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

 

 

 

The contentions urged by the scholars may now be noticed.

 

 

 

Dr. Sayyid Tahir of Institute of Islamic Economy, International Islamic University, Islamabad contended that interest in every form is `Riba’ and a lender is entitled to the exact amount he has advanced as loan, under the Shariah, no matter whatever expenses was made in advancing a loan or its recovery. Regarding the loan contracts which had already been executed on the basis of interest, he contended that those should be treated as past and closed chapter. He contended that under the Islamic Injunctions, the contract already executed had to be honoured minus Riba; that contract for debt between two individuals must be based on equality.

 

 

 

Dr.Waqar Masood, Director-General (Planning), International Islamic University an Economic Expert of the Government contended that the new system has to conform with the change through tremendous re-documentation of the present arrangements in the private sector, but in the public sector it would require many changes in the fiscal system; referring to the banking sector, it was contended that the profit and loss savings were closest to the Islamic banking system and there was a consensus that the bankers need not inform the depositors where their funds were being invested that Mudarbas and Musharkas (finance and partnership) fell into the Islamic concept of investment. Talking about three kinds of coins at the time of revelation of Islam, he said the existing system of coinage was accepted by the Holy Prophet (peace be upon him) and besides gold and silver coins, copper coins were also in use at that time which was later named as “fulus”, and the ultimate survivor was the “fulus”. He narrated the brief history of different coins and its origins and usages between different people. He said that there were four aspects which affected the currency and this includes inadequacy in backing up commodity (gold. silver); Trust (credibility of the issuing institution); Social, political and economic circumstances; and risk of forgery. He referred to the situation during British-French War, to state that the people had started withdrawing the gold they had deposited against the currency issued to them and that was the first time when conversion was denied by the Government. According to him indexation is basically motivated to combat the adverse effects of inflation and it (indexation) is no answer to inflation, rather it amplifies inflation. He pointed out that besides the laws noticed in the impugned judgment there are other laws containing provisions as to charging of “interest” and examination of the same is necessary for eliminating Riba and for seeking compliance of Shariah in all facets of economy. Dr. Waqar Masood also referred to the provisions of Constitution e.g. Article 78, 79 and 166, to point out the necessity to enact law with a view to regulate the borrowing by the Government. The written submissions later filed elaborating various aspects of the issues involved will be dealt with while discussing these matters.

 

 

 

Mr.Abu Bakar Chundrigar, Advocate, learned counsel for the Habib Bank Limited; while assisting the’ Court on the question of Riba argued that the research carried out by the Muslim Scholars showed that interest does not fall within the connotation of `Riba’. According to him, there is prohibition of Riba in Qur’an but the detailed view on the issue has not been expressed there. He requested the Court to keep in mind all the complexities of the system which affected the economic system and the banks should be compensated against rise in inflation.

 

 

 

Mr.Abdul Jabbar Khan, a Banking Expert (former President of the National Bank of Pakistan), addressing the Court contended that interest was illegal and forbidden in all forms and the Holy Prophet (peace be upon him) had waged a Jihad against interest or Riba and proposed a 16-Point Action Plan for dealing with the issue of Riba. He informed the Bench that Commission of Islamization of Economy in its report on banks and financial institutions had even drafted circular instructions to be issued by the State Bank to the banks and financial institutions, alongwith formats of legal documents to be executed by the clients financed under non-interest Banking system. He added that the report of the Commission had also identified how financial steeds could be better met within Sharia parameters. Mr.Khalid M Ishaque, Senior Advocate, contended that all the forms of interest were riot prohibited in Islam and only “Ribs al Nasie” or form of interest which was made compulsory/mandatory or taken by force was prohibited. He contended that the present banking system as a whole could not be termed un-Islamic and learned Federal Shariat Court has erred in declaring all forms of interest un-Islamic and it would be in the interest of justice if the case is remanded to the Federal Shariat Court so that the Court can review its decision in view of Injunctions of Qur’an and Sunnah and current banking system. It was contended that ‘current Banking System is not above Constitution and its adoption is a compulsion; that a mid way will have to be found as Qur’an’s teachings can control the economy of the world; that if a compromise way is not found then our economy would be destroyed like those of Korea, Indonesia, Malaysia and Thailand.

 

 

 

Dr. Muhammad Omer Chhapra, an Economist and Expert on Islamic Banking System, and Senior Economic Advisor at Saudi Arabian Monitoring Agency, dealt at length with the Islamic modes of financing and whether or not the existing Banking System fulfilled the requirements of Shariah. He further submitted that Qur’an has used the word “Ribs” for “interest” whereas there are about 70 different shapes of Riba; that the laws given by the Allah Almighty in Qur’an are final and explicit and there is no other way for Muslims but to subscribe to such injunctions without any hesitation; that it is possible that human mind does not comprehend the benefits hidden in following Islamic system of finance which totally prohibit “Riba” (interest in its all forms) but as the humanity develops these benefits will be felt and surface as bounties of Allah Almighty; that the biggest handicap of the Banking System in vogue is that only the people having valued assets or lands which can be mortgaged avail facility of loan and these individuals in general do not pay interest and mostly usurp the principal amount and in such a scenario the -possibility of national development diminishes; that Pakistan should try to attain self-sufficiency to end crucial dependence on loans from World Bank or IMF as these loans are giving rise to financial instability; that declaring interest as un-Islamic is not  he real issue instead question of doing away with the interest system is a big ,question which warrants solution; that transactions and profit where risk is not involved come under the definition of interest; that a country can get loans on interest from non-Muslims in acute emergency, but such loans are devastating for economy of that country; that Islam allows use of Haram for existence. He pointed out that Turkey got loans of about 6.5 billion dollars on interest to improve its economy but the economy did not improve; Pakistan has taken credit of over 30 billion dollars, which would be harmful for economy; that instead of investing reasonable amount in social sector and development projects, the Pakistan Government is allocating only 15 per cent. of its total annual budget; that for elimination of interest-based system, the Government should implement a judicious economic system, in which the people should be provided equal opportunities in employment, education and health; that charging of interest was prohibited mainly because of the injustice it inflicted upon the poor. Emphasising that in a Muslim society all measures were needed to reduce luxury expenditure both by the people as well as the Government, he dealt with various connotations of investment which, according to him, could be productive, unproductive and speculative. Turning to the interest-based banking system, he contended that the element of speculation in international market caused diversion of resources from essential investment which was against the principles of Islam, and when consumption rose the rate of savings decreased which in turn limited the Government’s ability to provide full employment. He, referring to the United States, where according to him, were negative savings, contended that this was because the dollar was an international currency and a sizable amount was brought back into the United States and in Pakistan’s case it was not possible so the rate of savings has to be increased. Giving comparative statistics of the rate of savings, he stated that Pakistan’s savings at 13 per cent. were very low as compared to 35 per cent. in Malaysia and Taiwan, and 42 per cent. in China. He added that for the past 100 years the rate of return on equity in the United States was 7 per cent. whereas on treasury it was 1 per cent. and in case of Germany and Japan it was 5.9 and 4 per cent. respectively on equity whereas in the case of T-Bills the return was wiped out during the world war. According to him it was possible to get a hither rate of return on equities. He dealt with the equitable distribution of resources and contended that despite progressive taxation in the Western countries it was no longer possible to continue with welfare spending such as health, education etc,, and maintained that the modern banking system has failed to finance smaller companies because they could not furnish collaterals; that 56 per cent, of the resources provided by over 28 million depositors went to borrowers who did not pay back. In respect of problems being faced by Japan and the Asian Tigers, he contended that too much money was doled out by the banks to the stock market and when the banks stopped lending, it had a domino effect. The Asian Tigers collapsed because over 50 per cent. of the money had been got from the outside on short term and the banks were lending it on medium ,or long terms, which created problems especially in view of hedge financing and, therefore, $30.3 billion out of a total of $1,490 billion in April, 1998 were transacted for speculate trading.

 

 

 

Dealing with prohibition of interest, Mr. Chhapra referred to the alternatives suggested by Shariah i.e. the primary and more risky modes of Modaraba (passive partnership between the financier and the entrepreneur), Musharakah (active partnership) and shares of joint stock companies, wherein the rate of return is based on the ultimate outcome of a business and not determined in advance and the depositor participates in the risk; and the secondary and less risky modes of Murabaha (cost plus service charge). Ijarah (Leasing), Ijra wa Iqtina (hire-purchase), Salam (forward delivery contract), and Istisna (contractual production) wherein rate of return is stipulated in advance and the depositor is free from the risks of the business. According to Mr.Chhapra, the bank is a Modaraba and it could lend to a sub-Modaraba and there is no permission required from the depositor for further lending, and the bank has the right to lend because it is providing the service of keeping the depositors’ money in safe custody. Narrating the major problems to be faced by an Islamic Bank he stated that Islamic Bank has to compete with other agencies as it would be very difficult to operate if harsh measures are taken. According to him a person might be imprisoned but no financial burden should be imposed, and the liberal view supported imprisonment and financial penalties as a deterrent by a Court of law to recover the actual damages which include compensatory cost. It was suggested that the law should be changed enabling the publication/circulation of names of defaulters by the bank. On rescheduling of loans Mr.Chhapra urged that it was possible in an interest based economy but in Islamic banking it could be done only for genuine reasons. He asserted that lease contracts must be different from the contracts for the purchase of residual assets.

 

 

 

As regards establishment of banks, Mr.Chhapra urged that 1400 years ago banks did not exist and people knew each other personally and performed trade and transactions among themselves during the period of Holy Prophet; that banks were formed in 15th and 16th centuries and first Islamic Bank was established in 1975 in Dubai and in 1996 there were 166 Islamic Banks in 34 Muslim and non-Muslim countries of the world.

 

 

 

Summing up arguments, he contended that a Central Shariat Board should be established; that the current Constitutional system of transactions is against teachings of Qur’an and Sunnah of the Holy Prophet (peace be upon him) and it is the Court’s responsibility to fix date for gradual Islamisation of system. He contended that new banking system should be started along with old system and later the non-Islamic Banking System should be eliminated.

 

 

 

Mr. Ebrahim Sidat, a Chartered Accountant by profession, appeared to make his submissions against the continuation of interest-based banking system and urged that the banking system of the country could be switched over to the Islamic mode within three to six months. According to him, there are no technical difficulties in introducing Islamic modes, it is just the lack of will and determination on the part of the Government. He contended that in order to bring the banking system strictly in accordance with the Islamic framework, Riba-based investments should be a cognizable offence as unless the Riba-based investments are made cognizable offences, many people will continue to circumvent it. He, however, added that the existing contracts must be honoured and after a cut off date option must be given for switching over to either of the Islamic modes. It was further contended that certain provisions of the Partnership Act should be amended to get rid of interest, in accordance with the judgment of the Federal Shariat Court; that revaluation of assets should not be done on the basis of book value but on the basis of its real value; that there could be no doubt about the need of doing away with Riba after what had been clearly spelt out in the Qur’an; that Riba is a matter which does not need to be dilated and fears and apprehensions that it cannot be replaced are misplaced; that Riba in all its manifestations was deplorable and the Federal Shariat Court’s judgment in this regard was a valid document and it is a matter of regret that after the initial steps in the early 80’s the process was reversed and ultimately put on the back-burner. He referred to State Bank of Pakistan’s report in which there is no mention of interest-free economy. He contended that one of the difficulties being faced in the Islamization of the banking system is that instead of treating Murabaha as a trading device people consider it as a financing instrument; that Modarabas and Musharikas are compatible with venture certificates and the venture certificates are influenced by the Islamic modes and its propriety under Shariah has to be looked into; that private Musharikas are operating successfully and no one is talking about its credibility. According to him Modarabas have become popular because some tax evaders use it as a shelter; and whole export funds are not subjected to tax on profits which provide strong motivation for playing with the figures e.g. presumptive tax. In reply to a question about the format of the accounting procedure under Islamic mode of financing he stated that it would not be different but requires expanding the scope of corporate law for carrying out Shariah audit and since every audit firm would not be having the Shariah experts, it could fall back upon others who possessed the expertise.

 

 

 

Mr.Ebrahim Sidat, like Mr. Chhapra, also recommended that the State Bank of Pakistan should have Central Shariat Supervisory Board to monitor the Islamic modes. He also suggested that not only corporate but private Modarabas should also be allowed to harness the funds available with individuals who lack the expertise but could make profit with the help of some experts citing the case of funds available with the employees relieved of the jobs through golden handshake.

 

 

 

Syed Muhammad Hussain, Chartered Accountant, contended that an authoritative pronouncement in respect of all types of interest, and with whatever name it is called, is required which could legally be implemented without scope for loopholes or misinterpretation; that interest be made a cognizable offence and investment companies should not accept interest based funding; that the economic order based on the Holy Qur’an and Sunnah of the Holy Prophet (peace be upon him) is for all times to come and the elimination of interest occupied a key position in the establishment of that order and centuries of colonisation have created doubts among the Muslims about the matter; that all loans taken by the Government from the public by issuing domestic debt instruments with a fixed rate of return/profit as well as the loans taken by the public from the Government-controlled banks should either be retired or be converted into an interest-free liability, such as equity; that the Government could request the foreign lenders to change the forms of contracts by replacing the existing interest-based contracts with those equivalent to Riba-free contracts as foreign loans contracted with foreign Governments or international financial institutions could not be terminated unilaterally, and if the foreign lenders refuse to do so, the contracts should.be honoured but without creating any further delay in meeting the payment obligations giving the quantum of uncertainty involved in settling the matter with foreign lenders; that the Federal Government should be directed to form a working group with a specific time-frame to chalk out an action plan for settling the matter with foreign creditors; that mark-up and interest in the present form levied by the financial institutions on accommodation, bill discounting charges, profit and interest payable on majority of leasing contracts, profit and interest payable on majority of PLS and interest-bearing deposits and profit and interest payable on majority of Term Finance Certificates (TFC) and National Savings, fell within the ambit of Riba prohibited by Islam; that interest payable on all present treasury bills and bonds, the interest levied on money due to Government on various accounts and the interest and penalties levied by the utilities and other business concerns on amount overdue also fell under the same category. He suggested structural and legal reforms and in this context mentioned Shariat audit, auditing and accounting standards, risk mitigation, trade finance and mark-up and Murabaha transactions.

 

 

 

Mr.Maqbool Hussain, Chairman Small Group of Companies, in his submissions stated that only paper work was done in Pakistan with regard to Islamization whereas the situation warrants a non-political autonomous body which not only makes laws in conformity with basic principles of Islam but also supervise the implementation of legislation regarding Islamization. He proposed creation of an Islamic Banking (Planning and Implementation) Board with a mandate to reform the whole, system- and suggested that this Board or Commission should comprise jurists, Ulerna, bankers and chartered accountants with a time span of two to five years. He contended Modarba is the only. system through which the economy of Pakistan could be transformed into a viable and credible economic order.

 

 

 

Dr.Shahid Hasan Siddiqui, an Economic Expert and Chairman of the Karachi-based Research Institute of Islamic Banking and Finance, appeared to state that present banking system is at the verge of collapse while the nationalized banks arc facing bankruptcy. Relying on various circulars and reports issued by, the State Bank of Pakistan which is regulatory body for all banking institutions including Development Finance Institutions, he urged that the successive Presidents of nationalized Banks had issued false and fictitious balance sheets showing increase in profits while in fact the banks have sustained record loss during the last ten years which even exceed the losses sustained during 41 years after independence, and these losses also exceed total profits by the banks in our whole life as a new nation; that interest-based banking system has failed due to corruption by the bankers and the interest-free banking system may also face the same fate at their (bankers’) hand and in the circumstances the Islamic Banking System may not prove successful; that the auditors who had been certifying false balance sheets of banks/DFIs including those who had certified higher value of assets for rescheduling of advances to sick units should be blacklisted and revaluation of assets should not be used for allowing new finances against the revalued assets. According to him in view of the documentation and declaration of correct profits by entrepreneurs the tax collection would be enhanced while the cost of production would go down as profits would be shared with the banks after the profits were declared. Referring to the Banking Companies Amendment Act, 1997 it was stated  that incentives given under this amendment are “un-Islamic, unjust and harsh for investors”. A high powered commission was also recommended by him to be established for looking into the cases of written off loans involving billions of rupees. He proposed that all modes of deposits, mobilization and utilization thereof must be based, as far as possible on profit and loss sharing system and the Government must restore its credibility by resolving the issue of imposing curbs on withdrawals from foreign currency accounts; that Kissan Bank and a Model Islamic Bank which should operate on 100 per cent. profit and loss sharing basis have to be established which would be able to offer much higher rates of return to the depositors even in the first year of their operation; that all major banks and DFIs should have an Islamic banking division and the same should be upgraded in the State Bank. Dealing with bank advances with up to date mark-up the economic expert said that no new loan on mark-up or interest should be allowed with immediate effect and at least 75 per cent. of new financing should be on Musharika, while for old advances he proposed that by January 1, 2000 all mark up or interest-based advances should be converted preferably into Masharika, if feasible; that in case of old debts there should be gradual reduction, optional conversion to second line techniques of financing and debt-equity swap, no renewal of existing products and optional transfer to new products on PLS basis as and when these products are developed, while in the context of external debts there should be no interest-based loans for new financing; and for old debts negotiations for conversion to second line technique of financing and for debt equity swap should be followed; that no interest-deposits should be accepted, including where, on the instrument, expected rate of profit was mentioned or announced in advance whether formally or informally; that existing deposits should be brought under the new system irrespective of the maturity and for foreign currency deposits the depositor should be given the option to convert it at the average of prevailing open market rates on the date of encashment and the maximum rate in the open market after 1998. He called for establishment of a high powered commission headed by a Judge of the superior Court to examine all cases of rescheduling/restructuring/written off/remissions etc. in the advances portfolio after January 1, 1985 and losses under these heads, according to him, could be as high as over Rs.100 billion; that the commission should be empowered to examine the State Bank’s Incentive Scheme to loan defaulters and decide whether it was un-Islamic, unjust and detrimental to the depositors’ interest; the commission should also fix the responsibility of bankers/directors and of the State Bank in respect of 869 cases of loan defaulters, where a sum of Rs.111 billion was involved and examine higher assignments given during the last five years in the Government departments and autonomous corporations to those who had been or were still a defaulter or had committed a fraud. ‘