INTEREST TO BE ILLEGAL FROM JUNE 30, 2001
By AMANULLAH BASHAR
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
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
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
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
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
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
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
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
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
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,
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
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
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
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
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,
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.