ISLAMABAD, 1 July — The photofinish landmark judgment by which the Supreme Court of Pakistan has canceled the mandatory order banning all interest-based banking in Pakistan has deep implications for banks and financial institutions.
The ban on all interest-based banking or ‘Riba’ was to come into force June 30, 2002 under a judgment of Federal Shariah Court (FSC) of Pakistan. The FSC that rules on what is un-Islamic had, in its Nov. 14, 1999 judgment, declared “all forms of interest based banking un-Islamic.” The Shariah Appellate Bench (SAB) of the Supreme Court of Pakistan that can overrule or confirm FSC judgments had, on Dec. 23, 1999 upheld the FSC judgment. By doing so, it mandated the government of Pakistan to ban all interest-based banking and to transform the economy according to Shariah laws and principles. United Bank Ltd. (UBL), a state-owned bank, filed a review petition against this FSC-SAB ruling in the Supreme Court of Pakistan (SCP), the highest judicial organ of the country.
The government of Pakistan supported the UBL review petition against the ban on interest-based banking. The government maintained that implementation of the FSC-SAB judgment will create enormous problems for the domestic, Western-style banking and the economy, as well as Pakistan’s official and private business and financial dealings with the outside world.
The SCP has now ruled on the UBL and government review petition against the Dec. 23, 1999, judgment. The bench was headed by Chief Justice of Pakistan Justice Shaikh Riaz Ahmad, and comprised Justice Munir A. Sheikh, Justice Qazi Muhammad Farooq, Justice Dr. Allama Khalid Mahmood, and Justice Dr. Rashid Ahmed Julundhri.
The SCP has now sent the case back to the FSC and directed review all matters of the present banking and financial system, keeping in view the legal, religious and business practices in other Islamic countries. Meanwhile, it revoked the proposed ban that was to become effective June 30, 2002.
Setting aside the 1991 and 1999 rulings it said, a case has been made by UBL, the government and those appealing against these orders because “there are errors floating on the surface of record.”
“We are of the considered view that the issues involved in the matter require to be determined after thorough and elaborate research and comparative study of the financial systems which are prevalent in the contemporary Muslim countries of the world.” The previous rulings, it said, did not give a definite finding on all the issues for resolution of the controversy — interest-free banking and ban on ‘Riba’ — involved in these cases.
The FSC, under the Constitution of Pakistan, it said, is “enjoined upon to give a definite finding on all the issues falling within its jurisdiction.” The Supreme Court also said that Justice Dr. Tanzilur Rehman, the then chief justice of FSC that gave the 1991 ruling had “delivered the judgment with a pre-determined mind, and had relied on views he himself had expressed in his own books and writings on interest-based banking and economy. Justice Rehman had also ignored opinions of globally known Islamic scholars and jurists including Shaikh Mohammad Abduhu, Shaikh Rashid Rida, Abdul Razzak Sanhuri, Shaikh Mahmood Shaltut the former rector of Al-Azhar University at Cairo, and the present rector of the university Dr. Muhammad Sayyid Tantawi.
There is a major task ahead for FSC, Islamic jurists and the financial institutions, as the Supreme Court will like all concerned to delve deep into several fundamental questions raised and recommendations made in the judgment that now stands canceled.
These include:
— The loans should be indexed which means that the debtor must pay an additional amount equal to the increase in the rate of inflation during the period of borrowing.
— The loans should be tied up with gold, and it should be presumed that the one who has loaned (say) Rs. 1,000 has actually loaned as much gold as could be purchased on that date for Rs. 1,000, and must repay as many rupees as are sufficient to purchase that much of gold.
— The loan should be tied up to a hard currency like dollar.
— The loss of the value of money should be shared by both the creditor and the lender in equal proportion. If the value of money has declined at a rate of five percent, 2.5 percent should be paid by the debtor and the rest should be borne by the creditor, because inflation is a phenomenon beyond the control of either of them. Being a common suffering, both should share it.
The Supreme Court wants the FSC to undertake, and make use of, thorough research at home and abroad, in the above four fields. It also requires it to do comparative study of the financial systems that are prevalent in the contemporary Muslim countries of the world.
These points have far reaching implications in complex monetary matters. How will the rate of inflation be determined? This is important in Pakistan, as well as most other developing countries, where the governments try to suppress fuller and correct information about the inflation rate, cost of living and the price levels, because they fear that if they admit prevalence of a high rate of inflation it will be considered as a failure of official economic policies. Also a rising inflation rate will mean that they will have to increase salaries and wages of employees on the government payroll.
Will the banks or lenders be prepared to share with the borrowers the loss in value of money? Will the banks build such expected losses in the rate of profit, markup or interest they charge the borrowers in order to hedge themselves against unquantified and unquantifiable losses.
Tying up the amount of loan with gold will require knowledge, projections, and trends in futures markets in bullion — a tricky job, made difficult by global factors ranging from gold production and host of relevant influences.
At the same time, expressing the amount of loans in terms of a hard currency like dollar will mean working out the future movement in the value, forex cross rates and parity of foreign currencies, such as dollar, with the local currency like rupee.
The United Bank had argued before the court that the Holy Qur’an did not ban what is “reasonable and fair,” although it did prohibit doubling, tripling or multiplication of the principal. At the same time, the government of Pakistan maintained that FSC, according to the Constitution of Pakistan, has no jurisdiction to declare bank interest or ‘Riba’ as ‘haram’ — illegal or impermissible. It is duty of the government, and not the FSC, to eliminate ‘Riba’ as early as possible. This constitutional obligation and fixation of a time schedule to do so, is to be performed by the government and not by any court.
There are yet other important questions: How should common people’s investment in government bonds or savings schemes to be treated as far as paying interest or profit to investors is concerned? Is, or isn’t, ‘Riba’ or interest-free banking applicable to non-Muslims?
The FSC did not at all deal with question of applicability or otherwise of the prohibition of ‘Riba’ to non-Muslims. According to the Supreme Court judgment canceling the earlier rulings, “surprisingly, Shariat Appellate Bench proceeded to hold that the prohibition applied also to non-Muslims, which was not the issue before it.” Both the FSC and the SAB of the Supreme Court had ruled to strike down several existing laws dealing with bank interest and banking.
These, more prominently, included the Interest Act 1839, and a part of the Banking Companies Ordinance, 1962. Thirteen years into the banking battles in Pakistan’s highest courts, the question still hangs on: Does bank interest that oils the wheels of the entire global banking and financial system fall under the term of ‘Riba’ or exploitative bank-interest? What should Islamabad do about it while even a number of Muslim countries, governed by Islamic law, find it impracticable or impossible to do away with it? While these questions linger both foreign and domestic investors have shied away. Can one operate on a long-term in this investment-starved country while terms of finance and rules of doing business stay unknown, ask prospective investors and businessmen?
