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

 

The first section hit by the aforesaid judgment is section 79 of the Act, 1881. which reads as follows:

 

“Subject to the provisions of any law for the time, being in force relating to the relief of debtors and without- prejudice to the provisions of section 34 of the Code of Civil. Procedure. 1908,---

 

(a) when interest (or return in any other form) at a specified rate is expressly made payable on a promissory note or bill of exchange and no date is fixed from which interest (or return in any other form) is to be paid, interest (or return in any other form) shall be calculated at the rate specified, on the amount of the principal money due thereon. from the date of the note or  in the case of a bill, from the date on which the amount becomes payable, until tender or realization of such amount, or until the date of the institution of a suit to recover such amount;

 

(b) when a promissory note or bill of exchange is silent as regards interest or does not specify the rate of interest, interest on the amount of the principal money due thereon shall, notwithstanding any collateral agreement relating to interest between any parties to the instrument, be allowed and calculated at the rate of six per centum per annum from the date of the note, or; in the case of a bill, from the date on which the amount becomes payable, until tender or realization of the amount due thereon, or until the date of the institution of a suit to recover such amount:

 

Provided that in the case of alt amount due on an instrument where the return is on basis other than interest, the return on the amount due, when no rate of return is specified in the instrument, shall be calculated at the following rate:---

 

(i) In the case of return on the basis of mark-up in price, lease, hirepurchase or service charges, at the contracted rate of mark-up, rental, hire or service charges, as the case may be; and

 

(ii) In the case of return on the basis of participation in profits and loss, at such rate as the Court may consider just and reasonable in the circumstances of the case, keeping in view the profit-sharing agreement entered into between the banking company and the judgment-debtor when the loan was contracted:

 

(c) notwithstanding the provisions of clauses (a) and (b), return on an amount due on an instrument where the return is on basis other than interest shall be allowed from the date it becomes due till the date it is actually paid.

 

The learned Federal Shariat Court has ordered that the provision of “Interest or return in any other form” in subsections (a) and (b) be deleted from these provisions. We agree with the learned Federal Shariat Court. Any return on a promissory note or a bill of exchange as contemplated in subsections (a) and (b) of section 79 is Riba and unlawful according to Shariah. Both these subsections are, therefore, held to be repugnant to the Injunctions of Islam as laid down in the Holy Qur’an and Sunnah.

 

However, Federal Shariat Court has not properly analysed the provision contained in clause (i) to the proviso of section 79 and as such the view recorded therein needs correction. Clause (i) to the said proviso specifies different ways to calculate a return on a promissory note or a bill of exchange where they are based on mark-up, leasing, hire-purchase or service charge. The learned Federal Shariat Courthas based its judgment about this clause on the permissibility or otherwise of the  transactions of mark-up, leasing, hire-purchase and service charge. `Mark-up’ as in vogue, was held by the learned Federal Shariat Court as invalid transaction, and, therefore, the word `mark-up’ was ordered to be deleted, while the same provision about leasing, hire-purchase and service charge has been retained and not declared against Islamic Injunctions.

 

A careful reading of section 79 with all its provisions, analyzed in the correct context would show that purpose of section 79 is not to validate or invalidate a certain return in the transactions of mark-up, leasing etc. The basic purpose of clause (i) is that once a promissory note or a bill of exchange is drawn on the basis of these transactions, and the issuer of the note or of the bill could not pay their amount on the date of their maturity, the Court may order a certain return in favor of the holder of the note or the bill for the period in which the amount remained unpaid after its maturity.

 

 

 

Looked at from this perspective, this provision, in its present form is totally against the Injunctions of Islam, regardless of whether or not, the transactions underlying the instrument (mark-up, leasing etc.) are in accordance with Shariah. The reasons are as follows:

 

 

 

Section 79 in the Act of 1881 was originally designed for the instruments of interest-bearing loans or debts. The nature of interest is such that it is calculated on daily basis and keeps on increasing for the whole period of non-payment. On the basis of this principle, Section 79 has visualized different situations where the amount of a note or a bill was not paid by the debtor on the stipulated date. Taking for granted that every day from the period of non-payment must give the creditor an additional amount as interest or return, subsection (a) has provided that if the instrument has specified a certain rate of interest for the original period of loan, the same rate will be applied to the whole period of further non-payment. Subsection (b) visualizes a situation where no rate of interest was specified in the instrument, either because the original transaction was free from interest, or because the amount of interest was built in the lump sum mentioned in the instrument. In this situation the rate of interest applied after maturity, has been fixed by law as six per cent. per annum.

 

 

 

When, in 1980, the Government announced the elimination of interest and the State Bank of Pakistan allowed some alternative modes of financing including mark-up, leasing, hire-purchase and service charge, some amendments were brought in certain laws. It is in this background that this proviso in section 79 was inserted, and the provisions relating to the notes and bills of exchange drawn on the basis of interest were applied to the transactions of mark-up, leasing etc. in the manner specified in sub-clauses of the proviso, without having regard to the fact that all these’ transactions are essentially different from an interest-based debt and they cannot be subjected to the same rules as govern the interest-based instruments. Each one of these four transactions has its own peculiarities, and should have been dealt with differently.

 

 

 

Let us now analyse each one of these transactions separately. The first transaction mentioned in sub-clause (i) is that of mark-up in price. What is meant by this term is the transaction of Murabaha or `Bai’ Mu’ajjal’, the details of which have been explained in paras. above as well as in paras. 189 and 218 of judgment of Mr. Justice Muhammad Taqi Usmani. It has been mentioned there that this technique was suggested by the Council of Islamic Ideology but was distorted to the worst extent by the banks when they applied it in practical terms. The learned Federal Shariat Court, therefore, observed that “mark-up system, as in vogue, is held to be repugnant to the Injunctions of Islam” (para. 262 of the judgment of the FSC) and consequently, it ordered that the words “mark-up” be deleted from this sub- clause.

 

 

 

We have already held that although the mark-up system as in vogue in our banks is repugnant to the Injunctions of Islam, yet it is not correct to assert that the transaction of Murabaha or Bai’ Mu’ajjal in itself is prohibited:. If the transaction fulfils the necessary conditions spelled out above, it cannot be held repugnant to the Injunctions of Islam. But the reference of this transaction in this clause, in the context of a return on a promissory note or a bill of exchange is not according to the basic principle of a Murabaha transaction. The reason is that Murabaha or Bai’ Mu’ajjal is a transaction of sale effected on the basis of deferred payment. One of the basic conditions of this transaction, like any other sale, is that the price is fixed at the time of the original contract of sale. This price may include a margin of mark-up (profit) added on the cost incurred by the seller. To determine the amount of mark-up, the seller may take different factors into consideration, including the deferred payment, but as already explained once the price is fixed, it will be attributable to the commodity and cannot be increased or decreased unilaterally, because as soon as the sale is accomplished, the price of the commodity became a debt payable by the purchaser. If this debt is evidenced by a promissory note or a bill of exchange, it is not different from a note or a bill evidencing a loan, and no return, whatsoever, can be charged over that note or bill, because it will amount to charging interest on the debt.

 

 

 

 Sub-clause (i) of the proviso to section 79 provides that if the purchaser in a Murabaha or Bai’ Mu’ajjal transaction did not pay the price, evidenced by a promissory note or a bill of exchange, a further return at the original rate of mark-up shall be payable by the purchaser for the whole period within which the price remained unpaid after its maturity. For example A purchased a commodity for Rs. 100, B agreed to purchase it from him on a mark-up of 10%. The commodity is, thus, sold to B for a price of Rs.110 to be paid after one year, say, on 31st January. A promissory note in the amount of Rs. 105 is signed by B in favour of A. Now, this promissory note is nothing but an instrument evidencing a debt payable by B to A, which includes the original mark-up allowed by the Shariah. If B doesn’t pay Rs. 110 to A on 31st January, sub-clause (i) of the proviso to section 79 of the Act, 1881 provides that a further return on the same rate of mark-up i.e. 10% in the above example, shall be payable by B to A for the whole period of non-payment after 31st January. This provision is repugnant to the Injunction of Islam, because after the sale price becomes a debt, no return on it can be claimed by the seller from the purchaser. If the purchaser could not pay at the due date because of his poverty, the Qur’anic command is very clear that he should be given more time till he is able to pay. The Holy Qur’an says:             

 

 

 

And if lie (the debtor) is poor, he must be given respite till he is well-off. (2:280)

 

 

 

However, if the purchaser has delayed the payment despite his ability to pay, he may be subjected to different punishments, but it cannot he taken to be a source of further `return’ to the seller on per cent. per annum basis as contemplated in section 79. It is discussed in para. 51 of the judgment of Mr. Justice Muhammad Taqi Usmani that the following Qur’anic verse was revealed in the background of a similar transaction:----

 

 

 

We, therefore, agree with the finding of the Federal Shariat Court that the words “mark-up price” occurring in sub-clause (i) of the proviso of section 79 are repugnant to the Injunctions of Islam, but not because the transaction of mark-up in itself is impermissible, but because after a sale is effected on the basis of mark-up, and the price is evidenced by a promissory note or a bill of exchange, including the original mark-up, no further return on the note or the bill is permissible in Shariah on the basis of the original mark-up.

 

 

 

The second transaction mentioned in sub-clause (i) is lease. The I learned Federal Shariat Court has held that lease being a permissible transaction, no change is necessary in this sub-clause with regard to lease But, as observed earlier, the learned Federal Shariat Court did not attend to the fact that this clause is not meant merely to legalize  the transaction of lease. It goes further. It says that if the obligation to pay rental in a leas transaction is evidenced by a promissory note or a bill of exchange and, the amount of rent is not paid by the lessee at its due date, the note or the bill will automatically subject the lessee to the payment of a further return to the lessor at the same rate at which the original rent was contracted. Let its take a concrete example: A has leased an equipment to B on 1st February, 1999 for a period of five years. The aggregate amount of rent agreed between the parties is Rs. 1,00,000 to be paid in monthly instalments. B has signed a promissory note in the sum of Rs. 1,00,000 to be paid on 31st January. 2004. While fixing the rental, the lessor had amortized the cost of the equipment alongwith a margin of his profit at the rate of 5% per annum. If B does not pay the full amount of Rs. 1,00,000 up to 31st January. ?004, the sub-clause (i) provides that A will be entitled to claim further return on the promissory note at the same rate of 5 % per annum that was taken into account while fixing the original rental, and thus, the debt will keep on increasing on daily basis until he pays off the full amount.

 

 

 

The correct position according to Shariah is that once the lessee has enjoyed the usufruct of the leased asset for the period of lease the amount of rent has become a debt due on him and it will be subjective to all the rules relevant to a loan or debt, and as mentioned in the case of mark-up, if the lessee is unable to pay on account of his poverty, he will, have to be given further time according to the clear Qur’anic command and if he is purposely delaying the payment, he will be subjected to punitive steps. But his delay will not be taken as an automatic source of return to the lessor, as contemplated in clause (i).

 

 

 

It should be remembered, however, that if the lessee neither pays rent nor delivers the asset back to the lessor and keeps it in his possession even after the lease period, he will he subjected to the same rent as was fixed during the lease period for the days he kept possessing the asset, but it is on the basis of his further enjoying the asset after maturity and not for delaying the previous payable rent.

 

 

Hire-Purchase

 

 

 

The third transaction mentioned in the said sub-clause is hire-’ purchase. The learned Federal Shariat Court has commented on it as follows:--

 

 

 

“Another term used in this provision is hire-purchase. Under this system banks may finance the purchase of these items under a Joint-ownership arrangement with or without security. The would receive, in addition to repayment of the principal a share in the net rental value...”

 

 

 

We are afraid, the learned Federal Shariat Court did not define the agreement of hire-purchase correctly and has confused it with the concept of ‘diminishing partnership’. The correct nature of hire-purchase is explained by Chitty in the following words:----

 

 

 

“A hire-purchase agreement may be defined as an agreement under which an owner lets chattels of any description out on hire and further agrees that the hirer may either return the goods and terminate the hiring or elect to purchase the goods when the payments for hire have reached a sum equal to the amount of the purchase price stated in the agreement or upon payment of a stated sum. The essence of the transaction is, therefore, (i) bailment of goods by the owner to the hirer, and (ii) an agreement by which the hirer has the option to return or purchase the goods at some time or another. “

 

 

 

Chitty: On Contracts, Sweet and Maxwell, London, 24th Edition, 1977, v.2, p.461, para.3212.

 

 

 

This transaction, as practised in the market, has different forms, some of which may have elements not conforming to Shariah, but it is not the right place to go into these details. Even if the hire-purchase is adopted as mentioned by Chitty in its purest form with no violation of a principle of Shariah, the question in the clause under discussion a not of the validity of the transaction in itself. The question here is one of payment of a `return’ on the promissory note or a bill evidencing the obligation to pay rent in a hire-purchase agreement. Therefore, it is subject to the same finding as recorded in the case of lease.

 

 

Service Charges

 

 

 

Next mentioned in clause (i) is the service charge. It is rightly held by the learned Federal Shariat Court that a service charge based on the actual (secretarial) expenses incurred by the financier in advancing a loan can be claimed by him from the borrower. This principle is derived from the following Qur’anic verse:

 

 

 

And the indebted person shall dictate (the document evidencing the’ debt). (2:82)

 

 

 

Here the preparation of the document of loan has been held to be the responsibility of the borrower which naturally means that if this documentation involves some expenses, they will be borne by the borrower.

 

 

 

See Al-Jassas: Ahkam al-Qur’an. Lahore, 1980, v.1, p.485.

 

 

 

It lays down the principle that the expenses of secretarial nature in a transaction of loan can be claimed by the financier on condition that they are really based on actual expenses and are not a mere ruse for charging interest.

 

 

 

But again, the question in the clause in discussion is not whether service charge is or is not permissible. The clause contemplates that if the obligation of a service charge is evidenced by a promissory note or a bill, and its amount is not paid on the due date, the note or the bill will automatically obligate the debtor to pay a `return’ on the note or the bill at the same rate as at which the original service charge was calculated.

 

 

 

It is now obvious that the service charge is allowed only on the basis of actual expenses and not on the basis of a `return’ at a specific rate. The secretarial expenses in advancing a loan are normally incurred only at the beginning when the loans are advanced. They are included in the original service charge evidenced by the promissory ‘note. These arc not normally recurring expenses, and if some additional expenses are incurred after the default through sending reminders etc. they are not necessarily at the same rate at which the original service charge was calculated. They can be less, and they can be more if the financier has to take a legal action against the borrower.

 

 

 

Sub-clause (ii)

 

 

 

Now, we come to sub-clause (ii) of the proviso of section 79 of the Act, 1881 which reads as follows:--

 

 

 

“‘In the case of return on the basis of participation in profit and loss, at such rate as the Court may consider just and reasonable in the circumstances of the case, keeping in view the profit sharing agreement entered into between the banking company and the judgment-debtor when the loan was contracted.”

 

 

 

Proceeding on the assumption that this clause is speaking of profit and loss sharing, which is in conformity with Shariah, the Federal Shariat Court did not touch upon it here, but has expressly declared-about a paralleled provision in section 80 that it does not appear to be repugnant to the Injunctions of Islam. The clause, however,  needs some clarification.

 

 

 

Firstly the words “when the loan was contracted” at the end of the clause are misleading. Financing on the basis of profit and loss sharing is not a loan. This word therefore, is misconceived.

 

 

 

Secondly the proportions of profit agreed to be distributed between the partners may be applicable as long as the Musharakah is not finally settled or liquidated, and so far this provision is correct. But the language used in the clause may cover a situation where a certain amount of profit is deserves by the financier after the liquidation and remained unpaid for a certain period. The words used in the clause may allow the financier to claim a further ‘return’ on the unpaid amount at the same rate at which the profit was declared for the financier. This is again objectionable, because if the business is totally liquidated and what remains with the client is only the amount which the financier is entitled to receive as a debt, any `return charged thereupon is not permissible, being interest charged on a debt.

 

 

 

The upshot of the above discussion is that even though the transactions of mark-up, leasing, hire-purchase, service charge and Musharakah are permissible subject to certain conditions, yet the way a, further ‘return’ on the pronote or a bill of exchange is provided in section 79, which contemplates a return over a debt is nothing but interest. It, i5, therefore, held that section 79 is repugnant to the Injunctions of Islam in its entirety. Although clause (ii) of the proviso of section 79 speaks of a Musharakah and a profit and loss sharing, this type of transaction does not  normally require a promissory note or a bill of exchange, because the rate of return in a Musharakah is unknown, and the pronote and a bill of exchange arc basically designed for a specific amount payable by the debtor. Therefore; retention of this truncated clause will make it applicable to a situation about which we have held that no further return is permissible in that situation. So far the amount of profit deserved by the financier remains in the business of the client a further return on the basis of actual profits accrued to the business will be deserved by the financier, but the provisions of the agreement of Musharakah can take care of it, its mention in the present context is not called for. The whole of section 79 is, therefore, held to be repugnant to the Injunctions of Islam.

 

 

Section 80

 

 

 

Section 80 of the Act of 1881 is almost analogous to section 79. The learned Federal Shariat Court has, therefore, subjected it to the same findings as recorded by it about section 79. We have the same comments on the findings of the learned Federal Shariat Court as detailed by us with regard to section 79. Like section 79, it is held that the whole of section 80 is repugnant to the Injunctions of Islam.

 

 

 

Sections 114 and 117 (c)

 

 

 

The learned Federal Shariat Court has also declared sections 114 and 117 (c) of the Act of 1881 as repugnant to the Injunctions of Islam, because both these provisions provide for interest.

 

 

 

Section 114 confers a right on the payer for honour of a bill of exchange to recover his paid amount alongwith interest from the original debtor. Similarly, section 117 (c) entitles an indorser who has paid the amount of the bill to recover it alongwith an interest at the rate of six per cent. per annum. Both provisions provide for charging of interest. The learned Federal Shariat Court has rightly declared them as repugnant to the Injunctions of Islam. The finding of the FSC about these provisions is upheld. However, it is to be noted that if a party has paid the amount due, inclusive of the interest payable on instrument prior to the date of coming into force of this judgment, the amount so paid by the payer for honour will in all fairness have to be allowed to be received by the party paying for honour.