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Interest free economic system

Equalizer based on "comprehensive indexation is replacement of interest

By Saalim Salam Ansari, 
July 16 - 22 , 2001

Through adoption of "Equalizer System" based on "Comprehensive Indexation", a New Interest free Economic Standard can be adopted, the "Comprehensive Indexation" will be based on inflation, actual devaluation and depression of value or purchasing power money, the Federal Government through Ministry of Finance or State Bank of Pakistan will announce at the expiry of every English Calendar year the equalizer rate of the instant year, the equalizer rate of each year will be called "equalizer rate of year 2002", 'equalizer rate of 2003, equalizer rate of year 2004, or as the case may be, the equalizer rate of every year will be calculated at the expiry of each calendar year and it will be based on "Non Interest actual Comprehensive Indexation." It is needless to say that equalizer rate of each year will be different.

The Supreme Court of Pakistan's Shariath Appellate Bench in it's historical Riba Case reported as PLD 2000 SC 225 known as (Dr. Mohammad Aslam Khaki Vs. Syed Mohammad Hashim) has left the issue of adoption of Indexation upon the Law Makers of Federal Government.

The indexation based equalizer system is a non-interest based scheme. There will be no concept of Compounding, "quarterly rest" and penal equalizer or "equalizer upon equalizer" like interest. Furthermore interest rate is "pre-determined" while equalizer rate will be "post determined".

Further the equalizer can not be pre-computed like interest. In any case equalizer rate will be on "actual comprehensive".

Indexation "while pre-determined interest is not based on any actual indexation" even in case of simple rate of interest which in compound / penal or quarterly rest interest there is neither any element of any "Indexation". Actual comprehensive Indexation based equalizer system has reflected in the minds of the judges of the apex court who had decided the chapter of indexation and used the term "Shariath Complaint Return" in replacement of interest.

The term "equalizer" can be used instead of "interest" or "mark-up in section 79 and 80 of Negotiable Instruments Act, Section 34 A&B of C.P.C, Order XXXVII Rule 3 C.P.C, and section 15 of Banking Companies (Recovery of Loans, Advances, Credits & Finances) Act XV of 1997 through the amended ordinances after the expiry of 30th June 2002 and with effect from 1st July 2002 as Shariath Appellate Bench of Supreme Court of Pakistan has extended the date for one year.

An independent Statutory Federal Commission for determination of Equalizer & Indexation" may be constituted.

The banking system will continue on present interest free banking introduced from 1984 with certain modifications and specific changes directed by the Supreme Court in it's "Riba" judgment.

In the interest free banking, there is no concept of "Interest" or "Riba" and the term of "mark-up" is also to be used in replacement of "interest". If in the "Interest free Banking" and "Non Interest Economic System", the term of "equalizer" will be adopted, the rate of which will be calculated on the "comprehensive indexation" based on the components of "inflation", "depreciation in the value of money" and "services charges", etc. then the term of "equalizer" will not be equalized to the term of "interest". In fact it will be different and permissible term, furthermore "letters of credits", "working finance" "imports & exports of the goods based on foreign currency", can be designed on "buy back system" and the profit will be based on "non interest profit" or "equalizer" and the banking system can be prevailed. The Shariath Appellate Bench of Supreme Court of Pakistan in it's "Riba's Judgment" also used the term "Shariath Complaint Return" which is based on "inflation", "depreciation in the purchasing power of money", "indexation of price hikes", "service charges", etc. and other components.

I propose the term and indexation of system of "equalizer" instead of "Shariath Complaint Return". The Supreme Court in its "Riba's judgement" has declined the rate of profit based on the indexation which will be based merely on inflation and declined the theory that "the concept of element of "interest" is based on the principles of supply and demand and not on the basis of "inflation". If on the basis of that formula, a distinguished concept of "comprehensive indexation" which will be based on "inflation", "depreciation" in the purchasing power of money", "indexation of price hikes", "depreciation in the price of paper currency in respect of "gold" and other goods", "service charges of the banking services" and/or other elements and factors, the such type of "equalizer" based on "comprehensive indexation" prescribed above will be based on "actual" and/or "non interest" concept of the banking profit as well as the "time price of the money" and such concept of "equalizer" based on "comprehensive indexation" can be distinguished from "interest" and will be different from the "indexation" which is declined by Supreme Court of Pakistan. On the basis of such "equalizer" based on the "comprehensive indexantion", the money decree(s) can be passed under the different provisions of the Civil Procedure Code 1908, Sections 79 and 78 of the Negotiable Instrument Act 1881, section 15 of Banking Recovery Act XV of 1997 can be benefited on the basis of "equalizer". The same "equalizer system" can replace the "interest system" which will be abolished from 1st July, 2002, throughout the Pakistan.

Mr. Justice Wajihuddin Ahmed and Mr. Justice Abdul Majid Khanzada (As the Lordships then were) of the Sindh High Court had announced the judgement in the matter of Province of Sindh V. United Construction Ltd., reported in PLD 1996 Karachi 506. The author of the instant judgement was Mr. Justice Wajihuddin Ahmed who allowed the equalizer @ 10% per annum as average of inflation. Mr. Justice Wajihuddin also held in the said judgement which runs as "We take judicial notice of the fact that over the years the average rate of inflation in the economy has been more than 10% annually which is the rate at which the purported interest has been granted, therefore, does not, in effect, qualify as interest at all." M. Justice Wajihuddin further held that "If only the value of gold was reckoned, which could not have been an irrelevant factor since, for a long time, the world economies had been ruled by the gold standard. As it is, only 10% per annum purported interest was decreed and such as discussed appears to be unexceptionable".

Mr. Justice Wajihuddin Ahmed was one of the members of Supreme Appellate Bench of the Supreme Court of Pakistan who delivered the historical judgement on "Riba" reported in PLD 2000 SC 225 in which the 20 modes of interest free banking and/or non interest economy has been discussed by the Supreme Court of Pakistan (There are 30 modes which are at present in practice). Mr. Justice Wajihuddin Ahmed also wrote his separate note which is from page 612 to 665 and at page 624 the "Philosophy of Gold and Silver" contained in respect of the purchase and/or re-purchase of gold and silver artificial in lieu of the Dinars (gold coins) and dharams (silver coins) also have been discussed.

Mr. Justice Wajihuddin Ahmed in his separate note in the instant judgement at page 665 (Relevant 665B) has concluded his separate judgement with these observations.

"Lastly, there are some aspects of the matter e.g., inflation / indexation and the argument of Mr. M. Aslam Khaki regarding the lawfulness or otherwise of a fixed (percentage) payment to the contributor of capital, subject to accrual of profits from a venture, on which I would like to reserve my opinion for a more appropriate time and occasion. For one thing, a true Islamic economy should necessarily be inflation-free and, as to Mr. Khaki's contention there are plenty of Islamic modes of finance to justify indulging, at this stage, in merely academic discussions".

The concept of "interest" can be replaced through the proposed Presidential Shariath Compliance Ordinance by the concept of "equalizer", "profit", "profit sharing" "Rental Sharing", Profit & Loss Sharing", "Commission, Service Charges etc. as it has been termed as "Shariath Complaint Return" by the Supreme Court of Pakistan in the said Riba's judgement.

In France the financing / investment financing is on the basis of "Equity Buying". According to French Banking one Bank's officer act as active director of Borrower's Company having signatory rights of the bank's accounts of the company.

The benefits of non interest banking and/or interest free system will be as under:-

(1) Interest portion will be decreased quarterly rest, compounding, penal, factor will be abolished.
(2) Comprehensive Indexation based equalizer system will replaced the interest which will be on actual.
(3) Interest is under financial duress and not on indexation of inflation or devaluation and indexation based equalizer system having no compounding factor.
(4) Investment Banking will boost the economy by actual financing.
(5) Non interest based system is different from interest based system.
(6) Religious thoughts of the common public will be satisfied who consider the interest as a sin and they do not indulge themselves in the present interest based banking system.
(7) The investment from Middle East and Arab world can be attracted after enforcement of interest free banking system.

(The author Mr. Saalim Salam Ansari Advocate is a practicing banking Lawyer, prominent economist and author of ample of books on Law, Banking and Economics.)