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

 

 

 

Late Professor Shaikh Mahmud Ahmad, a leading thinker and a senior economist of our country had devoted a considerable part of his life to the study of the theory of interest. The result of this study are embodied in the book Man and Money, printed posthumously in Lahore. According to iris findings interest-based economy leads to such insurmountable economic problems as unemployment, inflation, fiscal deficit, deficit financing and business fluctuations. These are only some of the many incurable diseases of which the western economics does not appear to possess any dependable remedies. These precisely are the issues which are of the highest concern to the common man all the world over. The difficulty of the western economics, according to him, is that the remedies suggested by it for unemployment are the ones that add to inflation, and the ones for curing inflation are those that increase unemployment. The late scholar notes with great concern that there is little logic behind these prescriptions, and finds that these are not distinguished for clear thinking, in so far as these confine to respective symptoms, rather than the causes that lead to their emergence.

 

 

 

Dr. Muhammad Umar Chapra addressed the Court on March 17, 18 and 19, 1999. He presented an overall survey of the issues and problems involved in the question of eliminating Riba from the economy of Pakistan.

 

 

 

He started with the question of the rationale of the prohibition of Riba by Islam. He did not agree with the belief of some people that interest or Riba was prohibited mainly because it involves injustice. He also dealt with the history of the establishment of Islamic banking institutions from the establishment of Mit-Ghamar in Egypt in 1963 to the latest experiment made in the field in some modern Muslim countries. He also pointed out that the concept and principles of Islamic Banking have attracted the attention of leading western banks and some international financial institutions. In the context of this discussion he identified the problems and difficulties involved and examined the criticism advanced against Islamic Banking by some scholars. We will come to the question of problems and difficulties later.

 

 

 

The question of rationale of the prohibition of interest by Islam has been dealt with by Dr. Chapra in his prestigious publications on the subject as well as some articles written for popular consumption. His book Towards a Just Monitary System, submitted by him to the Court, contains valuable discussion on the question of rationale. The gist of Dr. Chapra’s thoughts on the subject is embodied in a note submitted by him to the Court. Discussing the wisdom of the prohibition of interest Dr. Umar Chapra says that the consideration of injustice inflicted upon the poor does not go far enough towards the full rationale of this prohibition. It is neither historically supported by the evidence nor is consistent with the theoretical framework of the economic system of Islam.

 

 

 

During the Prophet’s time (may the peace and blessings of God be upon him) borrowing was primarily undertaken not by the poor but by tribes and rich traders who operated as large partnership companies to conduct large-scale trade. This was inevitable. The difficulty of the circumstances, toughness of the terrain, harshness of the climate and primitiveness of communication made the task of trade caravans difficult and time consuming.

 

 

 

It was not easy for the Arab traders to make business trips to the commercial centres as frequently as the need demanded. They would, rather, confine to- two trips every year, the Winter Trip and the Summer Trip. It was necessary for the caravans to muster all available financial resources to purchase the local exportable products, sell them abroad, and bring back the entire needs of their society for imports during a specific period. Before Islam, such resources were mobilized on the basis of interest. Islam abolished the interest-based nature of the financier entrepreneur relationship and reorganized it on a profit-and-loss sharing basis. This enabled the financier to have a just share in the enterprise, but the entrepreneur was not crushed by adverse conditions - such as the caravan being waylaid on the journey. This demonstrates that although the extension of meaningful help to the poor carries a high priority in the Islamic value system, it is not the only reason for the proscription of interest. The primary reason is the realization of overall socio-economic justice, which is declared by the Qur’an to be the main mission of all God’s Messengers[57:25].

 

 

 

Justice, however, is not a hollow term. It has several implications, the most important of which is that the resources provided by Allah to mankind must be utilized in such a manner that the universally-cherished humanitarian goals of general need fulfilment, full employment, equitable distribution of income and wealth, and economic stability, are realized. These humanitarian goals cannot be realized without a humanitarian, strategy. An important, though pot the only, element of such a strategy is the abolition of interest. This would necessitate the reorganization of financial intermediation on the basis of equity and profit-and-loss sharing; and making the financier share the risks as well as the rewards of business, and not assuring him of a predetermined rate of return irrespective of the ultimate outcome of business.

 

 

 

Financial intermediation on the basis of interest tends to allocate financial resources among borrowers on the criteria of their ability to provide acceptable collateral to guarantee the repayment of principal, and sufficient cash-flow to service the debt. End-use of financial resources does not constitute the main criterion. Hence, financial resources go to the rich, who fulfil both the criteria, and also to Governments which, it is assumed, will never go bankrupt. However, the rich borrow not only for investment but also for conspicuous consumption and speculation, while Governments borrow not only for development and public well-being, but also for defence and big projects. This contributes to a rapid expansion in unproductive and, at times wasteful, spending and, besides accentuating macro-economic and external imbalances, squeezes resources available for need fulfilment and development. This explains why even the richest countries in the world, like the United States, have been unable to fulfil the essential needs of all their people in spite of abundant resources at their disposal.

 

 

 

The unproductive and wasteful spending which the collateral linked, interest-based financial inter-mediation has the tendency to promote, has led to a decline in savings in almost all countries around the world. Even in the industrial countries, net national saving as a percentage of national income declined by almost 4 % between the 1960s and the 1980s. The world saving shortfall has been responsible for persistently high levels of real interest rates. This has led to lower rates of rise in investment, economic growth and employment. Unemployment has hence become one of the most intractable problems , for all countries, including the rich industrial world. Unemployment stood at 8.6 per cent in Europe in 1988-90, three times its level of 2.9 per cent. in 1971--73. It is not expected to fall significantly below this level in the near future because a real rate of economic growth of 3.5 per cent. is required to prevent unemployment from rising, and European growth has been below this benchmark since 1976 Even more worrying is the higher than average rate of youth unemployment because it hurts their pride, dampens their faith in the future, increases their hostility towards society and damages their personal capacities and potential contribution. Given the budgetary constraints, the ever-looming threat of inflation, and the prospect of low growth rates continuing in the foreseeable future. the possibility of attaining full employment in the Western world is not very bright, A decline in wasteful spending and a rise in savings and investment would be very helpful. But this is not possible when the value system encourages both the public and the private sectors to live beyond their means and the interest-based financial intermediation makes this possible by making credit easily available without due regard to its end use. If, however, interest is prohibited and banks are required to share in the risk and rewards of financing, they will be more careful in lending. Wasteful spending will decline and more resources will become available for productive investment and development. This will lead to higher growth, a rise in employment opportunities, and a gradual decline in unemployment.

 

 

 

The inequitable allocation of financial resources in the conventional” interest-based financial system is not widely recognized. According to Arne Bigsten, `the distribution of capital is even more unequal than that of land’, and `the banking system tends to reinforce the unequal distribution of capital’. The reason, as already indicated, is that interest-based financial intermediation relies heavily on collaterals, giving inadequate consideration to the strength of the project or the ultimate use of financing. Thus, while deposits come from a cross-section of society, their benefit goes mainly to the rich. The Islamic financial system can be more conducive to the realization of equity-. Risk-and-reward sharing would compel the financier to give due consideration to the strength of the project, thus making it possible for even the poor but competent entrepreneurs to get finances if they have worthwhile projects. A large number of small and medium enterprises would thus be able to get finances from financial institutions without being able to offer the collaterals. This should enable the society to harness the pool of entrepreneurial ability from even among the poor. The rich contribution that such entrepreneurs can make to output, employment and need fulfilment would thus be tapped.

 

 

 

According to Dr. Umer Chapra, there is no reason to be unduly apprehensive about loan losses from such financing. The experience of the International Fund for Agricultural Development (IFAD) is that credit provided to the most enterprising of the poor is quickly repaid by them from their higher earnings. Other small-loan programmes have yielded similar results in several countries. .

 

 

 

The rate of interest has become one of the most important destabilizing factors in the present-day world economy. Milton Friedman, a Nobel Laureate, attributed the unprecedently erratic behaviour of the U.S. economy to the erratic behaviour of interest rates. The high degree of interest rate volatility injects great uncertainty into the investment market. It makes the share of interest in the total return on invested capital (interest + profit) to continually fluctuate. This makes it difficult to take long-term investment decisions with confidence. It drives borrowers and lenders alike into the shorter end of the financial market, thus bringing about a shift in the short and long term commitment of funds, and between equity and loan financing. Fluctuating interest rates also create gyratic shifts in financial resources between users, sectors of the economy and countries, causing erratic movements in loan based investments, commodity and stock prices, and exchange rates. With every rise in the rate of interest in a floating rate system in a short-ended market, there is a rise in the rate of business failures, not because of any inefficiency or slackness on the part of the proprietor, but because of sudden decline in profit which is the entrepreneur’s share in the total return on capital. Business failures mean not only personal financial losses to proprietors and stock-holders. but also a decline in employment, output, investment and productive capacity - losses which take longer. and are more difficult to make up All these factors have, no doubt, serious implications for economic activity and stability.

 

 

 

In a wholly equity-based system, the entrepreneur’s share in the total return on capital would depend on the profit-sharing ratio and the ultimate outcome of the business. The profit-sharing ratio between the entrepreneur and the financier cannot fluctuate from day to day or even month to month like the rate of interest because it would be determined by custom and considerations of justice and remain contractually stable throughout the duration of the financing agreement. Since the ultimate outcome of business depends on a number of factors which do not change erratically, an equity-based economy would therefore tend to be more stable than a loan-based economy. This has been recognized by a number of prominent Western economists.

 

 

 

Dr. Chapra considers the prohibition of interest an indispensable part of the strategy of any system which believes in the brotherhood of mankind and wishes to actualize the humanitarian goals of need fulfilment, full employment. equitable distribution of income and wealth, and economic stability. The reason why capitalism has not been able to realize these goals is that there is a conflict between its goals and its strategy. The goals are humanitarian, originating from its religious past, while the strategy is social Darwinist, based on the concept of the survival of the fittest. For the allocation of scarce financial resources, capitalism relies primarily on the rate of interest, which gives an edge to the rich and leads not only to a concentration of wealth but also a rise in conspicuous and wasteful consumption. This hurts the goal of need fulfilment and contributes to a slower growth in saving, investment, employment and output, thus frustrating the realization of overall human well-being.

 

 

 

Counsel for the Federation and several other experts including Mr. Khalid M. Ishaque, Dr. Muhammad Aslam Khaki and Hafiz Abdul-urRehman Madani, have submitted that the main and the primary cause of the prohibition of interest is Zulm or injustice. Dr. Muhammad Umar Chapra M has also dealt with this issue at length in some of his written documents M presented to us. Let us, here, examine the meaning, scope and contours of M zulm in this context.

 

 

 

In order to understand the rationale of the prohibition of interest. one should also look into the objectives or the Maqasid of the Shariah. The financial policy of Islam has to be commensurate with these objectives. If it is not, the objectives would be defeated. In this context when we look into: Qur’an we find that the establishment of ist or real justice is the primary and central objective of Islam. The Qur’an and the Sunnah have both placed tremendous stress on justice. According to the Qur’an, establishment of real justice (Qist: just, Qistas: Justice) the primary purpose for which Allah has sent down His prophets (Qur’an: 57:25). The Qur’an places justice nearest to Taqwa (Qur’an, 5:8), in terms of its importance in the Islamic scheme. Righteousness or Taqwa is the most important because it serves as a springboard for all rightful actions, including justice. The Holy Prophet (peace be upon him) equated the absence of justice with “absolute darkness”. (Sahih Muslim (1955), Vol 4, p. 1996: 56, Kitab al-Birr wa alSilah wa al-Adab. Bab Tahrim al-Zulm, from Jabir Ibn Abdullah). The Prophet (peace be upon him) has used the word . zulumat in this Hadith. Zulumat is the plural of zulmah or darkness, and signifies several layers of darkness, leading ultimately to `pitch’ or `absolute’ darkness, as is also evident in the Qur’anic verse, 24:40. This is but natural, because injustice undermines brotherhood and solidarity, accentuates conflict, tensions and crimes, aggravates human problems, and thus leads ultimately to nothing but t agony and ordeal in this world and misery and condemnation to Hellfire in the Hereafter. Brotherhood or Ukhuwwah whose establishment is an ideal for Muslims to be achieved becomes a meaningless jargon if it were not sustained by justice in all walks of life particularly in the allocation and distribution of God-given resources.

 

 

 

All leading jurists throughout Muslim history have, therefore, without any exception, held justice to be the foundation stone of the Maqasid al-Shariah. For example, Imam Abu Yusuf laid considerable stress on justice in his letter to Caliph Harun al-Rashid by saying that: “Rendering justice to those wronged and eradicating injustice, raises tax revenue, accelerates development of the country and brings blessings in addition to reward in the Hereafter”. A great Shafi’e jurist and a political thinker of note, Abul Hasan Mawardi stressed that comprehensive justice “inculcates thutual love and affection, obedience to the law, development of the country, expansion of wealth, growth of progeny, and security of the sovereign”, and that “there is nothing that destroys the world and the conscience of the people faster than injustice”. The celebrated revivalist thinker and the renowned Hambali jurist Ibn Taymiyyah considered justice to be an essential outcome of Tawhid or belief in one God. To him justice is a very wide concept - “everything good is a component of justice and everything bad is a component of injustice and oppression. Hence, justice towards everything and everyone is an imperative for everyone and injustice is prohibited to everything and everyone. Injustice is absolutely not permissible irrespective of whether it is to a Muslim or a non-Muslim or even to an unjust person”. Ibn Taymiyyah refers to the well-known saying `attributed to Hazrat Ali that “Allah upholds the just state even if it is unbelieving, but does not uphold the unjust state even if it is Islamic”, and that “the world can survive with justice and unbelief, but not with injustice and Islam”. The great philosopher of history and the founder of the Science of Sociology Ibn Khaldum stated unequivocally that it is not possible for a country to develop without justice, something that has now been belatedly recognized by the pundits of development economics after a long flirtation with injustice. Ibn Khaldum goes to the extent of emphasizing that “oppression brings an end to development and the end of development becomes reflected in the breakdown and destruction of the state, and that “a decline in prosperity is the necessary and inevitable result of injustice and transgression”. He elaborated further that, “oppression does not consist, merely in taking away wealth and property from its owner without cause or compensation. Oppression has rather a wider connotation. Anyone who seizes the property of others, forces them to work for him against their will, makes unjust claims on them, or imposes, on them burdens not sanctioned by the Shariah, is an oppressor”.

 

 

 

Given the importance of justice in Islam, there arises the question of its implications. Justice is a comprehensive term in Islam and covers all aspects of human interaction, irrespective of whether it relates to the family, the society, the economy or the polity, and irrespective of whether the object is a human being, animal, insect or the environment. This has wide implications, one of the most important of these is that the resources provided by God to mankind should be treated like a trust and must be utilized in such a manner that the well being of all is ensured, irrespective of whether they are rich or poor, high or low, male or female, and Muslim or non-Muslim. In the field of economics, one could assert that justice demands the use of resources in such an equitable manner that the universally cherished humanitarian goals of general need fulfilment, optimum growth and full employment, equitable distribution of income and wealth, and economic stability are realized. These humanitarian goals are recognized by almost everyone everywhere. They are the outcome of moral values provided by most religions. However, it is the strategy for realizing these which makes a difference. These humanitarian goals cannot be realized without a humanitarian strategy. The strategy requires, among other things, the injection of a moral dimension into economics in place of the materialist and hedonist orientation of capitalism. Abolition of interest is a part of this moral dimension. This is perhaps one of the reasons why Islam is not alone in condemning interest. All other major religions, including Judaism Christianity and Hinduism have also condemned it. The Bible makes no distinction between usury and interest and brands those who take interest as wicked.

 

 

 

Even though the extension of help to the poor and the raising of their socio-economic condition enjoys a high profile in the Maqasid alShariah, confining the rationale behind the prohibition of interest to just this limited objective is not only factually wrong but also unduly restrictive in terms of the concept of justice in Islam. During the Prophet’s time, may the peace and blessings of God be on him, the Muslim society had become so well organized in terms of mutual care that the needs of the poor were automatically taken care of by the rich. To the extent that this did not happen, the Bayt al-Mal was there to fill the gap. The poor were not, therefore, constrained to borrow to fulfil their basic needs. Since there was no conspicuous consumption of extravagance in marriages and other festivities there was no need to resort to borrowing for this purpose as well.

 

 

 

Throwing light on the distributive justice in Islam, in his written statement submitted to us, Dr. Muhammad Umar Chapra refers to the example of Pakistan. He says Pakistan is a very clear example of how excessive borrowing squeezes resources for need-fulfilment. Governments in Pakistan have borrowed right and left until debt-servicing (interest + amortization) has reached 46 per cent. of total Central Government spending in the 1998-99 Budget. Since another 24 per cent. of the total is allocated to defence and 12 per cent. to administration, only 18 per cent. remains for’ development spending, including education, health and infrastructure construction. This is far less than what Pakistan needs to fulfil its dream of becoming an Asian tiger. If the Government of Pakistan had taken the Islamic injunction against interest seriously, it would have tried to reduce its deficits with a view to minimize its borrowing. It would have streamlined the tax collection system and also reduced its unproductive and wasteful spending. A number of projects which were undertaken by the Government and which have proved to be sour would have been avoided. The Far Eastern countries adopted fiscal discipline, while Pakistan, which should have done so all the more because of its commitment to Islam, did not do so. Pakistan is, of course, not alone in this predicament. A number of other countries are in a worse condition. Suggesting the basic ingredients for sustained growth in a modern economy Dr. Chapra refers to saving, investment, hard and conscientious work, technological progress and creative management, along with helpful social behaviour and Government policies. As far as saving is concerned, its positive effect on growth is now well established. It helps raise capital formation, which in turn helps raise output and employment. A well-established fact is that high saving countries have generally grown faster than low saving countries. The central importance of saving brings into focus the likely effect of Islamic values and institutions on aggregate savings? It is now well recognized that since Islam prohibits extravagance, status symbols and living beyond means, there should be a positive effect of Islamic values on saving. Moreover, studies conducted in conventional economics have indicated a strong link between the households’ access to credit and the savings rate. High saving countries like Japan and Germany have tax systems that tend to discourage consumer borrowing. On the basis of these findings, it may be hoped that the adoption of the profit and loss sharing system would help raise savings provided we totally close the doors of credit to both the public and the private sectors for unproductive purposes, as it has always been a major drain on savings. It may be mentioned here that some experts who appeared before us explained to us how over the last hundred years the equity premium has been substantially high in the U.S. On the other hand, the hyper-inflation of the 1920s wiped out bondholders altogether in Germany, and the post-World War-II hyper-inflation did the same in Japan. Equity investments involve greater risk, and everyone may not be willing to bear that risk, or some people may prefer to have less risky modes. All these are available within the Islamic framework. Hence, what is important is the availability of, and easy access to, investment opportunities. of varying risks and maturates to satisfy different preferences of the savers.