Jan 03 - 16, 2000

The Shariah Bench of the Supreme Court of Pakistan has declared all laws dealing with payment of interest as un-Islamic which shall cease to effect from June 30, 2001 in Pakistan.

With this historic judgment, Pakistan becomes the only country, amongst the Muslim states, where the interest has been outlawed from all segments of the economy.

Legally speaking, there could be no appeal against the judgment, only a request to review the verdict can however be prayed before the court.

This calls the financial system especially the banks for tightening their belt to work on a war-footing to switch over from the interest based financial mechanism, instruments and products to a system without interest to implement the historic decision of Shariah Bench in letter and spirit, said Dr. Imran Osmani of Al-Meezan Bank.

The verdict of the Shariah Bench however poses immediate challenges for the financial markets. They would be requiring professionals of Islamic financial system to handle multi-dimensional issues and complexities, otherwise it could lead to a situation of chaos and potential collapse of the financial systems, said Mahmood Mandviwala, a legal expert and advocate by profession.

As a result of declaring the interest related laws un-Islamic by the Supreme Court of Pakistan, various financial instruments like term financial certificates(TFCs) all saving schemes offering a fixed rate of return to the investors within a specified period such as defence saving certificates and others, import and export financing, export refinance, service charges, rescheduling of loans etc where the interest plays a basic role would cease to operate with effect from June 30, 2001.

Renowned religious scholar Maulana Mufti Rafi Usmani while welcoming the judgment has clarified that it has nothing to do with the external debt and would deal with the local financial system including domestic debt.

Unfortunately, the successive governments ruthlessly used the tool of the domestic debt to rule the country in a princely manner. Costlier than the foreign debt, the domestic debt becoming a formidable burden on the national economy as it took a quantum jump during last 7-8 years. The size of the domestic debt was Rs445 billion in June 1991 which increased to Rs1362 billion in 1999. As far as the foreign debt is concern it was 421 billion in terms of rupee which shot up to Rs1565 billion in 1999.

Zafar Aziz Osmani

Zafar Aziz Osmani, Senior Executive Vice President of Pakistan Kuwait Investment Company (pvt) ltd. while giving his expert opinion said that it is critical that the situation in hand is carefully evaluated and addressed with a high degree of professionalism.

Amongst other issues, one of the major problem is availability of professional bankers who also have a reasonable understanding of the Shariah principals and Islamic financial products. These professional would then need to understand the implementation process, the issues arising during the transition and develop workable solutions to ensure that the process is successfully adopted, said Zafar Aziz Osmani.

Despite having high quality Shariah scholars and a number of efficient conventional bankers, currently the financial sector specially the banking system of the country does not have professional Islamic Banking Training Centres.

Since, we do not have a combination of the two disciplines i.e. scholars and the bankers, the conventional bankers can understand the interest based banking systems, they do not have a sound idea about the Shariah requirements for financial transactions. Similarly, the Shariah scholars do not understand the fundamentals of financial markets and complexities of the risk associated transactions.

Hence, building a class of professional bankers who also have reasonable knowledge of the Shariah concepts with the professional capacity to develop financial products meeting the requirement of Islamic Banking is of course an immediate challenge for our financial system.

To address this issue on a short term basis there is a need to launch a crash training programme with defined curriculum of Islamic financial products. Middle to senior level bankers be sent to attend this programme initially with emphasis on Train the Trainer courses. After the training, the trainers should be sent across the country to run similar short programme at area, division and branch level operations of the banks at different locations.

Some of the competencies needed for the successful Trainer for this specific need would include a strong commitment to the vision, ability to identify issues, develop creative solutions, desire to succeed against odds and strong communication and interpersonal skills. The responsibility for developing such Trainers can be taken-up by all the major financial institutions of the country through a common platform which will help building consistency in thoughts and understanding of the concepts.

Both the government and private sector will have to play the important role in creating awareness, identifying resources and peoples and launching the professional development programme towards accomplishment of this important objective.

It will be interesting to note that Al-Meezan Investment Bank has already taken a lead and started a certification programme on Islamic Banking in Coordination with IBA and Darul Uloom, Karachi.

Dr. Shahid Hasan Siddiqui

Speaking on the subject, Dr. Shahid Hasan Siddiqui, Chairman Islamic Banking Research Council said at a seminar that present financial system based on interest which is against the injunctions of Islam should come to an end as laid down by Holy Quran and Sunnah.

The legal battle regarding various issues pertaining to Riba, usuary and interest in all forms and manifestations are now over. The new government and State Bank of Pakistan would be well advised to take immediate practical steps for implementation of the judgment in letter and spirit. The Muslim scholars, bankers, economists, jurists, bureaucrats, businessmen and the media all will have to play a role for the elimination of Riba from the economy, he said.

Dr. Shahid recalled that Appeal filed in 1992 by the Federal Government in the Shariat Appellate Bench had mentioned various obstacles in the implementation of the judgment dated November 14, 1991 of the Federal Shariat Court.

The unfriendly climate for the elimination of Riba from the economy as prevailing in 1992 has now in fact been transformed into a hostile climate. It is unfortunate that successive governments have been raising the slogans of self reliance but for all practical purposes have chosen to remain in confront zone by enhancing reliance on interest based debt.

Dr. Shahid said that imprudent economic policies of the successive governments, large scale corruption, exorbitant expenditures, continued dependence on interest based economy and lack of desire to achieve self-reliance have resulted in slower rate of economic growth, rising unemployment, ever rising quantum of domestic and foreign debt and stagnation in exports and continued imports of locally available resources.

The present government has also chosen to rely on securing external debt even for unproductive purposes from IMF and other agencies in an Islamic framework. This is totally unacceptable. He suggested that under no circumstances unproductive domestic and external debt are availed for meeting the budgetary and balance of payment deficits.

Outlining the ills of the interest based system, Dr. Shahid said that a handful of the influential people enjoyed the hard earned deposits of 30 million account holders in the country. He was of the view that the only way to revive and strengthen the economy is to arrest the rate of inflation and loan advances based on profit and loss basis through Islamic Banking. The credit line from International Monetary Fund (IMF) is also confronted with the Islamic Shariah because it is backed with paper and not against the assets. He strongly recommended to do away with the new loans from IMF. We can avail credit facilities from the World Bank for investments because it deals with project financing.

The government is also intended to launch its programme to privatize public sector entities. Since the country is aimed at promoting interest free economy, the transfer of management of these public sector entities be avoided to the supporters of interest based transactions.

The government will have to honour to its previous interest based commitments, however new advances should be availed on profit and loss basis.

Maulana Mufti Mohammad Rafi Usmani

Maulana Mufti Mohammad Rafi Usmani while welcoming the Supreme Court's decision has said that the historic decision has brought another distinction for Pakistan.

Beside being the only nuclear power among the Muslim states, Qarardad-e-Pakistan( Resolution of Pakistan) has been incorporated in the constitution of the country which declares that " Hakmiat Allah Ki Hay" Rule of Almighty Allah and supremacy of Holy Quran and Sunnah is the supreme law of the country which is not found in the constitution of any other Islamic country. The verdict of the Supreme Court has added another milestone in the Islamic History which can be taken as a pride by every citizen of the country.

Zaigham Mehmood Rizvi

Zaigham Mehmood Rizvi of Pak-Kuwait Holding Company said a level ground will have to be provided for making the Islamic modes of financing a success in the country. He cited the example that Term Financing Certificates were tax exempted while Musharika which is the Islamic Mode of Financing is liable to tax. Why this discrimination has been allowed if the government really desires to bring about Islamic financial system in the country. He suggested that beside level ground some incentives should also be given in the initial stage to make the programme of Islamic banking a success. He said that Islamic Banking is not something beyond imagination. In simple term it is the name of prudential banking.

Dr. Imran Osmani

Giving his opinion on the subject Dr. Imran Osmani, son of the renowned scholar Mufti Taqi Usmani said that with the historic verdict of the Supreme Court which has declared interest as "haram" the issue has been resolved for ever. What needed now is the determination and firm commitment to implement the decision in its true spirit to have the blessings of Al-Mighty Allah. Use of any tactics to escape from its implementation may hurt its sole and the benefits too. He pointed out that over 200 financial institutions all over the world including Europe and the United States are already successfully working on interest free system and they are growing their business three times more when compared with those organizations working on interest based system, he said.

Ministry of Law

The Ministry of Law and Parliamentary Affairs shall form a task force comprising its officials and two Shariah scholars from the Council of Islamic Ideology or from the Commission on the Islamization of Economy to draft a new law for the prohibition of Riba and other laws as proposed in the guidelines, to review the existing financial and other laws so as to bring them into conformity with the requirements of the new financial system and to draft new laws to give cover to the new financial instruments.

The recommendations of the task force shall be vetted and finalized by the "Commission for Transformation" proposed to be set up in the State Bank of Pakistan, after which the federal government shall promulgate the recommended laws.

The Supreme Court has also directed the banks and the financial institutions to prepare their model agreements and documents for all major operations and present them to the Commission for Transformation, within six months for approval.

All the joint stock companies, mutual funds and the firms requiring in aggregate about Rs5 million a year shall be required by law to subject themselves to independent rating by neutral rating agencies. All the banks and financial institutions shall thereafter arrange for training programmes and seminars to educate the staff and clients about the new arrangements of financing their requirements.

The Ministry of Finance shall form a task force of its experts

to find out means to convert the domestic borrowings into project related financing and to establish a mutual fund that may finance the government on that basis. The units of the mutual fund may be purchased by the public and they will be tradable in the secondary market on the basis of net asset value. Certificates of the existing bonds of savings schemes, based on interest, shall be converted into units of the proposed mutual fund.

The domestic inter-government borrowings as well as the borrowings of the federal government from the SBP shall be designed on interest-free basis.

The Supreme Court has observed that an effort to eliminate only Riba in isolation from banking system would be more harmful than helpful due to intricate inter-dependence of different vital economics sectors and that the efficient course will be to first identify and strengthen the existing critical economic sectors falling under Shariah thus isolating Riba system for its proper treatment.

It was argued that economy in this way will be strengthened and a strong foundation will be laid to promote Riba-free economy. An important fallout of this approach will cause the major savings of citizens to be channelled into Shariah based sectors.

This situation will automatically put banking system to innovate itself into Islamic system to attract depositors interesting in parallel Shariah based sectors. It is pertinent to note that the total value of capital market is much bigger than the GDP. So, even if we in Pakistan are successful in creating an Islamic based judicious regulations at least for capital markets we can hope for a quick change for the better as well. These reforms would be effective to check corruption in all the sectors. The disintermediation will also trigger competition within our banking sector towards promoting Islamic products. The regulatory framework is designed to maximise justice and fair play at all levels of investors interaction to control unlawful conduct.:

The disclosure equirements are so elaborated that speculative activities are minimized and this achieved inter alia through credit history of the individuals and credit rating of the industries or the companies.


The government has, however, clarified that as a result of the verdict given by the Supreme Court, obligations to the foreign government, banks, financial institutions and other entities remained unaffected by the judgment of the Shariat Appellate Bench of the Supreme Court on Riba.

The government has made it clear that recovery proceedings currently in hand either in courts or by the creditors would remain unaffected.

All laws currently applicable to financial contracts, agreements, transactions etc will continue to remain in force as before until new laws are frmed by the competent authority to replace the old laws for which a timeframe has been given by the judgment itself which is june 2001.

The government further said: The commitments of the federal government to individuals, organizations, banks or other entities in terms of their investments and returns are fully protected and will continue to retain so in future until these are modified appropriately in the light of the recommendations of the commission for transformation.

It added that financial relations of the government with the State Bank and tose of and between provincial governments and local authorities would be carried out on the same lines as at present. Appropriate changes in these arrangements would be recommended by the commission for transformation.

The standards currently applicable to individuals, firms, corporations, organizations and other bodies for accessing the money and capital markets would remain in force until these standards were amended by the law.

The government believes that there was no cause for any concern in the minds of the people regarding the subject matter of the order. " No immediate change has been brought about in the judgment which should cause concern. The day-to-day working of the economy, accordingly will continue as before.

Prominent religious scholar Maulana Rafi Usmani feels that Nawaz Sharif had to lose power twice because his government had filed appeals in the Supreme Court of Pakistan against interest free financial system.

Quoting verses from Holy Quran he said dealing or involving in Interest based transactions in any manner amounts to be at war with Allah and his Prophet(Pbuh). Nawaz Sharif committed the crime of ignoring the clear instructions of Quran and consequently facing the defeat because no one can win against Allah and his Prophet, he remarked.

— Establishment of a commission for transformation in the State Bank of Pakistan that will be responsible for developing and preparing the groundwork for such methods of financial dealings as will be in conformity with the principles of Islam.

— Formation of a committee of experts in the Ministry of Law to recommend legislative changes required to support the new arrangements and to suggest amendments in other laws to bring them in conformity with the requirements of Islamic law.

— Formation of a task force in the ministry of finance to study and suggest methods for domestic borrowings by the government which will be in conformity with the requirements of Islamic law.

— All the contracts, arrangements and laws would remain so till such time that the modified arrangements were worked out in the light of the recommendations of the commission for transformation, to be set up in the State Bank of Pakistan.


The Shariah Bench of the Supreme Court of Pakistan comprising Mr.Justice Khalil-ur-Rehman Khan, Mr. Justice Munir A Sheikh, Mr.Justice Wajihuddin Ahmed and Mr.Justice Muhammad Taqi Usmani declared all laws which deal with the payment of interest as repugnant to the injunctions of Islam on Dec 23, 1999.

Disposing of three identical appeals, laid down that any amount, big or small over the principal in a contract of loan or debt was Riba which is prohibited by the Holy Quran, regardless of whether the loan was taken for the purpose of consumption or for some production activity.

The Bench also declared the Interest Act 1839, the West Pakistan and the Punjab, Sindh, NWFP, Balochistan Money Lenders Ordinances 1960, the West Pakistan Money Lenders Rules 165, and Section 9 of Banking Companies Ordinance 1962 repugnant to the Injunctions of Islam and ruled that the same shall cease to have effect from March 31, 2000.

The bench also directed the government to constitute a high level commission within one month in the State Bank of Pakistan. The commission will be comprising Shariah Scholars, committed economists, bankers and chartered accountants fully empowered to carry out, control and supervise the process of transformation of the existing financial system to the one conforming to Shariah.

The commission shall chalk out a strategy to evaluate scruitinse and implement the report of the Commission for Islamization of the economy as well as the report of Raja Zafarul Haq Commission within two months. After circulating the same among leading banks, religious scholars, economists, the SBP and the Finance Division, inviting their comments and further suggestions. The strategic plan so finalised shall be sent to the ministries of Law, Finance and Commerce and all the banks and financial institutions to take implementation steps.