embodied in the Qu’ranic verses of Surah al-Baqarah (verse 279). It was understood by the Companions, the Followers and the later Jurists to be cardinal principle governing a loan. There is unanimity of views among all the jurists of Islam that any benefit accruing out of loan is Riba. This unanimity of views found expression in the well-known dictum. This dictum has been reported by many compilers of Hadith on the authority of several Companions. It has been reported by Abdullah Ibn Saud, Ubayy Ibn Ka’b, Abdullah Ibn Salam and Abdullah Ibn Abbas on the authority of Hazrat Ali by Syyuti, Fadalah Ibn Ubaid Bayhaqi. Some scholars have attributed this to the Holy Prophet (s.a.a.w.) through some weak chain of narrators. It is, therefore, beyond any shadow of doubt that this is an accepted principle among the Companions and it is they who have phrased this dictum into this wording.

 

 

 

Now we proceed to examine the position of Letters of Credit of Banks. The purpose or the objective of the opening of letters of credit is not something objectionable. On the other hand; it is a facility extended by the banks to the traders and the businessmen. The purpose of opening letters of credit is to facilitate quick and easy payment and the transfer of money from one place to another. This facility, being a lawful service, has to be properly compensated in terms of Shariah. If the payment of compensation or remuneration is linked with the volume of service, the Shariah has no objection. In this case it will be a kind of service charge which has been already considered and approved by almost all the contemporary scholars and learned bodies. In this case it will be necessary that the rate of service charge is determined keeping in view the magnitude of the service, quickness of the payment and the level of credibility and performance of the bank concerned. Since it is related with the time or duration of payment and is collected in terms of percentage of the amount paid, it becomes Riba. There is no objection if the banks require collateral or hypothecation of certain assets or securities to ensure timely, repayment, provided the guarantor does not charge any interest and the mortgage is controlled by the law of Rahn. The payment made by the bank to an importer or a purchaser under a letter of credit is again in the nature of Qard because it does not fall in any other legitimate category of transaction. As such it ‘is to be regulated under the law of Riba. It seems worthwhile if the State Bank of Pakistan determines certain fixed rates of service charge to be paid by the importer/purchaser to the: bank as a compensation to the service rendered by the bank. There may be different- rates for different kind of transactions provided these rates do not change with any delay in the payment and are not calculated on the basis of the amount of money involved. There may be flat rates for various kinds of transactions whenever letters of credit are need to be opened.

 

 

 

The discounting of negotiable instruments is not only an important function of modern banks but also, constitutes a sizeable source of their income. The discounting of instrument by the State Bank of Pakistan is a big source for the revenue of the Government. One of the experts appearing before us estimated the proceeds of the Government from discounting to reach up to 19% of the total State revenue. However, irrespective of the magnitude of the income .the question of discounting is to be tackled in the light of the Shariah. There has been difference of opinion as to the real nature of this transaction in terms of Islamic law. The question whether the practice is permissible under Shariah and, if so, up to what extent and under what conditions depends on determining the question where the discounting is Hawalah (transfer of debt), or sale of a title or a loan taken from the bank. As we have seen, it cannot be taken to be a sale because it is the sale A of debt for higher price which is not allowed. Moreover, the deferred payment is involved in the sale of money for money. It may, however, be construed to be a loan and has to be regulated as a loan. The increase ultimately earned by the bank through this operation would fall under the category of Riba. Some scholars have tried to justify this practice on the basis of a precedent attributed to the Prophet (s.a.a.w.) in a similar case. We have dealt with that precedent elsewhere.

 

 

 

The rest of the activities undertaken by the banks are allowed under the Shariah on payment of such fee, remuneration or service charge as may be fixed by the State Bank or may be determined by the concerned bank under the general guidelines issued by the State Bank. However,’ it will be necessary that the amount of fee, remuneration or the service charge is not related to the duration or the time frame of any payment or repayment involved and that it is calculated exclusively on the basis of the volume of labour involved and the nature of service rendered.

 

 

 

The banking operations having been analysed in the perspective of Injunctions of Islam, the need to restructure and redesign banking operations by amending the related laws and affording new approach and dedication to the objectives of Shariah is apparent. This brings to focus the development of alternative modes conforming the requirements of Shariah. The question of developing a viable alternative to the present interest-based operations has engaged the attention of a large body of scholars. There has been no C difference of opinion, even among those who considered bank interest to be permissible, that the modern banking operations require remodelling and restructuring if interest is to be abolished. To have a cease-fire with Allah and His Messenger (s.a.a.w.) has always motivated Muslim minds to come out with a Riba-free model.

 

 

 

There is a general consensus that the abolition of interest will require some restructuring ‘of the banking practices and patterns. It is generally felt that the banks should work as investment banks and, wherever necessary, as holding companies. If the banks reorganize themselves as holding companies, they may, perhaps, easily undertake what was known in, the United States as group banking. It is said that group banking, has some merits if it works under a holding company. Under the group banking a corporation, a business trust or a professional association controls two or more commercial banks. The experiment of holding companies controlling commercial banks has been successful in the United States. The main feature of the group banking system is the centralized management and a uniform command and control system leading to economizing the expenditure and maintenance of larger cash reserves. Moreover, the resources of all the member banks can be pooled to finance large enterprises and business concerns. However, if group banking system is adopted it will require strict legal measures to ensure effective control and supervision, larger and more effective coordination and to avoid the furtherance of personal or group interests of those controlling the holding company.