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
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
Further the equalizer can not be pre-computed like
interest. In any case equalizer rate will be on "actual
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"
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
(5) Non interest based system is different from interest based
(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.)