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

 

Following conditions are prescribed for the validity of Murabaha/Bai’ Mu’ajjal:--

 

(i) The time of payment of consideration must be known; and

 

(ii) the seller has to possess the commodity involved before it is delivered to the purchaser.

 

The system of mark-up adopted in Pakistan in January, 1981 did not conform to the standard stipulations of Bai’ Mu’ajjal. Bai’ Mu’ajjal/Murabaha is one of the most popularly used modes of financing used by the Islamic Banks in the world.

 

Murabaha mode of Finance or the “mark-up” system with the conditions attached thereto is permissible mode of Islamic finance and this mode cannot, therefore, be held to be repugnant to the Injunctions of Islam if the conditions prescribed are not being practised by some of the parties. Such violations occurred as there was no monitoring system in existence to check such errors, omissions arid commissions and violations. In the system proposed to be adopted with Shariah Board in existence in the State Bank of Pakistan as well as in the financial institutions themselves, such violations as and when noticed shall be pointed out and eradicated. Moreover, such errors will he eliminated where the system as a whole will be geared up to enforce Islamic Laws with commitment and dedication.

 

The adoption of the mark-up system within the limits prescribed appears to be the need of the economic system in the transitional period and till the time more and adequate number of Shariah-compliant financing modes are developed.

 

Any return on a promissory note or a bill of exchange as contemplated in subsections (a) and (b) of section 79 of the Negotiable instruments Act of 1881 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.

 

Clause (i) to the proviso to section 79, Negotiable Instruments Act, 1881 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 charges.

 

A careful reading of section 79 of the Negotiable Instruments Act, 1881 with all its provisions, analysed 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 favour 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 the 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.

 

The first transaction mentioned in sub-clause (i) of the proviso to section 79 of the Act of 1881 is that of mark-up in price. What is meant by this term is the transaction of Murabaha or `Bai’ Mu’ajjal’.

 

Although the mark-up system as in vogue in banks in Pakistan 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 principles 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 they 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. 110 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 Injunctions 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 he (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 be taken to be a source of further ‘return’ to the seller on per cent per annum basis as contemplated in section 79.

 

‘` The words “mark-up in 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 Sharjah on the basis of the original mark-up.

 

The second transaction mentioned in sub-clause (i) of the proviso to section 79 of the Act is lease. Let us 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, 2004, 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 subject 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 sub-clause (i).

 

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 be subjected to the same rent as was fixed during the lease period for the days he kept on 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.

 

The third transaction mentioned in the said sub-clause is hire purchase.

 

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.

 

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 above in its purest form, with no violation of a principles of Shariah, the question in the clause under discussion is 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 hirepurchase agreement. Therefore, it is subject to the same finding as recorded in the case of lease.

 

Next mentioned in clause (i) is the service charges. 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 the documentation involves some expenses, they will be borne by the borrower.

 

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.

 

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 are not normally recurring expenses, and if suttee additional expenses are incurred after the default through sending reminders etc. they are nut necessarily a« he same rate at which the original service chance was calculated. They can be less, and they can be more ii the financier has to take a legal action against the borrower.

 

Clause (ii) of the proviso to section 79 of the Act, 1881, 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 toss sharing is -trot a loan. This word, therefore, is misconceived.

 

Secondly, the proportions of profit agreed to he 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 deserved 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 it 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.

 

Contracts by Chitty, Sweet and Maxwell, London, 24th Edn., 1977, Vo1.2, p.461, para.3212 and Ahkam-al-Qur’an by Al-Jassas, Lahore, 1980, Vol.l., p.485 ref.

 

(f) Negotiable Instruments Act (XXVI of 1881)-----

 

----Ss.. 114 & 117(c)---Constitution of Pakistan (1973), Art.203-F--Repugnancy to Injunctions of Islam---Provisions of Ss.114 & 117(c) of the Negotiable Instruments Act, 1881 which provide for charging of interest, are repugnant to the Injunctions of Islam---If a party, however, has paid the amount due, inclusive of the interest payable on instrument prior to the date .of coming into force of the judgment of Supreme Court, 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---.Shariat Appellate Bench of Supreme Court declared that the provision will cease to have effect from 30th June, 2001.

 

Section 114, Negotiable Instruments Act, 1881 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 and, therefore, repugnant to the Injunction of Islam. However, if a party has paid the amount due, inclusive of the interest payable on instrument prior to the date of coining 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.

 

(g) Negotiable Instruments Act (XXVI of 1881)---

 

----S. 13---Constitution of Pakistan (1973), Art. 203-F---Repugnancy to Injunctions of Islam---Definition of “negotiable instrument” as given in S.13, Negotiable Instruments Act, 1881 does not, in itself, provide that it will. be traded in, or that it will be transferred or indorsed at a discount--Practice prevalent in the financial market that such instrument is discounted on the basis of interest is against the Injunctions of Islam as the same involves Riba---Principles---Shariat Appellate Bench declared that the provision will cease to have effect from 30th June, 2001.

 

The definition of a “negotiable instrument” as given in section 13 of the Negotiable Instruments Act, 1881 does not, in itself, provide that it will be traded in, or that it will be transferred or indorsed at a discount. But the practice prevalent in the financial market is that it is discounted on the basis of interest. This practice is against the Injunctions of Islam and involves Riba. A promissory note or a. bill of exchange represents a debt payable by the debtor to the holder. This debt cannot be transferred to anybody except at its face value. Discounting of a bill or a note or a cheque, therefore, involves interest. In an Islamic financial market, the papers representing money or debt cannot be traded. However, the papers representing holder’s ownership in tangible assets, like shares, lease certificates, Musharakah certificates etc. can be traded in, And a viable secondary market can be developed on that basis.

 

(h) Land Acquisition Act (I of 1894)--

 

----Ss. 28, 32, 33 & 34---Constitution of Pakistan (1973), Art.203-F--Repugnancy to Injunctions of Islam---Sections 28, 32, 33 & 34 of Land Acquisition Act, 1894 to the extent these contain the provisions relating to “interest” are repugnant to Injunctions of Islam---Reasons and principles detailed ---Shariat Appellate Bench declared that the provision will cease to have effect from 30th June 200:

 

Section 28 of the Land Acquisition Act, 1894 manifests the intention of the provision i.e. to compensate the landowner who was deprived of the land without payment of the true price payable. The deprivation so made is sought to be calculated through the prescribed mechanism i.e. compensation is being assessed at the rate of 6 per cent. per annum, difference of the amount payable for the period that the landowner was deprived of the usufruct of the land. The principle sought to be given effect is that an owner cannot be deprived of his property except by paying adequate and proper price/compensation thereof and that the rights in the property are not to be treated as transferred unless proper compensation is paid.

 

Section 32, Land Acquisition Act, 1894 regulates the amount of compensation which, for the reasons given in the previous section i.e. section 31 of the Land Acquisition Act, could not be paid to the rightful owner. Such amount lying with the Court is to be invested in the purchase of other land to be held under the like title and conditions of ownership as the land in respect of which such money has been deposited was held, or if such purchase cannot be effected forthwith, then in such Government or other approved securities. This section further provides that the interest or other proceeds arising from such investment shall be paid under the direction of the Court to the person/persons who are found entitled to the possession of the land acquired.

 

Section 33 of the Act provides for regulation of the money deposited in the Court for any cause other than the one mentioned in section 32 of the Land Acquisition Act and provides that such money deposited with the Court is to be invested in Government or other approved securities and the interest or the proceeds of any such investment are to be paid to the person/persons found entitled on the basis of their interest in the land and their entitlement to receive benefit from the land in respect of which the money had been deposited.

 

The true tests for adjudicating the real nature of an amount in the domain of Riba can come from the Holy Qur’an, Sunnah of the Holy Prophet (p.b.u.h.) and time tested opinions of the jurists and scholars well versed in Islamic Law and Shari’ah. Consequently, the process of reasoning employed for dubbing the interest payable under sections 28 and 34 to be something else than Riba is difficult to justify in Shari’ah. The increase or addition in the form of interest under sections 28 and 34 over the debt payable in the form of compensation by acquiring authority to the landowners obviously falls in the category of Riba.

 

The first principle applicable is that in case of compulsory acquisition the compensation or the value of the land and the property acquired is to be paid either before taking over the possession of property or simultaneously with the taking over the possession or within such period of time after taking over the possession that the time involved may not be considered as real (mentionable) delay in making payment. If there is any delay, then it will be considered and treated that interest in the ownership of the land to that extent has not been passed. This is so treated so as to impress upon the necessity of making the payment of the due price/counter value and it is for this reason that section 28 of the Land Acquisition Act provides for awarding an amount with reference to the amount of compensation which was less paid or assessed or fixed by the Collector.

 

From the viewpoint of Shariah, the acquisition is a compulsory purchase of a property from the owner and the compensation awarded to him is the price of such purchase. One of the necessary conditions of a permissible acquisition, is that the owner is given a fair market price of the property before or at the time of taking possession. If the Collector has paid less than the fair market price, it means that he has compelled the owner, not only to surrender his property without a fair price, but also to face the hardships of litigation. The function of the Court in this case is to fix a fair price of the property. While discharging this function the Court can take into consideration the injustice done to and the hardships suffered by the owner bf the property and may, thus, increase the price so as to make it more than the normal market price. Instead of adopting this simple mode, section 28 of the Act; 1894 has first fixed the price by specifying the “excess”, then it has allowed an additional amount in the name of interest at the rate of 6% per annum. That is why it is repugnant to the Islamic Injunctions, because once the price is fixed and it became a debt, any increase over it calculated at per cent. per annum basis makes it interest, hence prohibited. On the contrary, if the price itself is increased for the considerations mentioned above, it will not entail interest, because the price of a property may be fixed on the basis of many considerations, including the hardship suffered by the seller at the hands of the purchaser in the same transaction.