Updated: Saturday June 09, 2012/AsSabt Rajab 20, 1433/Sanivara Jyaistha 19, 1934, at 12:38:27 AM

 

P L D 2000 S C 225                                                    (Riba prohibition stayed)

 

[Shariat Appellate Jurisdiction]

 

Present: Justice Khalil-ur-Rehman Khan, Chairman, Justice Munir A. Sheikh, Justice Wajihuddin Ahmed and Justice Maulana Muhammad Taqi Usmani, Members

 

Civil Shariat Appeal No. l of 1992

 

Dr. M. ASLAM KHAKI---Appellant

 

versus

 

Syed MUHAMMAD HASHIM and 2 others---Respondents

 

Civil Shariat Appeal No.2 of 1992

 

THE AGRICULTURAL DEVELOPMENT BANK OF PAKISTAN, ISLAMABAD---Appellant

 

versus

 

FEDERAL GOVERNMENT OF PAKISTAN

 

through Secretary, Ministry of Finance, Islamabad and 53 others---Respondents

 

Civil Shariat Anneal No.3 of 1992

 

THE MANAGER, ALLIED.BANK LIMITED, B/O BAGHBANPURA, LAHORE and 2 others---Appellants

 

versus

 

Malik MUNIR AHMED and 2 others---Respondents

 

Civil Shariat Appeal No.4 of 1992

 

ALLIED BANK OF PAKISTAN LIMITED---Appellant

 

versus

 

NAVEED ASIF and another---Respondents

 

 

Civil Shariat Appeal No.5 of 1992

 

ALLIED BANK OF PAKISTAN LIMITED---Appellant

 

versus

 

NAVEED ASIF and another---Respondents

 

Civil Shariat Appeal No.6 of 1992 ‘

 

ALLIED BANK OF PAKISTAN LIMITED---Appellant

 

versus

 

NAVEED ASIF and another---Respondent

 

Civil Shariat Appeal No.7 of 1992

 

ALLIED BANK OF PAKISTAN LIMITED---Appellant

 

versus

 

NAVEED ASIF and another---Respondents

 

Civil Shariat Appeal No.8 of 1992

 

ALLIED BANK OF PAKISTAN LIMITED

 

through President, Head Office, Jubilee Insurance House, Karachi---Appellant

 

versus

 

NOOR AHMED and another---Respondents

 

Civil Shariat Appeal No.9 of 1992

 

ALLIED BANK OF PAKISTAN LIMITED

 

through President, Head Office, Jubilee Insurance House, Karachi --- Appellant

 

versus

 

FEDERATION OF PAKISTAN through Secretary, Ministry of Finance, Government of Pakistan, Islamabad---Respondent

 

Civil Shariat Appeal No. 10 of 1992

 

ALLIED BANK OF PAKISTAN LIMITED---Appellant

 

versus

 

GOVERNMENT OF PUNJAB

 

through Secretary, Finance Department, Government of Punjab, Lahore and 4 others---Respondents

 

Civil Shariat Appeal No. l l of 1992

 

UNITED BANK LIMITED---Appellant

 

versus

 

Messrs FAROOQ BROTHERS

 

through Sole Proprietor Zafar Alam Chaudhry and 5 others---Respondents

 

Civil Shariat Appeal No. 12 of 1992

 

UNITED BANK LIMITED---Appellant

 

versus

 

Chaudhry SHARIF AHMED and another---Respondents

 

Civil Shariat Appeal No. 13 of 1992

 

UNITED BANK LIMITED---Appellant

 

versus

 

MUHAMMAD AMIN and another---Respondents

 

Civil Shariat Appeal No. 14 of 1992

 

UNITED BANK LIMITED---Appellant

 

versus

 

Messrs KAMRAN ICE FACTORY and 5 others----Respondents

 

Civil Shariat Appeal No. 15 of 1992

 

UNITED BANK LIMITED---Appellant

 

versus

 

MUHAMMAD IQBAL ZAHID and 3 others---Respondents

 

Civil Shariat Appeal No. 16 of 1992

 

UNITED BANK LIMITED---Appellant

 

versus

 

Messrs HAJISONS ANGOLO CINEMA

 

through Ch.Talib Hussain, Managing Partner and 8 others- --Respondents

 

Civil Shariat Appeal No. 17 of 1992

 

UNITED BANK LIMITED---Appellant

 

versus

 

ABDUL QAYYUM QURESHI and another---Respondents

 

Civil Shariat Appeal No. 18 of 1992

 

UNITED BANK LIMITED---Appellant

 

versus

 

ABDUL RASHID and 2 others---Respondents

 

Civil Shariat Appeal No. 19 of 1992

 

UNITED BANK LIMITED---Appellant

 

versus

 

Shaikh MASOOD ELLAHI and another---Respondents

 

Civil Shariat Appeal No.20 of 1992

 

MUSLIM COMMERCIAL BANK---Appellant

 

versus

 

ALLIED PAPER INDUSTRIES LTD. and 8 others---Respondents

 

Civil Shariat Appeal No.21 of 1992

 

NATIONAL BANK OF PAKISTAN---Appellant

 

versus

 

ALLIED PAPER INDUSTRIES LTD. and 13 others---Respondents

 

Civil Shariat Anneal No.22 of 1992

 

NATIONAL BANK OF PAKISTAN---Appellant

 

versus

 

ALLIED PAPER INDUSTRIES LTD. and 8 others---Respondents

 

Civil Shariat Appeal No.23 of 1992

 

NATIONAL BANK OF PAKISTAN---Appellant

 

versus

 

ALLIED PAPER INDUSTRIES LTD and 8 others---Respondents

 

Civil Shariat Appeal No.36 of 1992

 

Messrs HABIB BANK LIMITED---Appellant

 

versus

 

Syed MUSHARAF ALAM and 4 others---Respondents

 

Civil Shariat Appeal No.37 of 1992

 

Messrs HABIB BANK LIMITIED---Appellant

 

versus

 

FAIZ AHMAD and 11 others---Respondents

 

Civil Shariat Appeal No.38 of 1992

 

Messrs HABIB BANK LIMITED---Appellant

 

versus

 

Messrs KASHMIR FABRICS through Haji Sh.Karamat Ali, Managing Partner and 2 others---Respondents

 

Civil Shariat Appeal No.39 of 1992

 

Messrs HABIB BANK LIMITED---Appellant

 

versus

 

FAIZ AHMAD and 11 others---Respondents .

 

Civil Shariat Appeal No.40 of 1992

 

Messrs HABIB BANK LIMITED---Appellant

 

versus

 

FAIZ AHMAD and 11 others---Respondents

 

 

Civil Shariat Appeal No. 41 of 1992

 

Messrs HABIB BANK LIMITED---Appellant

 

versus

 

FAIZ AHMAD and 11 others---Respondents

 

 

Civil Shariat Appeal No.42 of 1992

 

NATIONAL BANK OF PAKISTAN---Appellant

 

versus

 

Messrs ALCOS (PAK), LAHORE and 2 others- --Respondents

 

Civil Shariat Appeal No.43 of 1992

 

NATIONAL BANK OF PAKISTAN---Appellant

 

versus

 

Messrs ALCOS (PAK), LAHORE and 2 others---Respondents

 

Civil Shariat Appeal No.44 of 1992

 

NATIONAL BANK OF PAKISTAN---Appellant

 

versus

 

Messrs ALCOS (PAK), LAHORE and 2 others---Respondents

 

Civil Shariat Appeal No.45 of 1992 .

 

NATIONAL BANK OF PAKISTAN---Appellant

 

versus

 

Messrs ALCOS (PAK), LAHORE and 2 others---Respondents

 

Civil Shariat Appeal No.46 of 1992

 

NATIONAL BANK OF PAKISTAN---Appellant

 

versus

 

Messrs M.A.QURESHI & SONS

 

through Proprietor Muhammad Ashraf and 2 others---Respondents

 

Civil Shariat Appeal No.47.of 1992

 

NATIONAL BANK OF PAKISTAN---Appellant

 

versus

 

Messrs M.A.QURESHI & SONS through Proprietor Muhammad Ashraf and 2 others---Respondents

 

Civil Shariat Appeal No.48 of 1992

 

NATIONAL BANK OF PAKISTAN---Appellant

 

versus

 

Messrs M.A.QURESHI & SONS through Proprietor

 

Muhammad Ashraf and 2 others---Respondents

 

Civil Shariat Appeal No.49 of 1992

 

NATIONAL BANK OF PAKISTAN---Appellant

 

versus

 

Messrs M.A.QURESHI & SONS through Proprietor Muhammad Ashraf and 2 others---Respondents

 

Civil Shariat Appeal No.50 of 1992

 

NATIONAL BANK OF PAKISTAN---Appellant

 

versus

 

ALLIED PAPER INDUSTRIES LTD. and 11 others---Respondents

 

Civil Shariat Appeal No.51 of 1992

 

NATIONAL BANK OF PAKISTAN---Appellant.

 

Versus

 

MUHAMMAD HASHIM --- Respondent

 

Civil Shariat Appeal No.52 of 1992 .

 

NATIONAL BANK OF PAKISTAN---Appellant ,

 

versus

 

MUHAMMAD HASH IM -Respondent

 

Civil Shariat Appeal No.53 of 1992

 

NATIONAL BANK OF PAKISTAN---Appellant

 

versus

 

Mian SALEEMUDDIN and 4 others---Respondents

 

Civil Shariat Appeal No.54 of 1992

 

Messrs ABN AMRO BANK through Authorised Officer and 19 others---Appellants

 

versus

 

The FEDERATION OF PAKISTAN through the Secretary, Ministry of Finance, Islamabad and 4 others---Respondents

 

Civil Shariat Appeal No.55 of 1992

 

NATIONAL BANK OF PAKISTAN---Appellant

 

versus

 

ALLIED PAPER INDUSTRIES LTD. and 7 others---Respondents

 

Civil Shariat Appeal No.56 of 1992

 

NATIONAL BANK OF PAKISTAN---Appellant

 

versus

 

ALLIED PAPER INDUSTRIES LTD. and 8 others---Respondents

 

Civil Shariat Appeal No.57 of 1992

 

NATIONAL BANK OF PAKISTAN---Appellant

 

versus

 

ALLIED PAPER INDUSTRIES LTD. and 11 others---Respondents

 

Civil Shariat Appeal No.58 of 1992

 

NATIONAL BANK OF PAKISTAN---Appellant

 

versus

 

ALLIED PAPER INDUSTRIES LTD. and 11 others---Respondents

 

Civil Shariat Appeal No.73 of 1992

 

FEDERATION OF PAKISTAN---Appellant

 

versus

 

Dr. MAHMOOD-UR-REHMAN FAISAL ---Respondent

 

Civil Shariat Appeal No.96 of 1992

 

PROVINCE OF PUNJAB

 

through Secretary Cooperative, Government of Punjab, Lahore and another---Appellants

 

versus

 

Ch. SARWAR HAYAT and another---Respondents .

 

Civil Shariat Appeal No.97 of 1992

 

PROVINCE OF PUNJAB

 

through Secretary Cooperative Government of Punjab, Lahore and 2 others---Appellants

 

versus

 

Mst. MUMTAZ BEGUM and another---Respondents

 

Civil Shariat Appeal No.98 of 1992

 

PROVINCE OF PUNJAB

 

through Secretary Cooperative, Government of Punjab, Lahore and another---Appellants

 

versus

 

GULZAR AHMAD KHAN, SENATOR and another---Respondents

 

Civil Shariat Appeal No.99 of 1992

 

PROVINCE OF PUNJAB

 

through Secretary Cooperative, Government of Punjab, Lahore and another---Appellants

 

versus

 

GULZAR AHMAD KHAN, SENATOR and another---Respondents

 

Civil Shariat Appeal No. 100 of 1992

 

PROVINCE OF PUNJAB

 

through Secretary Cooperative, Government of Punjab, Lahore and another---Appellants

 

versus

 

GULZAR AHMAD KHAN, SENATOR and another---Respondents

 

Civil Shariat Appeal No. 101 of 1992

 

PROVINCE OF PUNJAB

 

through Secretary Cooperative, Government of Punjab, Lahore and another---Appellants

 

versus

 

Ch. SARWAR HAYAT and another---Respondents

 

Civil Shariat Appeal No. 102 of 1992, ,

 

PROVINCE OF PUNJAB

 

through Secretary Cooperative, Government of Punjab, Lahore and another---Appellants

 

versus

 

Ch. SARWAR HAYAT and another---Respondents

 

 

Civil Shariat Appeals Nos. l to 23. 36 to 58,73 and 91 of 1992

 

(On appeal from the judgment of Federal Shariat Court dated 14-11-1991 passed in Shariat Petitions Nos. 42-1 + 45-I/91, 14-I/90, 42-L/91, 67-L/91, 74-L/91, 69-L/91, 68-L/91, 28-L/91, Suo Motu Case No.3-I/91, Shariat Petitions Nos.4-I/91, 30-L/91, 31-L/91, 32-L/91, 17L/91, 18-L/91, 49-L/91, 73-I/91, 76-L/91, 89-L/91, 30-1/90, 17-A/I/91, 16C/I/91, 16-A/I/91, 21-L/90, 29-L/91, 26-L/91, 31-1/91, 32-t/91, 33-I/91, 70-L/91, 71-L/91, 72-L/91, 73-L/91, 27-L/90 (in four cases), 16-1/91, 421/91, 45-1/91, 73-1/90, 72-L/91, 17-1/91, 16-B/I/91, 17-B/I/91, 17-C/I/91, 30-1/90 and 16-I/90 respectively).

 

Shariat Appeals Nos. 96 of 1992. 99 of 1992, 100 of 1992 and 101 of 1992

 

(On appeal from the judgment of Federal Shariat Court dated 22-61992 passed in Shariat Petitions Nos.84-1/91, 78-1/91, 79-1/91 and 83-I/91 respectively).

 

Civil Shariat Appeals Nos. 97 of 1992, 98 of 1992 and 102 of 1992

 

(On appeal from the judgment of Federal Shariat Court dated 30-61992 passed in Shariat Petitions Nos.l-I/92, 80-I/91 and 82-I/91 respectively).

 

(a) Islamic Jurisprudence-

 

---- Riba---Kinds---Any amount, big or small, over the principal, in a contract of loan or debt is Riba prohibited by Holy Qur’an, regardless of whether the loan is taken for the purpose of consumption or for some production activity- “Riba-al-Sunnah” and “Riba-al-Qur’an” are types of transactions termed as “Ribs” in Islamic Fiqh based on the Holy Qur’an and Sunnah.

 

Any amount, big or small, over the principal, in a contract of loan or debt is “Riba” prohibited by the Holy Qur’an, regardless of whether the loan is taken for the purpose of consumption or for some production activity. The ‘Holy Prophet (p.b.u.h.) has also termed the following transactions as Riba:

 

(i) A transaction of money for money of the same denomination where the quality on both sides is not equal, either in a spot transaction or in a transaction based on deferred payment.

 

(ii) A barter transaction between two weighable or measurable commodities of the same kind, where the quantity on both sides is not equal, or where the delivery from any one side is deferred.

 

(iii) A barter transaction between two different weighable or measurable commodities where delivery from one side is deferred.

 

These three categories are termed in the Islamic Jurisprudence as Riba-al-Sunnah because their prohibition is established by the Sunnah of the Holy Prophet (p.b.u.h.). Alongwith the Riba-al-Qur’an, these are four types of transactions termed as `Riba’ in the literature of Islamic Fiqha based on the Holy Qur’an and Sunnah.

 

Out of these four transactions, the last two ones, mentioned above as (ii) and (iii) have not much relevance to the context of modern business, the barter business being a rare phenomenon in the modern trade. However, the Riba-al-Qur’an and transaction of money mentioned above as (i) are more relevant to modern business.

 

(b) Islamic Jurisprudence---

 

----Riba---Loan---No difference between types of loan, so far as the prohibition of Riba is concerned---All the prevailing forms of interest, either in the banking transactions or in private transactions do fall within the definition of Riba---Any interest stipulated in the Government borrowings, acquired from domestic or foreign sources, is Riba and prohibited by the Holy Qur’an---Present financial system, based on interest, being against the Injunctions of Islam as laid down by the Holy Qur’an and Sunnah, and in order to bring the system in conformity with Shariah, Shariat Appellate Bench of Supreme Court directed that the system had to be subjected to radical changes---Alternatives to the present system being available, the transactions of interest could not be allowed to continue for ever on the basis of necessity.

 

There is no difference between types of loan, so far as the prohibition of Riba is concerned. It also does not make any difference whether the additional amount stipulated over the principal loan or debt is small or large. Therefore, all the prevailing forms of interest, either in the banking transactions or in private transactions do fall within the definition of Riba. Similarly, any interest stipulated in the Government borrowings, acquired from domestic or foreign sources, is Riba and clearly prohibited by the Holy Qur’an.

 

The present financial system, based on interest, is against the Injunctions of Islam as laid down by the Holy Qur’an and Sunnah, and in order to bring it in conformity with Shariah, it has to be subjected to radical changes.

 

A variety of Islamic modes of financing has been developed by Islamic scholars, economists and bankers that may’ serve as a better alternative to interest. These modes are being practised by about 200 Islamic financial institutions in different parts of the world.

 

These alternatives being available, the transactions of interest cannot be allowed to continue for ever on the basis of necessity.

 

There is ample evidence to prove that quite a substantial ground work has been done to suggest strategy for the transformation of the existing financial system to the Islamic one, and the present interest based system need not be retained for an indefinite period on the basis of necessity. However, the transformation may take some time which can be allowed on that basis.

 

(c) Interest Act (XXXII of 1839)---

 

----Preamble---Constitution of Pakistan (1973), Art.203-F---Repugnancy to Injunctions of Islam---Undefined, naked and generalised power to allow interest on a debt, as provided in Interest Act, 1839, being repugnant Injunctions of Islam, Shariat Bench of Supreme Court directed the repeal of Interest Act, 1839 and declared that the Act shall cease to have effect from 31st March, 2000.

 

The Interest Act, 1839, confers power on the Court to allow interest to the creditor upon all debts or ascertained sum payable which the Court gets recovered. The Council of Islamic Ideology had recommended its repeal in its Session held on 11th November. 1981.

 

The question of allowing interest by the Court while granting decree has been exhaustively dealt with by the Negotiable Instruments Act, 1881 and the Civil Procedure Code, 1908 as amended from time to time and as such there is no need to retain the Interest Act. 1839 on the Statute Book, so the same, for this reason alone, needs to be repealed. Even otherwise an undefined, naked and generalized power to allow interest on a debt is repugnant to Injunctions of Islam, therefore. Interest Act, 1839 being repugnant to Injunctions of Islam was directed to he repealed.

 

(d) Government Savings Banks Act (V of 1873)---

 

----S. 10---Constitution of Pakistan (1973), Art.203-F---Repugnancy to Injunctions of Islam---Provision of S.10, Government Savings Banks Act, 1873 on account -of the use of the word “interest” which was payable along with the amount of deposit was repugnant to Injunctions of Islam---If the accrual was caused through permissible mode of investment, no objection could be taken, for the emphasis had to be on adoption of Islamic modes of finance and conduct of business following Islamic principles--Word “interest” appearing in S.10 of the Government Savings Banks Act, 1873 being repugnant to the Injunctions of Islam, Shariat Bench of Supreme Court directed that word “interest” be substituted with the words “Shariah compliant return” and declared that the provision shall cease to have effect from 30th June, 2001.

 

The Government Savings Banks Act, 1873 provides for nomination and payment of deposit on death of the depositor and such payment to be a full discharge. However, it provides for the savings of rights of executor and creditor etc.

 

Section 10, as challenged, reads as under:---

 

“Any deposit made by, or on behalf of, any minor may be paid to him personally if he made the deposit, or to his guardian for his use if the deposit was made by any person other than the minor, together with the interest accrued thereon.”

 

The provision, on account of the use of the word “interest” which is payable alongwith the amount of deposit was repugnant to Injunctions of Islam. If the accrual is caused through permissible mode of investment, obviously no objection can be taken. The emphasis should be on adoption of Islamic modes of Finance and conduct of business following Islamic principles. The word `interest’ appearing in section 10 of the Act being repugnant to the Injunctions of Islam was directed to be substituted with the words ‘Shariah compliant return’.

 

(e) Negotiable Instruments Act (XXVI of 1881)--

 

----Ss. 79 & 80---Constitution of Pakistan (1973), Art,203-F---Repugnancy to Injunctions of Islam---Whole of Ss.79 & 80, Negotiable Instruments Act, 1881 are repugnant to the Injunctions of Islam---”Mark-up” system as in vogue in Banks in Pakistan was though repugnant to the Injunctions of Islam, yet transaction of Murabaha or Bai Mu’ajjal in itself was not prohibited---If the transaction fulfilled the specified conditions, same could not be held to be repugnant to Injunctions of Islam ---Shariat Appellate Bench of Supreme Court declared that the provision will cease to have effect from 30th June, 2001---Reasons and principles elucidated with illustrations.

 

Even though the transactions of mark-up, leasing, hire-purchase, service charges and Musharakah are permissible subject to certain conditions, yet the way a further `return’ on the pronote or a bill of exchange is provided in section 79, which contemplates a return over a debt is nothing but interest. Section 79 of the Negotiable Instruments Act, 1881, therefore, is repugnant to the Injunctions of Islam in its entirety. Although clause (ii) of the proviso of section 79 speaks of a Musharakah and a profit and loss sharing; this type of transaction does not normally require a promissory note or a bill of exchange, because the rate bf return in a Musharakah is unknown, and the pronote and a bill of exchange are basically designed for a specific amount payable by the debtor. Therefore, retention of this truncated clause will make it applicable to a’ situation about which it has been held that no further return is permissible in that situation. So far the amount of profit deserved by the financier remains in the business of the client, a further return on the basis of actual profits accrued to the business will be deserved by the financier, but the provisions of the agreement of Musharaka can take care of it, its mention in the present context is not called for. The whole of section 79 is, therefore, repugnant to the Injunctions of Islam.

 

Like section 79 the whole of section 80 is repugnant to the Injunctions of Islam.

 

Following conditions are prescribed for the validity of Murabaha/Bai’ Mu’ajjal:--

 

(i) The time of payment of consideration must be known; and

 

(ii) the seller has to possess the commodity involved before it is delivered to the purchaser.

 

The system of mark-up adopted in Pakistan in January, 1981 did not conform to the standard stipulations of Bai’ Mu’ajjal. Bai’ Mu’ajjal/Murabaha is one of the most popularly used modes of financing used by the Islamic Banks in the world.

 

Murabaha mode of Finance or the “mark-up” system with the conditions attached thereto is permissible mode of Islamic finance and this mode cannot, therefore, be held to be repugnant to the Injunctions of Islam if the conditions prescribed are not being practised by some of the parties. Such violations occurred as there was no monitoring system in existence to check such errors, omissions arid commissions and violations. In the system proposed to be adopted with Shariah Board in existence in the State Bank of Pakistan as well as in the financial institutions themselves, such violations as and when noticed shall be pointed out and eradicated. Moreover, such errors will he eliminated where the system as a whole will be geared up to enforce Islamic Laws with commitment and dedication.

 

The adoption of the mark-up system within the limits prescribed appears to be the need of the economic system in the transitional period and till the time more and adequate number of Shariah-compliant financing modes are developed.

 

Any return on a promissory note or a bill of exchange as contemplated in subsections (a) and (b) of section 79 of the Negotiable instruments Act of 1881 is Riba and unlawful according to Shariah. Both these subsections are, therefore, held to be repugnant to the Injunctions of Islam as laid down in the Holy Qur’an and Sunnah.

 

Clause (i) to the proviso to section 79, Negotiable Instruments Act, 1881 specifies different ways to calculate a return on a promissory note or a bill of exchange where they are based on mark-up, leasing, hire-purchase or service charges.

 

A careful reading of section 79 of the Negotiable Instruments Act, 1881 with all its provisions, analysed in the correct context, would show that purpose of section 79 is not to validate or invalidate a certain return in the transactions of mark-up, leasing etc. The basic purpose of clause (i) is that once a promissory note or a bill’ of exchange is drawn on the basis of these transactions, and the issuer of the note or of the bill could not pay their amount on the date of their maturity, the Court may order a certain return in favour of the holder of the note or the bill for the period in which the amount remained unpaid after its maturity. Looked at from this perspective, this provision, in its present form is totally against the Injunctions of Islam, regardless of whether or not the transactions underlying the instrument (mark-up, leasing etc.) are in accordance with Shariah. The reasons are as follows:

 

Section 79 in the, Act of 1881 was originally designed for the instruments of interest-bearing loans or debts. The nature of interest is such that it is calculated on daily basis and keeps on increasing for the whole period of non-payment. On the basis of this principle, section 79 has visualized different situations where the amount of a note or a bill was not paid by the debtor on the stipulated date. Taking for granted that every day from the period of non-payment must give the creditor an additional amount as interest or return, subsection (a) has provided that if the instrument has specified a certain rate of interest for the original period of loan, the same rate will be applied to the whole period of further non-payment. Subsection (b) visualizes a situation where no rate of interest was specified in the instrument, either because the original transaction was free from interest, or because the amount of interest was built in the lump sum mentioned in the instrument. In this situation the rate of interest applied after maturity, has been fixed by law as six per cent. per annum.

 

When, in 1980, the Government announced the elimination of interest and the State Bank of Pakistan allowed some alternative modes of financing including mark-up, leasing, hire-purchase and service charge, some amendments were brought in certain laws. It is in this background that the proviso in section 79 was inserted, and the provisions relating to the notes and bills of exchange drawn on the basis of interest were applied to the transactions of mark-up, leasing etc. in the manner specified in sub-clauses of the proviso, without having regard to the fact that all these transactions are essentially different from an interest-based debt and they cannot be subjected to the same rules as govern the interest-based instruments. Each one of these four transactions has its own peculiarities.

 

The first transaction mentioned in sub-clause (i) of the proviso to section 79 of the Act of 1881 is that of mark-up in price. What is meant by this term is the transaction of Murabaha or `Bai’ Mu’ajjal’.

 

Although the mark-up system as in vogue in banks in Pakistan is repugnant to the Injunctions of Islam, yet it is not correct to assert that the transaction of Murabaha or Bai’ Mu’ajjal in itself is prohibited. If the transaction fulfils the necessary conditions spelled out above, it cannot be held repugnant to the Injunctions of Islam. But the reference of this transaction in this clause, in the context of a return on a promissory note or a bill of exchange is not according to the basic principles of a Murabaha transaction. The reason is that Murabaha or Bai’ Mu’ajjal is a transaction of sale effected on the basis of deferred payment. One of the basic conditions of this transaction, like any other sale, is that the price is fixed at the time of the original contract of sale. This price may include a margin of mark-up (profit) added on the cost incurred by the seller. To determine the amount of mark-up, the seller they take different factors into consideration, including the deferred payment, but as already explained once the price is fixed, it will be attributable to the commodity and cannot be increased or decreased unilaterally, because as soon as the sale is accomplished, the price of the commodity became a debt payable by the purchaser. If this debt is evidenced by a promissory note or a bill of exchange, it is not different from a note or a bill evidencing a loan, and no return, whatsoever, can be charged over that note or bill, because it will amount to charging interest on the debt.

 

Sub-clause (i) of the proviso to section 79 provides that if the purchaser in a Murabaha or Bai’ Mu’ajjal transaction did not pay the price, evidenced by a promissory note or a bill of exchange, a further return at the original rate of mark-up shall be payable by the purchaser for the whole period within which the price remained unpaid after its maturity. For example A purchased a commodity for Rs. 100. B agreed to purchase it from him on a mark-up of 10%. The commodity is, thus, sold to B for a price of Rs. 110 to be paid after one year, say, on 31st January. A promissory note in the amount of Rs. 110 is signed by B in favour of A. Now, this promissory note is nothing but an instrument evidencing a debt payable by B to A, which includes the original mark-up allowed by the Shariah. If B doesn’t pay Rs. 110 to A on 31st January, sub-clause (i) of the proviso to section 79 of the Act, 1881 provides that a further return on the same rate of mark-up i.e. 10% in the above example, shall be payable by B to A for the whole period of non-payment after 31st January. This provision is repugnant to the Injunctions of Islam, because after the sale price becomes a debt, no return on it can be claimed by the seller from the purchaser. If the purchaser could not pay at the due date because of his poverty, the Qur’anic command is very clear that he should be given more time till he is able to pay. The Holy Qur’an says:

 

And if he (the debtor) is poor, he must be given respite till he is well-off. (2:280).

 

However, if the purchaser has delayed; the payment despite his ability to pay, he may be subjected to different punishments, but it cannot be taken to be a source of further ‘return’ to the seller on per cent per annum basis as contemplated in section 79.

 

‘` The words “mark-up in price” occurring in sub-clause (i) of the proviso of section 79 are repugnant to the Injunctions of Islam, but not because the transaction of mark-up in itself is impermissible, but because after a sale is effected on the basis of mark-up, and the price is evidenced by a promissory note or a bill of exchange, including the original mark-up, no further return on the note or the bill is permissible in Sharjah on the basis of the original mark-up.

 

The second transaction mentioned in sub-clause (i) of the proviso to section 79 of the Act is lease. Let us take a concrete example: A has leased an equipment to B on 1st February, 1999 for a period of five years. The aggregate amount of rent agreed between the parties is Rs. 1,00,000 to be paid in monthly instalments. B has signed a promissory note in the sum of Rs. 1,00.000 to be paid on 31st January, 2004. While fixing the rental, the lessor had amortized the cost of the equipment alongwith a margin of his profit at the rate of 5 % per annum. If B does not pay the full amount of Rs.1,00,000 up to 31st January, 2004, the sub-clause (i) provides that A will be entitled to claim further return on the promissory note at the same rate of 5 % per annum that was taken into account while fixing the original rental, and thus, the debt will keep on increasing, on daily basis until he pays off the full amount.

 

The correct position according to Shariah is that once the lessee has enjoyed the usufruct of the leased asset for the period of lease, the amount of rent has become a debt due on him and it will be subject to all the rules relevant to a loan or debt, and as mentioned in the case of mark-up, if the lessee is unable to pay on account of his poverty, he will have to be given further time according to the clear Qur’anic command, and if he is purposely delaying the payment, he will be subjected to punitive steps. But his delay will not be taken as an automatic source of return to the lessor, as contemplated in sub-clause (i).

 

If the lessee neither pays rent nor delivers the asset back to the lessor and keeps it in his possession even after the lease period, he will be subjected to the same rent as was fixed during the lease period for the days he kept on possessing the asset, but it is on the basis of his further enjoying the asset after maturity and not for delaying the previous payable rent.

 

The third transaction mentioned in the said sub-clause is hire purchase.

 

A hire-purchase agreement may be defined as an agreement under which an owner lets chattels of any description out on hire and further agrees that the hirer may either return the goods and terminate the hiring or elect to purchase the goods when the payments for hire have reached a sum equal to the amount of the purchase price stated in the agreement or upon payment of a stated sum. The essence of the transaction is, therefore, (i) bailment of goods by the owner to the hirer, and (ii) an agreement by which the hirer has the option to return or purchase the goods at some time or another.

 

This transaction, as practised in the market, has different forms, some of which may have elements not conforming to Shariah, but it is not the right place to go into these details. Even if the hire-purchase is adopted as mentioned above in its purest form, with no violation of a principles of Shariah, the question in the clause under discussion is not of the validity of the transaction in itself. The question here is one of payment of a ‘return’ on the promissory note or a bill evidencing the obligation to pay rent in a hirepurchase agreement. Therefore, it is subject to the same finding as recorded in the case of lease.

 

Next mentioned in clause (i) is the service charges. A service charge based on the actual (secretarial) expenses incurred by the financier in advancing a loan can be claimed by him from the borrower. This principle is derived from the following Qur’anic verse:

 

And the indebted person shall dictate (the document evidencing the debt). (2:82)

 

Here the preparation of the document of loan has been held to be the responsibility of the borrower which naturally means that if the documentation involves some expenses, they will be borne by the borrower.

 

The expenses of secretarial nature in a transaction of loan can be claimed by the financier, on condition that they are really based on actual expenses and are not a mere ruse for charging interest.

 

But again, the question in the clause in discussion is not whether service charge is or is not permissible. The clause contemplates that if the obligation of a service charge is evidenced by a promissory note or a bill, and its amount is not paid on the due date, the note or the bill will automatically obligate the debtor to pay a `return’ on the note or the bill at the same rate as at which the original service charge was calculated.

 

The service charge is allowed only on the basis of actual expenses and not on the-basis of a `return’ at a specific rate. The secretarial expenses in advancing a loan are normally incurred only at the beginning when the loans are advanced. They are included in the original service charge evidenced by the promissory note. These are not normally recurring expenses, and if suttee additional expenses are incurred after the default through sending reminders etc. they are nut necessarily a« he same rate at which the original service chance was calculated. They can be less, and they can be more ii the financier has to take a legal action against the borrower.

 

Clause (ii) of the proviso to section 79 of the Act, 1881, however, needs some clarification.

 

Firstly, the words “when the loan was contracted” at the end of the clause are misleading. Financing on the basis of profit and toss sharing is -trot a loan. This word, therefore, is misconceived.

 

Secondly, the proportions of profit agreed to he distributed between the partners may be applicable as long as the Musharakah is not finally settled or liquidated, and so far this provision is correct. But the language used in the clause may cover a situation where a certain amount of profit is deserved by the financier after the liquidation and remained unpaid for a certain period. The words used in the clause may allow the financier to claim a further `return’ on the unpaid amount at the same rate at which the profit was declared for the financier. This is again objectionable, because it the business is totally liquidated and what remains with the client is only the amount which the financier is entitled to receive as a debt, any `return’ charged thereupon is not permissible, being interest charged on a debt.

 

Contracts by Chitty, Sweet and Maxwell, London, 24th Edn., 1977, Vo1.2, p.461, para.3212 and Ahkam-al-Qur’an by Al-Jassas, Lahore, 1980, Vol.l., p.485 ref.

 

(f) Negotiable Instruments Act (XXVI of 1881)-----

 

----Ss.. 114 & 117(c)---Constitution of Pakistan (1973), Art.203-F--Repugnancy to Injunctions of Islam---Provisions of Ss.114 & 117(c) of the Negotiable Instruments Act, 1881 which provide for charging of interest, are repugnant to the Injunctions of Islam---If a party, however, has paid the amount due, inclusive of the interest payable on instrument prior to the date .of coming into force of the judgment of Supreme Court, the amount so paid by the payer for honour will, in all fairness, have to be allowed to be received by the party paying for honour---.Shariat Appellate Bench of Supreme Court declared that the provision will cease to have effect from 30th June, 2001.

 

Section 114, Negotiable Instruments Act, 1881 confers a right on the payer for honour of a bill of exchange to recover his paid amount alongwith interest from the original debtor. Similarly, section 117 (c) entitles an indorser who has paid the amount of the bill to recover it alongwith an interest at the rate of’ six per cent. per annum. Both provisions provide for charging of interest and, therefore, repugnant to the Injunction of Islam. However, if a party has paid the amount due, inclusive of the interest payable on instrument prior to the date of coining into force of this judgment, the amount so paid by the payer for honour will, in all fairness, have to be allowed to be received by the party paying for honour.

 

(g) Negotiable Instruments Act (XXVI of 1881)---

 

----S. 13---Constitution of Pakistan (1973), Art. 203-F---Repugnancy to Injunctions of Islam---Definition of “negotiable instrument” as given in S.13, Negotiable Instruments Act, 1881 does not, in itself, provide that it will. be traded in, or that it will be transferred or indorsed at a discount--Practice prevalent in the financial market that such instrument is discounted on the basis of interest is against the Injunctions of Islam as the same involves Riba---Principles---Shariat Appellate Bench declared that the provision will cease to have effect from 30th June, 2001.

 

The definition of a “negotiable instrument” as given in section 13 of the Negotiable Instruments Act, 1881 does not, in itself, provide that it will be traded in, or that it will be transferred or indorsed at a discount. But the practice prevalent in the financial market is that it is discounted on the basis of interest. This practice is against the Injunctions of Islam and involves Riba. A promissory note or a. bill of exchange represents a debt payable by the debtor to the holder. This debt cannot be transferred to anybody except at its face value. Discounting of a bill or a note or a cheque, therefore, involves interest. In an Islamic financial market, the papers representing money or debt cannot be traded. However, the papers representing holder’s ownership in tangible assets, like shares, lease certificates, Musharakah certificates etc. can be traded in, And a viable secondary market can be developed on that basis.

 

(h) Land Acquisition Act (I of 1894)--

 

----Ss. 28, 32, 33 & 34---Constitution of Pakistan (1973), Art.203-F--Repugnancy to Injunctions of Islam---Sections 28, 32, 33 & 34 of Land Acquisition Act, 1894 to the extent these contain the provisions relating to “interest” are repugnant to Injunctions of Islam---Reasons and principles detailed ---Shariat Appellate Bench declared that the provision will cease to have effect from 30th June 200:

 

Section 28 of the Land Acquisition Act, 1894 manifests the intention of the provision i.e. to compensate the landowner who was deprived of the land without payment of the true price payable. The deprivation so made is sought to be calculated through the prescribed mechanism i.e. compensation is being assessed at the rate of 6 per cent. per annum, difference of the amount payable for the period that the landowner was deprived of the usufruct of the land. The principle sought to be given effect is that an owner cannot be deprived of his property except by paying adequate and proper price/compensation thereof and that the rights in the property are not to be treated as transferred unless proper compensation is paid.

 

Section 32, Land Acquisition Act, 1894 regulates the amount of compensation which, for the reasons given in the previous section i.e. section 31 of the Land Acquisition Act, could not be paid to the rightful owner. Such amount lying with the Court is to be invested in the purchase of other land to be held under the like title and conditions of ownership as the land in respect of which such money has been deposited was held, or if such purchase cannot be effected forthwith, then in such Government or other approved securities. This section further provides that the interest or other proceeds arising from such investment shall be paid under the direction of the Court to the person/persons who are found entitled to the possession of the land acquired.

 

Section 33 of the Act provides for regulation of the money deposited in the Court for any cause other than the one mentioned in section 32 of the Land Acquisition Act and provides that such money deposited with the Court is to be invested in Government or other approved securities and the interest or the proceeds of any such investment are to be paid to the person/persons found entitled on the basis of their interest in the land and their entitlement to receive benefit from the land in respect of which the money had been deposited.

 

The true tests for adjudicating the real nature of an amount in the domain of Riba can come from the Holy Qur’an, Sunnah of the Holy Prophet (p.b.u.h.) and time tested opinions of the jurists and scholars well versed in Islamic Law and Shari’ah. Consequently, the process of reasoning employed for dubbing the interest payable under sections 28 and 34 to be something else than Riba is difficult to justify in Shari’ah. The increase or addition in the form of interest under sections 28 and 34 over the debt payable in the form of compensation by acquiring authority to the landowners obviously falls in the category of Riba.

 

The first principle applicable is that in case of compulsory acquisition the compensation or the value of the land and the property acquired is to be paid either before taking over the possession of property or simultaneously with the taking over the possession or within such period of time after taking over the possession that the time involved may not be considered as real (mentionable) delay in making payment. If there is any delay, then it will be considered and treated that interest in the ownership of the land to that extent has not been passed. This is so treated so as to impress upon the necessity of making the payment of the due price/counter value and it is for this reason that section 28 of the Land Acquisition Act provides for awarding an amount with reference to the amount of compensation which was less paid or assessed or fixed by the Collector.

 

From the viewpoint of Shariah, the acquisition is a compulsory purchase of a property from the owner and the compensation awarded to him is the price of such purchase. One of the necessary conditions of a permissible acquisition, is that the owner is given a fair market price of the property before or at the time of taking possession. If the Collector has paid less than the fair market price, it means that he has compelled the owner, not only to surrender his property without a fair price, but also to face the hardships of litigation. The function of the Court in this case is to fix a fair price of the property. While discharging this function the Court can take into consideration the injustice done to and the hardships suffered by the owner bf the property and may, thus, increase the price so as to make it more than the normal market price. Instead of adopting this simple mode, section 28 of the Act; 1894 has first fixed the price by specifying the “excess”, then it has allowed an additional amount in the name of interest at the rate of 6% per annum. That is why it is repugnant to the Islamic Injunctions, because once the price is fixed and it became a debt, any increase over it calculated at per cent. per annum basis makes it interest, hence prohibited. On the contrary, if the price itself is increased for the considerations mentioned above, it will not entail interest, because the price of a property may be fixed on the basis of many considerations, including the hardship suffered by the seller at the hands of the purchaser in the same transaction.

 

Hence, awarding of compensation and the mechanism adopted in original section 28 as well as provided in Provinces of Punjab, Sindh and N.-W.F.P. is objectionable from Shariah point of view. This section as is enacted in Balochistan vide section 9-A, Balochistan Act XIII of 1985 also does not provide permissible mechanism to allow proper and adequate compensation. These sections shall be substituted by a provision to the following effect:--

 

“In addition to the compensation fixed on the basis of market value as prevailing on the date of notification under section 4, an additional sum at the rate of fifteen per centum per annum (or the rate fixed from time to time) of the compensation so fixed shall be added to the compensation due and payable from the date of notification under section 4 till the date of payment of compensation finally.”

 

As regards section 34, the amount awarded is not compensation paid to the owner for depriving him of his right to possess the land acquired but is given to him for deprivation of the use of money representing the compensation for the land acquired and as such is “interest” paid for the delayed payment of the compensation amount.

 

While correctly analyzing the nature of additional amount specified under section 28 one should not overlook the fact that the landowner has been deprived of the possession of his rightfully owned property without any compensation. Acquisition from the point of view of Shariah is a compulsory purchase by the Government. One of the basic conditions for the validity of such a compulsory purchase is that the fair market price is given to the landowner before or at the time of taking, possession or immediately after it. It means that a valid sale, in the case of acquisition, takes place only when the price is actually paid by the Government to the’ landowner. Taking possession without the -payment of the price, in the case of acquisition, does not in itself amount to effecting a valid sale. The landowner, therefore, is entitled to claim a rent for the period commencing from the date of possession to the date of the payment of the price (the awarded amount) whereby the actual valid sale shall have taken place. This rent should not be less than the fair market rent in the relevant period.

 

What is wrong in section 34 is, firstly, the use of the word `interest’ and secondly, determining the rate of eight per cent. per annum, with no regard to the rental value of the acquisitioned property. However, it may be provided that the landowner shall be paid the fair rental value or an amount equal to 8% per annum of the awarded amount, whichever is higher, from the time of taking possession to the time when the amount of compensation is actually paid to him.

 

Government of N.-W.F.P. through Collector, Land Acquisition, Nowshera v. Muhammad Sharif Khan PLD 1975 Pesh. 161; Islamia University Bahawalpur through its Vice-Chancellor v. Khadim Hussain and 5 others 1990 MLD 2158: Qazilhash Waqf and others v. Chief Land Commissioner. Punjab, Lahore add others PLD 1990 SC 99: Behari Lal Bhargava v. Commissioner of Income-tax. C P and U.P. AIR 1941 All. 135: Commissioner of Income-tax, Biltar and Orissa v. Rani Prayag Kumari Debi AIR 1939 Pat. 662; Revenue Divisional Officer, Trichinopoly v. Venkatararna Avvar and another AIR 1936 Mad. 199; Dr. Sham Lai Narula . The Commissioner of Income-tax, Punjab Jammu and Kashmir, Himachal Pradesh and Patiala AIR 1964 SC 1878; .SIR 1970 SC 1702 and AIR 1972 SC 260 ref.

 

(i) Civil Procedure Code (V of 1908)--

 

----Ss.34, 34-A & 34-B(b)(c)---Constitution of Pakistan (1973), Art.203-F--Repugnancy to Injunctions of Islam---Provisions of Ss.34, 34-A & 34-B, C.P.C. having been declared to be repugnant to Injunctions of Islam, Shariat Appellate Bench of Supreme Court directed that said provisions be suitably amended keeping in view the observations recorded in the judgment by the Court---Shariat Appellate Bench declared that the provisions will cease to have effect from .30th June, 2001.

 

Section 34, C.P.C. provides that where a decree is for the payment of money, the Court may, in the decree, order “interest” at such rate as the Court deems reasonable to be paid on the principal amount adjudged, from the date of the suit to the date of the decree, in addition to any interest adjudged on such principal sum for any period prior to the institution of the suit, with further “interest” at such rate as the Court deems reasonable on the aggregate amount so adjudged, front the date of the decree to the date of payment, or to such earlier date as the Court thinks fit.

 

Section 34-A, C.P.C. has been dealing with interest on public dues It provides that where the Court is of opinion that a suit was instituted with intent to avoid the payment of any public dues payable by the plaintiff or on his behalf, the Court may, while dismissing such suit, make an order for payment of ‘interest’ on such public dues at the rate of two per cent., above the bank rate.

 

Subsection (2) of section 34-A, C.P.C. deals with a different situation. It provides that if the Court is of opinion that the recovery of any public dues from the plaintiff was unjustified, the Court may, while disposing of the suit, make an order for payment of interest on the amount recovered at the rate of two per cent., above the bank rate.

 

Section 34-B, C.P.C. deals with interest on dues of a banking company. It provides that where .a decree is for payment of money due to a banking company in repayment of a loan advanced by it, the Court shall, in the decree, provide for interest or return, as the case may be, on the judgment debt from the date of decree till payment. It further provides that in case of interest-bearing loans, the Court shall award a decree for interest at the contracted rate or at the rate of two per cent. above the bank rate, whichever is the higher.

 

Clause (b) of section 34-B provides that in the case of loans given on the basis of mark-up in price, lease, hire-purchase or service charges for the contracted rate of mark-up, rental, hire or service charges, as the case may be, the Government shall provide for interest or return at the contracted rate or at the latest rate of the banking company for similar loans, whichever is higher.

 

Clause (c) of section 34-B, C.P.C. provides that in the case of loans given on the basis of participation in profit and loss, for return at such rate, not being less than the annual rate of profit for the preceding six months paid by the banking company on term deposits of six months accepted by it on the basis of participation in profit and loss, the Court shall, in the decree, provide for such return and at such rate, not less than the annual rate of profit for the preceding six months as stated above, which the Court may consider just and reasonable in the circumstances of the case.

 

Section 34-B (b) and (c) relates to the recovery of money owed to a banking company by a client who entered into a transaction of mark-up, leasing, hire-purchase, service charge or profit and loss sharing.

 

These provisions of the Code are meant in more express terms for the recovery of the previous obligations.

 

Consequently, subsections (b) and (c) of section 34-B of the C.P.C. are repugnant to the Injunctions of Islam.

 

The provisions of sections 34 and 34-A, C.P.C. conferred a power on the Court to grant additional sum over and above the decreed amount and the sums to be allowed have been named as interest. Any amount over and above the principal amount of debt is Riba, hence prohibited. Therefore, any additional amount contemplated in these provisions does fall within the definition of ‘Riba’.

 

In legal system of Pakistan the difficulties of the decree-holders compound when the decree is sought to be executed. The obtaining of decree itself is not an easy task as all sorts of frivolous objections and delaying tactics are adopted/used for delaying completion of the trial. In addition to the delaying tactics adopted by the litigants the heavy work load of the Courts also contributes in delaying early and timely decision of cases. The number of cases daily fixed for hearing is so numerous that Presiding Officers cannot afford to give more than a few minutes to each case. The cases keep on lingering for years together due to all these factors.

 

The provisions of the Code of Civil Procedure are, therefore, to be viewed in the aforenoted perspective in addition to the legal question whether the power conferred by these provisions on a Court to grant additional amount over and above the amount decreed, though the said additional amount is called interest, falls within the definition of Riba.

 

The power conferred on the Court by law to grant additional sum is not premised on any act of the party to the transaction yet this grant of additional sum is without a counter-value and is a payment receipt of which law permits over and above the principal amount. Thus, indirectly Riba al-Nasiah has been allowed to be practised as it is Riba that is paid and received in a loan transaction and this is the Riba that has been prohibited by the Holy Qur’an. If the said provision is taken to be conferring a power on the Court to allow compensation to the lender/decree-holder for the loss caused to him by not returning the amount of liability through vexatious pleas and dilatory tactics after the filing of the suit or even after passing of the decree then granting of such power to allow compensation cannot be objected to but the compensation at a fixed rate to be awarded in each and every case based on opportunity cost of money is not permissible as in each case such a power will have to be exercised in consideration of the circumstances prevailing in that particular case. The Legislature can also confer a power on the Court to impose penalty on a party who makes a default in meeting out his liability or who is found guilty of putting up vexatious pleas and adopting dilatory tactics with a view to cause delay in decision of the case and in discharge of liabilities and from the amount of such penalty a smaller or bigger part depending upon the circumstances can he awarded as solarium to the party who is put to loss and inconvenience by such tactics. The amount of penalty can be received by the State and used for charitable purposes and in the projects of public interest including the projects intended to ameliorate economic conditions of the sections of the society possessing little or nothing i.e. needy people/peoples without means. The provisions of the Code of Civil Procedure, quoted above, are therefore, repugnant to the Injunctions of Islam as laid down in the Holy Qur’an and Sunnah of the Holy Prophet for the reasons given above and these sections may, therefore, be suitably amended keeping in view the observations given above.

 

(j) Civil Procedure Code (V of 1908)---

 

----Ss. 2(12), 35(3), 144(1), O.XXI, R.11(2)(g), O.XXI, R.38, O.XXI, R.79(3), O.XXI, R.80(3), O.XXI, R.93, O.XXXIV, Rr.2(1)(a)(i) & (iii), (c)(i) & (ii), 2(2), 4, 7(1)(a)(i) & (iii), (c)(i) & (ii), 7(2), 11, 13(1), O.XXXVII, R.2 & O:XXXIX, R.9---Constitution of Pakistan (1973), An.203-F---Repugnancy to Injunctions of Islam---Word “interest” wherever appearing in Ss.2(12), 35(3), 144(1), O.XXI, R.11(2)(g), O.XXI, R.38, O.XXI, R.79(3), O.XXI, R.80(3), O.XXI, R.93, O.XXXIV, Rr.2(1)(a)(i) & (iii), (c)(i) & (ii), 2(2), 4, 7(I)(a)(i) & (iii), (c)(i) & (ii), 7(2), 11, 13(1), O.XXXVII, R.2 & O.XXXIX, R.9, C.P.C. being repugnant to Injunctions of Islam, was directed by Shariat Appellate Bench of Supreme Court to be appropriately substituted ---Shariat Appellate Bench declared that said provisions will cease to have effect from 30th June, 2001.

 

The word “interest” wherever appearing in section 2(12), section 35(3) section 144(1), Order XXI, Rule 11 (2)(g), Order XXI, Rule 38, Order XXI, Rule 79(3), Order XXI, Rule 80(3), Order XXI, Rule 9.5, Order XXXIV, Rule 2(1) (a)(i), (iii), (c) (i), and (ii), Order XXXIV, Rule 2(2), Order XXXIV, Rule 4, Order XXXIV, Rule 7(1)(a)(i) & (iii) and (c)(i) & (ii), Order XXXIV, Rule 7(2), Order XXXIV, Rule 11, Order XXXIV, Rule 13(1), Order XXXVII, Rule 2 and Order XXXIX, Rule 9 of C.P.C: shall be deleted and substituted appropriately.

 

Order XXXVII, Rule 2 (2)(a) and (b), C.P.C. are similar to the provisions of sections 79 and 80 of the Negotiable Instruments Act, 1881.

 

Both these provisions (i.e. sub-rules (a) and (b) of Rule 2, Order XXXVII) of the Code are repugnant to the injunctions of Islam.

 

Rule 79 (3) of Order XXI of C.P.C. provides that if, in pursuance of a decree of recovery, a debt receivable by the defendant is sold, the Court shall prohibit the original creditor of that debt from receiving the debt or any interest thereon, and the debtor from making payment thereof to any person except the purchaser.

 

Similarly, Rule 80(3) of the Order XXI of the Code contemplates the transfer of a negotiable instrument, required for the purpose of recovery, and provides as under:

 

“Until the transfer of such negotiable instrument or share, the Court may, by order, appoint some persons to receive any interest or dividend due thereupon and to sign a receipt for the same...”

 

Appointed person having been allowed to receive interest, the provisions were objectionable.

 

(k) Cooperative Societies Act (VII of 1925)---

 

----Ss. 59(2)(e) & 71(2)---Cooperative Societies Rules, 1927, Rr. 14(1)(h), R.22, R.41 & Appendices I to IV---National Industrial Cooperative Finance Corporation Limited Bye-Laws, Bye-Law 3(6)---Constitution of Pakistan (1973), Art.203-F---Repugnancy to Injunctions of Islam---Provisions of Ss.59(2)(e) & 71(2), Cooperative Societies Act, 1925; Rr.14(1)(h), R.22, R.41 and Appendices I to IV of Cooperative Societies Rules, 1927 and ByeLaw 3(6) of National Industrial Cooperative Finance Corporation Limited Bye-Laws to the extent same provide for “interest”, are repugnant to Injunctions of Islam---Appellate Shariat Bench of Supreme Court directed that the word “interest” appearing in these provisions be deleted as the charging, levying and recovery of interest was not permissible under the Injunctions of Islam and provisions will cease to have effect from 30th June, 2001.

 

The word “interest” appearing in section 59 (2) (e) of the Cooperative Societies Act, 1925 and Rule 14(1)(h), Rule 22 and Rule 41 alongwith Appendices I to IV of the Cooperative Societies Rules, 1927 be deleted on the ground that charging, levying and recovery of interest is not permissible under the Injunctions of Shariah.

 

PLD 1992 FSC 1; PLD 1992 FSC 537 and PLD 1992 FSC 535 mentioned.

 

(l) Insurance Act (IV of 1938)---

 

----Ss. 3-BB(1)(b), 27(3), 29(8)(b)(c)(iii), 47-B(1)(2) & 81(2)(d)---Constitution of Pakistan (1973), Art.203-F---Repugnancy to Injunctions of Islam---Provisions of Ss.29(8)(b)(c)(iii), 47-B(1)(2) & 81(2)(d) to the extent same provide .for range of rate of interest, guarantees as to the interest amount, payment of interest on instalments and other conditions as to interest, are repugnant to Injunctions of Islam---Word “interest” appearing in Ss.29(8)(b)(c)(iii), 47-B(1)(2) & 81(2)(d) may be deleted but to the extent of 5.27(3), Insurance Act, 1938 the words “rate of interest” has to be deleted in consonance with objectives of prohibition of interest under Shariah--Word “interest” in S.27(3) need not be omitted as same pertains to securities of, and guarantees as to principal and interest, by the Government of the country in whose currency such policies are expressed---Word “interest” in S.27(3), therefore, be substituted with suitable amendments, keeping in view the purposes and the policy of the law On the lines indicated by the Court--Purpose behind the substitution of word “interest” should be to effectively implement the objectives of eliminating Riba from the economy of society without hampering the economic activities and also ensuring at the same time the growth and progress of the economy together with fairness to meet the obligations and liabilities---Question whether insurance business as in vogue in the country was in accord with Injunctions of Islam being a different question, was not taken into consideration by the Shariat Appellate Bench of Supreme Court ---Shariat Appellate Bench declared that the provision will cease to have effect from 30th June, 2001.

 

In section 27(3), Insurance Act, 1938 the words “rates of interest” may be deleted in consonance with the objectives of prohibition of interest under Shariah. The word “interest” appearing in subsection (3) of section 27 need not be omitted as this pertains to securities of, and guarantees as to principal and interest, by the Government of the country in whose currency such policies are expressed. This as such pertains to the assured of foreign origin and securities of foreign Government This amount, however, is to be taken notice in computing the investment required to be invested by an insured. The word “interest” appearing in the other provisions may, however, be deleted but it should be substituted with suitable amendments keeping in view the purposes and the policy of the law on the lines indicated in this judgment. The purpose should be to effectively implement the objectives of eliminating Riba from the economy of the society without hampering the economic activities and also ensuring at the same time the growth and progress of the economy together with fairness to meet the obligations and liabilities. However, the question whether Insurance business as in vogue is in accord with Injunctions of Islam is a different question, which is not under consideration.

 

(m) State Bank of Pakistan Act (XXXII of 1956)---

 

----S. 22(1)---Constitution of Pakistan (1973), Art.203-F---Repugnancy to Injunctions of Islam---Provision of S.22(1), State Bank of Pakistan Act, 1956 to the extent of purchase of Bills and other commercial instruments like Debentures, Bonds etc. on the basis of interest is repugnant to the Injunctions of Islam---Mode of transacting such financial products/instruments has to be changed to a mode compatible with the Islamic modes of finance; Shariat Appellate Bench of Supreme Court, however, left said matter to the economists and bankers to adapt the new situation, keeping in view the Qura’nic prohibition of Riba---Shariat Appellate Bench declared that the provision will cease to have effect from 30th June, 2001.

 

(n) West Pakistan Money-Lenders’ Ordinance (XXIV of 1960)---

 

----Preamble---West Pakistan Money-Lenders’ Rules, 1965---Punjab Money Lenders’ Ordinance (XXIV of 1960), Preamble ---Sindh Money Lenders’ Ordinance (XXIV of 1960), Preamble ---Balochistan Money Lenders’ Ordinance (XXIV of 1960), Preamble---Constitution of Pakistan (1973), Art.203-F---Repugnancy to Injunctions of Islam---West Pakistan Mone3 Lenders’ Ordinance. 1960; West Pakistan Money. Lenders’ Rules, 1965; Punjab Money Lenders’ Ordinance, 1960; Sindh Money Lenders’ Ordinance, 1960; Balochistan Money Lenders’ Ordinance, 1960; being the laws pertaining to money-lending and money-lenders and alien to Islamic Injunctions and the concept of Islamic Social Justice, could have no place on the statute book of the land and these laws and the Rules framed thereunder were repugnant to Injunctions of Islam ---Shariat Appellate Bench of Supreme Court directed that the above laws shall cease to have effect from 31-3-2000.

 

(o) Agricultural Development Bank Rules, 1961---

 

----R. 17(1)(2)(3)---Constitution of Pakistan (1973), Art.203-F--Repugnancy to Injunctions of Islam---Rule 17(1)(2)(3) of the Agricultural Development Bank Rules, 1961 on the question of interest is repugnant to Injunctions of Islam---Levy, charging and recovery of interest being not permissible, Shariat Appellate Bench of Supreme Court directed that Rule in question be suitably amended on the lines indicated in the Judgment---Shariat Appellate Bench of Supreme Court directed that the law shall cease to have effect from 30-6-2001.

 

(p) Banking Companies Ordinance (LVII of 1962)---

 

----Ss 25(2) & 9---Constitution of Pakistan (1973), Art.203-F---Repugnancy to Injunctions of Islam---Mark-up---Prohibition---Extent---Concept of a real tale, based on mark-up, is not impermissible in its origin, subject to certain conditions, major condition being that it should not be charged on lending or advancing money and it must be based on the genuine sale of a commodity with all its substantive consequences---When the word “mark-up” used in S 25 of Banking Companies Ordinance, 1962 is read in juxtaposition with S.9 of the said Ordinance, it is certainly repugnant to Injunctions of Islam, because a valid mark-tip transaction cannot be imagined without a genuine gale effected by the Bank, provision of mark-up and provision of S.9 of the Ordinance, thus, cannot stand together and either of the two must be struck down---Striking down of S:9, Banking Companies Ordinance, 1962 is necessary because provisions of S.9 are an obstacle in the way of a true Islamic Banking and the correct, just and practicable decision about the concept of mark-up as provided in S.25 of the said Ordinance is not possible unless the bar imposed by S.9 is relaxed, word “mark-up” in S.25 of the Banking Companies Ordinance, 1962 may therefore be retained---Section 9 of the said Ordinance being repugnant to the Injunctions of Islam, in so far as the same prohibits Banks from purchase and sale of goods and other trading activities necessary for adopting the Islamic modes of financing like Bai Mu’ajjal and Murabaha based on mark-up, leasing, hire-purchase and Musharaka in their true and genuine forms ---Shariat Appellate Bench of Supreme Court directed that S.9, Banking Companies Ordinance, 1962 be substituted to accommodate all the Islamic Modes of Financing with their necessary requirements and the provision of S.9 shall cease to have effect from 31st March, 2000.

 

Section 25(2), Banking Companies Ordinance, 1962 empowers the State Bank of Pakistan to give certain directions to banking companies, including a direction about the rates of interest, charges or mark-up to be applied on advances, or prohibiting the giving of loans to any borrower on the basis of interest.

 

So far as the provision of interest in section 25 is concerned, it is against the Injunctions of Islam in the light of the Injunctions about Riba. The way ‘mark-up’ is applied at present is nothing but Riba, hence prohibited. But at the same time the concept of a real sale, based on mark up, is not impermissible in its origin, subject to certain conditions. The major condition for the permissibility of a mark-up transaction is that it should not be charged on lending ‘or advancing money. It must be based on the genuine sale of a commodity with all its substantive consequences. But section 9 of the Banking Ordinance prohibits a bank from trading. It is provided in section 9 that:

 

“Except as authorized under section 7, no banking company shall directly or indirectly deal in the buying or, selling or bartering of goods or engage in any trade or buy, sell or barter goods for others, otherwise than in connection with bills of exchange received for collection or negotiation.”

 

When the word ‘mark-up’ used in section 25 is read in juxtaposition with section 9, it is certainly repugnant to the Injunctions of Islam, because a valid mark-up transaction cannot be imagined without a genuine sale effected by the bank. Therefore, the provision of mark-up and the provision of section 9 cannot stand together. Either of the two must be struck down.

 

The transaction of a sale of Murabaha based on mark-up, even after fulfilling its necessary conditions is not an ideal mode for the extensive use of Islamic Banks. Still, the banks will have to resort to this transaction in certain cases, especially in the initial phase of transformation. It is therefore, more necessary to strike down section 9 as it stands at present, instead of striking down the transaction of `mark-up’ totally, because provisions of section 9 are an obstacle in the way of a true Islamic Banking. These not only invalidate the transaction of Murabaha or Bai’ Mu’ajjal according to Shariah, but also hamper the natural function of leasing hire-purchase Musharaka or Mudaraba transactions. Section 9 was, in fact, designed in the context of interest-based banking in which the banks deal in money and papers only, while a true Islamic financing is always backed by real assets, and this is the basic distinctive feature of Islamic Banking which can rid the economy from many evils of the interest-based banking. The concept of Islamic Banking cannot be translated into reality unless it is realized that the banks are not meant only to deal in money and papers, but their financing is based on and firmly related with real business activities. The elimination of interest can neither be effective nor feasible without lifting the bar imposed on the banks by section 9 of the Banking Ordinance. The correct, just and practicable decision about the concept of mark-up provided in section 25 is not possible unless the bar imposed by section 9 is relaxed.

 

Where a proper and just settlement of the issues involved in a law under challenge is not possible without striking another provision of the same law, the Court has the jurisdiction to hit that provision also.

 

A just decision about the `mark-up’ envisaged in section 25 of the Banking Ordinance is not possible without striking down section 9. Therefore, the word `mark-up’ in section 25 may be retained, however, section 9 of the same Ordinance is repugnant to the Injunctions of Islam in so far as it prohibits banks from purchase and sale of goods and other trading activities necessary for adopting the Islamic modes of financing like Bai’ Mu’ajjaI and Murabaha based on mark-up, leasing, hire-purchase and Musharaka in their true and genuine forms. Section 9 shall be substituted to accommodate all the Islamic modes of financing with their necessary requirements.

 

Province of the Punjab v. Amin Jan Naeem and 4 others PLD 1994 SC 141 and Qazilbash Waqf v. The Land Commissioner, Punjab PLD 1990 SC 99 ref.

 

(q) Banking Companies Rules, 1963---

 

----R. 9(2)(3)---Constitution of Pakistan (1973), Art.203-F---Repugnancy to Injunctions of Islam---Provisions of R.9(2)(3), Banking Companies Rules, 1963 in so far these pertain to interest, are repugnant to the Injunctions of Islam ---Shairat Appellate Bench of Supreme Court directed that the law shall cease to have effect from 30-6-2001.

 

Sub-rule (2) of Rule 9, Banking Companies Rules, 1963 provides for crediting of interest on foreign approved securities on realization while sub-rule (3) relates to crediting of interest realized on rupee securities. Sub-rules (2) and (3) of Rule 9, in so far as they pertain to interest, are repugnant to the Injunctions of Islam as laid down in the Holy Qur’an and Sunnah of the Holy Prophet (p.b.u.h.). The retention of interest on foreign approved securities already realized need not be refused. The amount so received is to be credited to Baitul Mal and can be used for discharging the foreign debt and meeting out the other liabilities. Such a transitory and provisional course of action is allowed by Shariah. Same way, the interest received on rupee securities already issued and held can be similarly dealt with. However, in future such transactions which involve interest shall not be permitted.

 

(r) Banks (Nationalization) Payment of Compensation Rules, 1974--

 

----R. 9---Constitution of Pakistan (1973), Art.203-F---Repugnancy to Injunctions of Islam---Rule 9, Banks (Nationalization) Payment of Compensation Rules, 1974, which provides for reckoning of interest from the date of acquisition of the shares and its annual payment and the procedure of payment of interest and provisions referring to interest, are repugnant to Injunctions of Islam----Shariat Appellate Bench of the Supreme Court directed that instead of merely deleting the word “interest” from the various clauses of R.9, a new Rule should be framed on the lines indicated by the Court ensuring effective enforcement of prohibition of interest in future---Return of the profit relatable to the shares to be managed through Shariah compliant modes ---Shairat Appellate Bench of Supreme Court directed that the law shall cease to have effect from 30-6-2001.

 

Rule 9, Banks (Nationalisation) Payment of Compensation Rules, 1974 which provides for reckoning of interest from the date of acquisition of the shares and its annual payment and the procedure of payment of interest and these provisions referring to interest are repugnant to the Injunctions of Islam. Instead of merely deleting the word “interest” from the various clauses of Rule 9, a new rule should be framed on the lines indicated in the judgment ensuring effective enforcement of prohibition of interest in future. However, the return or the profit relatable to the shares shall be managed through Shariah compliant modes.

 

(s) Banking Companies (Recovery of Loans) Ordinance (XIX of 1979)---

 

----S.8(2)(a)(b)---Constitution of Pakistan (1973), Art. 203-F---Repugnancy to Injunctions of Islam---Provision of whole of S.8(2)(a) relating to interest and S.8(2)(b) of Banking Companies (Recovery of Loans) Ordinance, 1979 relating to mark-up are repugnant to Injunctions of Islam---shariat Appellate Bench ‘of Supreme Court directed that said provisions be suitably amended keeping in view the observations recorded in the judgment ---Shariat Appellate Bench declared that the provision will cease to have effect from 30th June, 2001.

 

(t) Islamic Jurisprudence---

 

---- Banking and economic system in Islam---Infrastructure and legal framework to successfully practise Islamic Banking and economic system--Elimination of Gharar, deceit and fraud is necessary by providing effective and necessary legal framework in order to ensure success of any economic system ---Gharar can be eliminated by bringing as much transparency, fairplay as possible in all public dealings---Effort to eliminate only Riba. in isolation from banking system, would be more harmful than helpful due to intricate interdependence of different vital economic sectors, and efficient v: course will be to first identify and strengthen the existing critical economic sectors falling under Shariah, thus, isolating Riba-based system for its proper treatment ---Shariat Appellate Bench of Supreme Court gave  guidelines and laid down measures needed to be taken to provide  infrastructure and legal framework to successfully practise Islamic economic system.

 

The framing of the laws and economic and monetary policies is the function of concerned organs and institutions of the State and not of Supreme Court but as the Government in the present case has insisted in its application that guidelines be provided in respect of the issues raised and as the economists, religious scholars etc. have expressed their. opinion with respect to these issues and with respect to the infrastructure needed to successfully practise Islamic economic system, Supreme Court has recorded guidelines for the consideration of the concerned quarters

 

The scholars, economists ‘and auditors are unanimous that elimination of Gharar, deceit and fraud is necessary by providing effective and necessary legal framework in order to ensure success of any economic system. The small investors who invested either in the stock markets or in bank deposits have been losers for the reasons that their savings have been eroded partially or fully because of presence of Gharar and speculative characteristics of stock markets. A reduction of nearly Rs. 300 billion in the market capitalization has gone unheeded. Similarly, defaults on bank loans amounting to approximately Rs.300 billion restricted these institutions to offer a reasonable return on deposits of small investors. Loopholes in the economic system allow defaulters to get away without any resistance and as such stringent measures/regulations are required to check speculative activities in the stock markets as also by formulating and administering monetary policy by an independent body which is competent and powerful enough to seek compliance of the monetary policy including borrowing activity prescribed under the laws/regulations to be framed and enacted in terms of the Constitutional mandate of Article 79 of the Constitution.

 

The laws in Pakistan on the subjects of good governance, fair dealings and transparency do exist but these need to be made comprehensive and also to the implemented in true spirit. Effort to eliminate only Riba. in isolation, from banking system would be more harmful than helpful due to intricate interdependence of different vital economic sectors, and that the efficient course will be to first identify and strengthen the existing critical economic sectors falling under Shariah, thus. isolating Riba-based system for its proper treatment.

 

Four major engines of economy identified by the economists which fueled the West’s economic growth are following:--

 

(i) Banking/Financial Sector;

 

(ii) Share market;

 

(iii) Debt/Bond Market; and

 

(iv) Government Borrowing/Lending.

 

Creation of large middle class is also a touchstone of Islamic Financial model to fight for concentration of wealth in few hands.

 

The other pertinent thing to be noted is 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 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 to control unlawful conduct including Gharar is designed to maximize justice and fairplay at all levels of investors’ interaction. Gharar can be eliminated by bringing as much transparency/ fairplay as possible in all public dealings. The disclosure requirements are so elaborate that speculative activities are minimized. This is achieved, inter alia. through the following measures:---

 

(1) Individual’s Credit History

 

No individual is allowed to get utilities connections, open any bank account, or obtain a loan unless his credit report received from a credit bureau is clean. These bureaus are non-Government entities and by paying a nominal fee any organization can access the databases for requisite information.

 

(2) Industries’ Rating

 

Four rating agencies namely, (i) Standard and Poor’s, (ii) Moody’s, (iii) DCR, and (iv) Fitch. IBCA are referred to by the financial institutions and lending institutions for reporting about credit ratings of the borrowers before extending loans, whether the borrower is a corporate body or other institution. The Security Exchange Commission, USA grants them licence and monitors their quality of work. In Pakistan, to regulate the business of credit rating companies, the Credit Rating Companies Rules, 1995 were framed by the Federal Government under section 33 of the Securities and Exchange Ordinance, 1969, but these Rules have not been usefully applied whereas in USA, individuals, corporations, banks and financial institutions and even the municipalities are all rated by the credit companies and their credit rating is relied upon by the investors before investing into the bonds or other instruments floated or offered for investment to the public. These ratings are instituted on the philosophy of right to know.

 

Even in England various statutes provide for prudential regulations and disclosure of necessary information. The Financial Services Act, 1986 and the regulations framed thereunder provide protection for the investors, with the “securitisation” of the investment industry in order to provide a system intended to make effective and to enhance London’s position as a financial centre. The Serious Fraud Office (S.F.O.) was established as an integral part of the criminal justice system. The S.F.O. is responsible for investigation and prosecution of some of the biggest cases of fraud in British .history. The S.F.O. is an independent Government Agency headed by Director who exercises his powers under the superintendence of the Attorney-General, maintains liaison with Government departments and regulatory bodies such as the Department of Trade and Industries, Bank of England. International Stuck Exchange, Securities and Investment Board, etc, These and other organizations report to the S.F.O. allegations of serious and complex abuses and misuse of powers and white-collar crimes.

 

The distinctive feature of the S.F.O.’s approach to investigations is the use of multidisciplinary teams, a team of Lawyers, Accountants, Police Officers, etc. appointed in each case, headed by a lawyer, who acts as a case controller being responsible for ensuring expeditious investigation and effective prosecution. It is through such measures that the West has effectively adopted Islamic teachings of justice, fairplay and proper disclosure to minimize Gharar. These measures are to be adopted by providing proper legal framework so as to bring about fundamental changes in the fabric of our society as transparency will put the economy on the right track quickly. It is due to absence of this regulatory legal framework and transparency and prudential measures that the investors in Pakistan were deprived of billions in the shape of Taj Company and Cooperatives scams. There has been a quick growth of companies at Stock Exchange as the corporate managers are least bothered to take investors into confidence by sharing company information and do not feel any moral obligation to share profits with investors. All this is due to absence of strict regulations, third party ratings and risk assessment. A comparison between the size of the economy and number of listed companies can be a guide to the loose regulatory framework that encourages rogues to fleece investors and creditors in the disguise of “Limited Liability” Laws. The number of companies at Karachi Stock Exchange Market arc 750 while the number of listed companies at New York Stock Exchange is five times larger whereas economy of USA is more than 100 times bigger than Pakistan’s economy. Unlike western countries there are no laws in Pakistan against insider trading (trading in Shares by owners) by major shareholders, which is conflict of interest, a crime in West.

 

The market indexes in the west like DOW JONES (USA), FTSE (UK), and Nikkei (Japan) were developed by third parties. In Pakistan tile KSE (Karachi Stock Exchange) 100 index is maintained by the stock market itself and has come under adverse comments from Ministry of Finance due to its speculative characteristics. It is said that this index serves the purpose of few players in the market by luring innocent investors into investment, thus, cyclically depriving them of their hard-earned money. This also requires transmission by introducing independent transparency.

 

(3) Debt Markets in Pakistan

 

We have an inactive debt market and its savings have been repeatedly wiped out as unlike western markets during melting clown of stocks. debt markets are not in a position to provide the necessary “hedge” to the investors. The result of this under-developed debt market is the promotion of Riba through savings being channeled into banking system as industries want long-term finance. they have to resort to the banking system which in turn results in promoting Riba transactions. It’ the concept of Islamic debt through Musharaka certificates is adopted on urgent basis. lot of equity/funds can be made available through developed debt markets and in that way reliance on banks can be reduced. Infrastructure can he provided by advising provinces/municipalities/corporate bodies to connote Qirad certificates/diminishing Musharaka certificates. thus, reducing reliance on foreign exchange borrowings and this is how local funds can he generated.

 

(4) Establishment of Data Collection Firms

 

The financial institutions should encourage experts, lawyers and others to establish firms for keeping track of the clients, individuals. corporations who commit default so that they could be brought before the competent Courts by facilitating service of the process of the Courts on them and also trace their properties and assets whether standing in their names or benami to facilitate recovery through execution of decrees.

 

(5) Recovery System

 

The laws pertaining to recovery of the defaulted loans are to be streamlined alongwith establishment of requisite number of Courts presided over by competent judges of unquestioned integrity. These judges should not be over burdened and only such number of cases should he assigned to them which can be disposed of within a period of three months. The tendency to institute recovery proceedings only when the borrowing company or the individual have almost squandered away their assets requires to be curbed and defaulters must be brought to book by instituting proper proceedings within reasonable time of default when the borrower as well as his assets are still traceable and realizable.

 

(6) Training of Officers and Staff

 

The education of the officers and staff of the financial institutions so as to make them aware of the rudimentary or essential principles of Islamic economy is imperative. They should have necessary knowledge of the modes and the products to be used by them. These training institutions should include courses in accounting and audit procedures suited and conforming to the principles of Shariah. Such an education will be objective oriented and should inculcate commitment with the objectives of Shariah.

 

(7) Audit and Accounts

 

The development of audit and accounts system and procedures conforming to the principles/ Injunctions of Islam and capable of achieving objectives of Shariah is also essential. Such standards and procedures have been laid down in detail in the book titled “Accounting and Auditing Standards for Islamic Financial Institutions” published by Accounting and Auditing Organization for Islamic Financial Institutions P.O.Box 1176, Manama, Bahrain Institute of Chartered Accountants and Auditors with the assistance of the representatives of the State Bank of Pakistan and Finance Division should study these standards, procedures for introducing any modification, change, alteration, if any required to suit the requirements and the needs of Financial Institutions and Banks in Pakistan.

 

Measures needed to be taken, the infrastructure and legal framework to be provided may be summarized as under:---

 

(1) Strict austerity measures to drastically curtail the Government expenditure should be adopted and implemented and deficit financing should he controlled as therein lies the solution to economic revival.

 

(2) An Act to regulate the Federal Consolidated Fund and Public Account, Provincial Consolidated Fund and Public Account requires to be enacted by the Parliament and the Provincial Assemblies respectively. This law will have to take care of borrowing powers, purpose and the scope of borrowing, its utilization, regulation and monitoring process including all ancillary matters.

 

(3) Law providing for necessary prudential measures ensuring transparency be enacted. These laws may include laws like Freedom of Information Act, the Privacy Act and Ethics Regulations of United States, Financial Services Act of Britain.

 

(4) Establishment of institution like Serious Fraud Office to control white collar and economic crimes.

 

(5) Establishment of credit rating agencies in the public sector.

 

(6) Establishment of evaluators for scrutiny of feasibility, reports.

 

(7) Establishment of special departments within the State Bank -

 

(a) Shariah Board for scrutiny and evaluation of Board’s procedures and products and for providing guidance for successfully managing the Islamic economics.

 

(b) A Board for arranging exchange of information, financial institutions about feasibility of projects, evaluation thereof and credit rating of institutions, corporations and other entities.,

 

(c) A Board for providing technical assistance to the financial institutions/banks with regard to the anomalies emerging in the practical operation of the financial institutions or difficulties arising during operation of financial products, transactions or arrangements between the financial institutions and the consumers/clients. This may also take the shape of Islamic Financial Service Institution. Such institutions will also work in the field of shares and investment certificates underwriting promotion and market making to help in activation of primary and secondary markets. The rise of such institutions, whose functions include the promotion of financial instruments and to work as their catalysts in the financial market, would be of great help and support to Islamic Banking. Among the factors which would help the creation and spreading of such institutions is the extension of tax incentives to their operation as well as to Islamic Banks to benefit from their services.

 

The establishment of aforenoted infrastructure is considered necessary by the economists for operation of the Islamic banking system with success.

 

Keeping all these aspects in view, Shariat Appellate Bench of Supreme Court appointed different dates for different phases of the transformation and directed that:

 

(1) The Federal Government shall, within one month from the announcement of this judgment, constitute in the State Bank of Pakistan a high-level Commission fully empowered to carry out, control and supervise the process of transformation of the existing financial system to the one conforming to Shariah. It shall comprise Shariah Scholars, committed economists, bankers and chartered accountants.

 

(2) Within two months from the date- of its constitution, the Commission shall chalk out the strategy to evaluate, scrutinize and implement the reports of the Commission for Islamization of the economy as well as the report of Raja Zafarul Haq Commission after circulating it among the leading banks, religious scholars, economists and the State Bank and Finance Division, inviting their comments and further suggestions. The strategic plan so finalized shall be sent to the Ministries of Law, Finance and Commerce, all the banks and financial institutions to take steps to implement it.

 

(3) Within one month from the announcement of this judgment, the Ministry of Law and Parliamentary Affairs shall form a task-force, comprising its officials and two Sharjah Scholars from the Council of Islamic Ideology or from the Commission of the Islamization of Economy, to:

 

(a) Draft a new law for the prohibition of Riba and other laws as proposed in the guidelines above.

 

(b) To review the existing financial and other laws to bring them into conformity with the requirements of the new financial system,

 

(c) To draft new laws to give legal 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 SBP after which the Federal Government shall promulgate the recommended laws.

 

(4) Within six months from the announcement of this judgment, all the banks and financial institutions shall prepare their model agreements and documents for all their major operations and shall present them to the Commission for Transformation in the SBP for its approval after examining them.

 

(5) All the joint stock companies, mutual funds and the firms asking in aggregate finance above Rs.5 million a year shall be required by lam to subject themselves to independent rating by neutral rating agencies.

 

(6) All the banks and financial institutions shall, thereafter, arrange for training programmes and seminars to educate the staff and the clients about the new arrangements of financing, their necessary requirements and their effects.

 

(7) The Ministry of Finance shall, within gone month from the announcement of this judgment, 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 he tradable in the secondary market on the basis of net asset value. The certificates of the existing bonds of the existing Government savings schemes based on interest shall be converted, into the units of the proposed mutual fund.

 

(8) The domestic inter-Government borrowings as well as the borrowings of the Federal Government from State Bank of Pakistan shall be designed on interest-free basis.

 

(9) Serious efforts shall be started by the Federal Government to relieve the nation from the burden of foreign debts as soon as possible, and to renegotiate the existing loans. Serious efforts shall also be made to structure the future borrowings, if necessary, on the basis of Islamic modes of financing.

 

(10) The following laws being repugnant to the Injunctions of Islam shall cease to have effect from 31st March, 2000:--

 

(1) The Interest Act, 1839.

 

(2) The West Pakistan Money-Lenders’ Ordinance, 1960.

 

(3) The West Pakistan Money-Lenders’ Rules, 1965

 

(4) The Punjab Money Lenders’ Ordinance. 1960.

 

(5) The Sindh Money Lenders’ Ordinance, 1960.

 

(6) The N.-W.F.P. Money Lenders’ Ordinance. 1960-

 

(7) The Balochistan Money Lenders’ Ordinance, 1960.

 

(8) Section 9 of Banking Companies Ordinance, 1962.

 

(11) The other laws or the provisions of the laws to the extent that those have been declared repugnant to the Injunctions of Islam shall cease to have effect from 30th June, 2001.

 

Per Justice Khalil-ur-Rehman Khan, Chairman---

 

(u) Constitution of Pakistan (1973)---

 

Arts.203-F, 203-E & 203-DD---Jurisdiction of Shariat Appellate Bench of Supreme Court and Federal Shariat Court---Scope---Provisions of the Constitution, Muslim Personal Law and any law relating to the procedure of any Court or Tribunal is outside the purview or jurisdiction of the Federal Shariat Court and the Shariat Appellate Bench of the Supreme Court Jurisdiction of said Courts is, thus, limited to the examination of the r1m,stion whether any la”, or provision of law is or is not repugnant to the Injunctions of Islam as laid down in the Holy Qur’an and Sunnah.

 

(v) Constitution of Pakistan (1973)---

 

----Art.203-B(c)---Term “law” defined in Art.203-13(c) also includes any custom or usage having the force of law or any law relating to banking or insurance practice and procedure---Principles.

 

The term “law” also includes any custom or usage having the force of law or any law relating to banking or insurance practice and procedure. The Legislature consciously included within the definition of term “law” for the purposes of Chapter 3-A of the Constitution of Pakistan “any custom or usage having the force of law”. The term “lam,” as used in Article 4 of the Constitution has also been used in Article 8 of the Constitution, in contradistinction with any “custom or usage having the force of law” and must, therefore, be given the same limited connotation in Article 4 as well.

 

Article 203-B(c), Constitution of Pakistan, 1973 provides an inclusive definition of law. On the force of that definition itself any usage having the force of law shall qualify as law. Such a usage may relate to the nation or group as a whole or may relate to practice and procedure of the Court. The former has been included in the definition of law but the latter has been expressly excluded by providing that law includes any custom or usage having the force of law but does not include “any law relating to the procedure of any Court or tribunal”. Law- here does not mean only the enacted law but includes usage having the force of law. Such usage or law may relate to procedure of Court or to matters not expressly excluded from the jurisdiction of the Court.

 

Federation of Pakistan through the Secretary, Ministry of Finance, Government of Pakistan; Islamabad and others v. United Sugar Mills Limited, Karachi PLD 1977 SC 397 and Wasi Ahmed Rizvi v. Federation of Pakistan PLD 1982 SC 20 ref.

 

(w) Constitution of Pakistan (1973)---

 

----Art.2A---Mandate of the Constitution as enshrined in Art.2A of the Constitution .

 

The mandate of the Constitution as is apparent from the Objectives Resolution under Article 2A is that the Muslims shall be enabled to order their lives in the individual and collective spheres in accordance with the teachings and requirements of Islam as set out in the Holy Qur’an and Sunnah; and that adequate provision shall be made for the minorities to profess and practise their religions and develop their cultures; and also that fundamental rights including equality of status, of opportunity and before law, social economic and political justice, and freedom of thought, expression, belief, faith, worship and association, subject to law and public morality,. shall be guaranteed.

 

(x) Constitution of Pakistan (1973)---

 

----Arts.203-D & 227---Provisions relating to the Holy Qur’an and Sunnah---Powers, jurisdiction and function of Federal Shariat Court--Scope---If any enacted law is considered by anyone to be repugnant to the Injunctions of Islam, the course to be adopted, as provided by the Constitution, is to challenge the said law before the Federal Shariat Court under Art.203-D of the Constitution, which power can also be exercised suo motu by the Federal Shariat Court.

 

(y) Constitution of Pakistan (1973)---

 

----Arts,73, 74, 78, 79, 80, 81, 82, 166 & Federal Legislative List, Entries 9 & 1()---Rules of Business [Federal Government], Sched. II, R,3(3), Entries, No.13(6)(7) & 16---Custody of Federal Consolidated Fund and Public Account---Act of Parliament to regulate the custody of Federal Consolidated Fund as mandated by Art.79 of the Constitution---Said mandate of the Constitution having’ not been complied with, Shariat Appellate Bench of Supreme Court directed that such a law should be enacted without further loss of time so that prudential measures could be adopted so as to regulate management of Federal Consolidated Fund as well as Provincial Consolidated Fund and Public Account and the borrowing power of the Federation particularly---Reasons.

 

The Federal Government has the power to frame the. financial, economic and fiscal policies of the State and also to provide necessary legal framework to execute such policies. It is the Federal Government which has the authority under the Constitution to operate and issue guarantees on the security of the Federal Consolidated Fund under such limits as may be fixed by an Act of the Parliament. However, no such law framed by the Parliament was referred. In the absence of such a law, the Government exercises unrestricted powers to borrow against the security of the Federal Consolidated Fund as no law has yet been framed to regulate the custody of Federal Consolidated Fund or the Public Account of the Federation. Though variety of rules such as Treasury Rules exist but in the absence of specific laws and rules pertaining to borrowing, it is, practically and ultimately the Rules of Business which are resorted to regulate the business of the Federal Government. Rules of Business [Schedule II, specified in Rule 3(3)] indicate at Entry No.13 `Finance Division’ and the functions assigned to the said Division. In sub-Entries 6 and 7 thereof, following items have been mentioned:

 

Public debt of the Federation both internal and external; borrowing money on the security of the Federal Consolidated Fund;

 

Loans and advances by the Federal Government.

 

It follows from these provisions of the Rules of Business that the lending and borrowing operations of the Federation are performed by the Ministry of Finance within the framework provided in the Rules of Business. No specific guidelines appear to have been provided to regulate and streamline such functions. It may, therefore, be inferred that the Secretary Finance or at best the Minister for Finance are free to make decisions on these subjects, though they may consult the Prime Minister if the matter is considered, in the discretion of the Secretary Finance or the Minister for Finance, to be an important policy matter. Rule 16 which specifies the cases required to be brought before the Cabinet does not contain borrowing proposals and as such even the Cabinet is not required to be taken into confidence. It will, therefore, be seen that neither the borrowings are restricted for specific uses nor the expediency of the situation necessitating borrowings has been spelled out. This situation of wide flexibility confers on the Finance Division unique and unlimited powers to borrow without at all being bothered about the productivity of the uses to which borrowed resources are applied or even without there being any limitation to the extent to which the nation is to be burdened with, borrowings.

 

As regards the revenues and loans credited to Federal Consolidated Fund and to Public Account, expenditures are incurred without regard to the sources of finds. It appears that no accounting is done for identifying the liabilities created by certain expenditures as revenues are mixed up with proceeds of loans and both are treated at par. This situation prevails as regards the borrowings both from foreign lenders as well as domestic lenders, as no distinction is made whether the borrowing is in rupee or to foreign exchange or from local and foreign markets. It is only the Government in power which is to decide freely the mix between the foreign and local borrowings or in rupee or in foreign exchange. Under the Federal Legislative List, Entries Nos. 9 and 10, make the subjects of foreign loans and foreign aid, Federal subjects.

 

As regards implications emerging from the legal provisions on the subject, the Federal Government enjoys borrowing powers under Article 78 of the Constitution. The mandate of Article 79 of the Constitution, however, is that an Act of the Parliament has to regulate-

 

(a)        the custody of the Federal Consolidated Fund;

 

(b)        the payment of moneys into that Fund;

 

(c)        the withdrawal of moneys therefrom;

 

(d)        the custody of other moneys received by or on behalf of the Federal Government;

 

(e)        their payment into, and withdrawal from, the Public Account of the Federation; and

 

(f)         all matters connected with or ancillary to the matters aforesaid.

 

This mandate has not yet been obeyed and complied with as no enactment has been, till date, framed and enacted by the Parliament. All the above matters are being dealt with under the Rules made by the President which Rules; as commented in one of the paragraphs above, are deficient in many respects and, in any case, cannot be a valid substitute of law framed by the Parliament itself. The Rules existing on the subject were probably made pursuant to section 151 of the Government of India Act, 1935, which section provided that the Rules may be made by the Governor-General and by the Governor of Province for the purpose of securing all moneys received on account of revenues of the Federation or of the Province and also with regard to the moneys to be paid into the Public Account of the Federation or the Province. After the establishment of Pakistan, the Constitutions of 1956 in Article 62, the Constitution of 1962 in Article 38 and the Constitution of 1973 in Article 79 mandated for the enactment of an Act by the Parliament to regulate the custody of the Federal Consolidated Fund, the payment of and withdrawal of moneys into or therefrom as well as custody of other moneys received by or on behalf of the Federal Government, their payment or withdrawal from the Public Account of the Federation and all matters connected with or ancillary thereto. Reference may also be made to Article 81 of the Constitution of which clause (c) provides that the expenditure charged upon the Federal Consolidated Fund includes all debt charges for which the Federal Government is liable, including interest, sinking fund charges, the repayment or amortisation of capital, and other expenditure in connection with the raising of loans, and the service and redemption of debt on the security of the Federal Consolidated Fund. Reference may also be made to Article 166 of the Constitution which provides that the executive authority of the Federation extends to borrowing upon the security of the Federal Consolidated Fund within such limits, if any, as may from time to time be fixed by Act of Majlis-e-Shoora (Parliament), and to the giving of guarantees within such limits, if any, as may be so fixed. Similar provisions were contained in the Constitutions of 1962 and 1956 in Articles 139 and 115 respectively. In the absence of any such enactment providing guidelines and fixing the limits up to which the borrowing power can be exercised by the Federation, it was argued that the charged expenditure enjoys the protection of complete insulation from parliamentary oversight as, on the one hand, no guidelines exist and, on the other, such expenditure can be debated but is not to be put to vote. Moreover, the Federal Government has complete freedom to manage the finances of the Federation and this unrestricted power has plunged the nation into huge indebtedness and has ruined the economy. It would be seen that for almost fifty years we have not been able to obey the mandate of the Constitution by not enacting appropriate law defining the borrowing powers, the purposes, the use and limit of the exercise of such power. The contracts of billions of dollars burdening the nation through execution of sovereign guarantees are being entered into without information of even the members of the cabinet, what to say of obtaining approval of the National Assembly by a member of bureaucracy or advisor appointed by Prime Minister in his sole discretion injudiciously. The contract executed with I.P.Ps. provides sufficient basis for providing prudential laws and making approval of such contracts by the National Assembly mandatory. Such a law should be enacted without further loss of time so that prudential measures could be adopted so as to regulate management of Federal Consolidated Fund as well as. Provincial Consolidated Funds and Public Account and the borrowing powers of the Federation particularly.

 

(z) Constitution of Pakistan (1973)---

 

----Arts.2A, 227, 203-D, 203-F, 203-B & 79---Powers, jurisdiction and functions of the Federal Shariat Curt and Shariat Appellate Bench of Supreme Court---Scope---Enactment regulating the Federal Consolidated Fund or the Public Account ---Repugnancy to Injunctions of Islam---Question of repugnancy or otherwise of the Constitutional provisions on the touchstone of Injunctions of Islam cannot be examined by the Federal Shariat Court and also by the Shariat Appellate Bench of the Supreme Court---Enactment which as and when framed regulating the Federal Consolidated Fund or the Public Account, as well as defining, prescribing and limiting the borrowing powers are enacted, the said Statute, enactment or even the rules shall have to conform to the Injunctions of Islam as contained in the Holy Qur’an and Sunnah of the Holy Prophet (p.b.u.h.) not in view of the provisions of Art.203-B of the Constitution but also of the provisions of Art.2A and Art.227 of the Constitution--Every law to be framed by the Parliament has to conform to the Injunctions of !slam and if any such law is found to be repugnant to the Injunctions of Islam. the Federal Shariat Court as well as the Shariat Appellate Bench of the Supreme Court has the power to scrutinize the said law on the touchstone of Islamic Injunctions and make the necessary declaration as is contemplated in Art.203-D of the Constitution and the Federal Government or the Provincial Government, as the case may be, shall have to amend the law suitably as required in the judgment---Principles.

 

It was contended that the process of prohibition cannot be extended to Government Finances under the existing scheme of judicial review of laws with regard to their consistency with the Injunctions of Islam on account of the fact that the Constitutional provisions cannot be scrutinized on the touchstone of Injunctions of Islam under Article 203-D of the Constitution. It is on account of exclusion of the Constitution from the definition of the term “law” given in clause (c) of Article 203-B that this view has been expressed. No doubt, the question of repugnancy or otherwise of the Constitutional provisions on the touchstone of Injunctions of Islam cannot be examined by the Federal Shariat Court and also by the Shari at Appellate Bench of the Supreme Court but the enactment which as ‘and when framed regulating the Federal Consolidated Fund or the Public Accounts as well as defining, prescribing and limiting the borrowing powers are enacted, the said statute, enactment or even the rules shall have to conform to the Injunctions of Islam as contained in the Holy Qur’an and Sunnah of the Holy Prophet not in view of the provisions contained in Article 203-B (c) but also of the provision of Article 2A and Article 227 of the Constitution.

 

The Court has no power to apply the test of repugnancy by invoking Article 2A of the Constitution for striking down any Article of the Constitution of the Islamic Republic of Pakistan for the reason that if any Article of the Constitution is in conflict with Article 2A, the appropriate procedure is to have it amended in accordance with the prescribed provision for the purpose. However, it does not absolve the Courts of their duty to give effect to the provisions of Article 2A as it has been made substantive part of the Constitution. A Constitution, is an organic whole. All its Articles have to be interpreted in a manner that its soul or spirit is given effect to by harmonising- various provisions. The Courts while construing the provisions of statute should make efforts that the interpretation of the relevant provision of the statute should be in consonance with Article 2A of the Constitution and the grund norms of human rights.

 

Effect of adoption of Objectives Resolution as Article 2A in the Constitution by the chosen representatives of the people as the operative part of the Constitution, is the acceptance of sovereignty of Allah to be binding on them who vowed that they will exercise only the delegated powers within the limits fixed by Allah. Such adoption also enhanced the power of judicial review of the superior Courts. The Constitution has adopted the Injunctions of Islam as contained in Qur’an and Sunnah of the Holy Prophet (p.b.u.h.) as the real and the effective law. In that view of the matter, the Injunctions of Islam as contained in Qur’an and Sunnah of the Holy Prophet (p.b.u.h) are now the positive law. Article 2A, made effective and operative the sovereignty of Almighty Allah and it is because of that Article that the legal provisions and principles of law, as embodied in the Objectives Resolution, have become effective and operative. Therefore, every man-made law must now conform to the Injunctions of Islam as contained in Qur’an and Sunnah of the Holy Prophet (p.b.u.h.). Therefore, even the Fundamental Rights as given in the Constitution must not violate the norms of Islam.

 

Not’ only the actions but also the laws to be framed as such are to conform to the grund norm established by the incorporation of the Objectives Resolution as substantive part of the Constitution with the addition of Article 2A in the Constitution Of the Islamic Republic of Pakistan, 1973.

 

The provisions of the Constitution conferring jurisdiction on the Federal Shariat Court to examine whether or not any law or provision of the law is opposed to the Injunctions of Islam, are to be interpreted in a manner which would give full effect to the process of Islamization, of laws and such interpretation will be more harmonious, with the spirit and letter of the Constitution.

 

Every law to be framed by the Parliament has to conform to the Injunctions of Islam as contained in Holy Qur’an and Sunnah of the Holy Prophet (peace be upon him) and if any such law is found to be repugnant to the Injunctions of Islam, the Federal Shariat Court as well as the Shariat Appellate Bench of the Supreme Court has the power to scrutinize the said law on the touchstone of Islamic Injunctions and make the necessary declaration as is contemplated in Article 203-0 of the Constitution and the Federal Government or the Provincial Governments, as the case may be, shall have to amend the law suitably as required in the judgment.

 

Hakim Khan and 3 others v. Government of Pakistan through Secretary Interior and others PLD 1992 SC 595; The State v. Syed Qaim Ali Shah 1992 SCMR 2192; Zaheeruddin and others v. The State and others 1993 SCMR 1718; Mushtaq Ahmad Mohal and others v. The Honourable Lahore .High Court, Lahore and others 1997 SCMR 1043 and Dr. Mahmood-ur-Rehman Faisal v. Government of Pakistan through Secretary, Ministry of Justice, Law and Parliamentary Affairs, Islamabad PLD 1994 SC 607 ref.

 

(aa) Interpretation of Constitution

 

Constitution being an organic whole, all its Articles have to be interpreted in a manner that its soul or spirit is given effect to by harmonizing various provisions:

 

(bb) Constitution of Pakistan (1973)---

 

----Arts.203-F & 203-D--Repugnancy to Injunctions of Islam ---Riba--Definition of Riba as finally determined by Shariat Appellate Bench of Supreme Court will provide touchstone for evaluating as to whether a provision of law conforms to the Injunctions of Islam or not and any such provision of law finally declared to be not conforming. to the Injunctions of Islam; shall have to be amended suitably---Position of the past and closed transactions and the liabilities already incurred under the existing provisions of law is, however, different.

 

(cc) Islamic Jurisprudence---

 

---- Riba---Concept---Nature, classifications of Riba and impact of its prohibition on trade and business---Literal meaning of word Riba classifies that it means the increased amount paid or claimed in excess of the principal by the borrower or the lender and it has been called Riba which is exactly what interest means ---Qur’an declares each and every increase over the principal sum as Riba irrespective of the object or purpose for which the principal sum was borrowed ---Riba, .therefore, means increase, addition, expansion or growth, technically refers to the “premium” that must be paid by the borrower to the lender alongwith the principal amount as condition for the loan or for an extension in its maturity ---Riba is that excess amount which a creditor settles to - receive/or recover from his debtor in consideration of giving time to the debtor for payment of his loan---Purpose of loan is totally irrelevant in the context of the definition of Riba as the prohibition of the Qur’an extends to both the categories of Riba namely interest charged on commercial loans and the interest charged on personal or consumption loans ---Qur’anic prohibition, therefore, includes every kind of increase or interest charged on loans advanced for commercial or consumption loans---Milder interest is at par with harder interest ---Riba includes both usuary and interest as known in English terminology, therefore, Bank interest is also Riba---Riba, thus, is essentially in conflict with the clear and unequivocal Islamic emphasis on socio-economic justice.

 

Al-Qur’an Majid: Verses (4:160-161); Surah al-Baqarah, Verses 278-279; Qur’an 6:57; 7:54; Surh Al-i-hnran 111:130; Al-Baqarah: Verses 275-276; 2:188; 4:29; 4:161; 9:34: 30:39; 4:161; Tafsir and Hadith by Qatadah ibn Di’amah (d.120 A.H.), Tabi’l: Islam Ke Ma’ashi Nazaviyye by Dr. Yusufuddin Vo1.lI, Karachi, 1984; Unlawful Gain and Legitimate Profii in Islamic Law by Dr. Nabil A. Saleh; I’lam-al-Mawaqqrin, Vol.II, p.154ff, “COMMERCIAL INTEREST KI FIKHI HAISIAT” by Maulana Muhammad Jaafar Shah Phulwarwi and Syed Yaqoob Shah; Stiengass English Arabic Dictionary, Lahore 1979, the word `interest’; `A Dictionary of Islam by Thomas Patrick Hughes, Lahore, 1964, p.544; Exold, xxii, 25,,Lev. XXV. 36 (Usuri); Tafsir Tabari by Imam Tabari (VOl.III, p.64); Kitab al-Nihayah fi-Gharib al-Hadith wa Athor by Ibn al-Athir, Cairo 1322 AH Vol.II, p.66; Ahkam al-Qur’an by Ibn ‘Arabi, Cairo, 1957, Vol.I, p.242; AI-Haidayah by Allama Burhanuddin al-Maghinani; Book XIV on sale, Chap. VIII on Riba; Hidayah English Translation by Hamilton, Lahore, p.289; Tafsir al-Kabir by Imam Fakhar Al-Din Al-Razi; Ahkam al-Qur’an by Allama Jassas, Istanbul, 1335 AH Vol.l, p.469; AIR 1944 Mad.243; Halsbury’s Law of England, para.106 Vol.32, 4th Edn.; Futuha al-Buldan by al-Baladhuri, Cairo 1932 p.67; aiBahr al-Muhit by Abu al-Abdulasi Vo1.II, p.335; Tabari, commentary of the Qur’an, Vol.IV, p.55; Futuh al-Buldan by al-Baladhuri, Leiden, p.56, Tayef; Verses 130 of Al-Imran by Tabari; Kitab al-Amwal by Abu Ubaid alQasim ibn Sallam paras.506-507; Kitab al-Amwal by Abu Ubaid, para.502; Book Islam Ke Muashi Nazariyyea, Karachi 1984, pp.44--50; Tijarati Sud. Tarikhi Awr Fiqhi Nuqtah-I-Nazar Se Aligarh 1967, pp.l-5 and Shorter Encyclopedia of Islam 1953, p.471 ref.

 

(dd) Interpretation of Holy Qur’an---

 

----Principles.

 

(ee) Islamic Jurisprudence---

 

---- Riba---Kinds---Riba al-Fadl---Riba al-Nasi’ah---Concept and nature--Prohibition---Extent.

 

(ff) Islamic Jurisprudence---

 

---- Riba---Prohibition---Extent---Loans taken by tribes from each other, each tribe acting like a large partnership company---Islam abolished the interest based nature of such relationship but re-organised same on the basis of profit-and-loss-sharing whereby the financier got a just share and the entrepreneur did not get crushed under adverse conditions, one of which was the caravan being waylaid during the journey.

 

AI-Qur’an Majid: 3:130-2 ref.

 

(gg) Islamic Jurisprudence---

 

---- Riba---Prohibition---Islamic economic order---Any attempt to treat the prohibition of Riba as an isolated religious injunction and not as an integral part of the Islamic economic order with its overall ethos, goals. and values, is bound to create confusion.

 

(hh) Islamic Jurisprudence---

 

---- Riba---Concept---Rib a has a broader concept and stems from a violation of the Qur’anic decree that loans and debts must be settled on an equal basis and object for which loans are taken is also unimportant for purposes of Riba---Correct approach to understand Riba would be to treat same as a technical term in the Qur’an and Hadith like Salah, Saum, Zakah and Hajj and to determine its meaning with reference to these two primary sources of Islamic knowledge---All loans and debts must be settled on an equal basis (in terms of the units of the object of the loan/debt) and same principle is to be followed in retiring debts created in lieu of, for example, sales or purchases on deferred payment or delivery basis---If a loan or debt is not handled in such a manner, that would constitute a violation of the law of Islam about Riba and, hence, give rise to Riba.

 

Riba is the predetermined, fixed and time-related, increase over and above the principal of a loan or debt A distinction is also ‘maintained between Riba al-Nasi’ah (Riba in loans) and Riba al-Fadl (Riba in trading). Several explanations are offered to rationalize the law of Riba. The most important of these explanations is that through the prohibition of Riba, Islam puts an end to Zulm (exploitation or injustice). Occurrence of Zulm is often traced to lenders seeking a return while borrowers might be in dire need of funds. Another conclusion drawn-with reference to the permissibility of trade is that guaranteed return claimed by owners of capital is despicable because other economic agents have to exert effort and/or expose themselves to risk .for seeking any gains. While these explanations may have some element of truth in them, they leave much to be desired. For example, they become less convincing when one finds that Shariah does not, in normal conditions, prescribe any ceiling on prices and, thereby, the rate of profit even when trading activities may carry little or .no risk but it is to be remembered that charging of exhorbitant or excessive profit is not conceived.

 

A correct approach to understand Riba would be to treat it as a technical term in the Qur’an and Hadith, like Salah, Saum, Zakat and Hajj, and to determine its meaning with reference to these two primary sources of Islamic knowledge. Briefly, the argument can be understood with reference to the basic verdict on Riba in the Qur’an. In the light of al-Baqarah 2:279 which restricts creditors to their principals, this decree can be stated as follows: All loans and debts must be settled on an equal basis (in terms of the units of the object of the loan/debt). The same principle is to be followed in retiring debts created in lieu of, for example, sales or purchases on deferred payment or delivery basis. If a loan or debt is not handled in this manner, it would constitute a violation of the law of Islam about Riba and, hence, give rise to Riba.

 

Interest is a predetermined, fixed and time-related excess on loans and debts. But as explained above, Riba is a broader concept. It stems from ;t violation of the Qur’anic decree that loans and debts must be settled on an equal basis. Likewise, the purpose for which loans are taken is also unimportant for purposes of Riba.

 

(ii) Islamic Jurisprudence---

 

---- Riba---Prohibition---Bank interest is Riba---Rationale.

 

At present, bank transactions involving interest come under the purview of loan transactions. Thus bank interest is Riba. That modern banks have no precedent in Islamic history is no ground for treating bank interest differently from Riba for two reasons. First, notwithstanding their complex nature, banks still personify groups of individuals-their shareholders. Hence, the prohibition of Riba applicable to individuals automatically carries over to banks. Second, again notwithstanding the complexities of modern transactions, they are still combinations of primary transactions-such as lending, trading, leasing, partnership, etc.-for which the basic principles have been laid down. Any change in the nomenclature of interest to `markup’ or ‘profit’ is inconsequential from the point of view of Riba as long as the basic transaction between banks and their customers remains a loan transaction.

 

Riba arises in loans, and profits in trading. A loan transaction represents the case of temporary exchange-give and take back- of property rights of the thing at hand for the pendency of the transaction. Trading, oil the other hand, is a case of irrevocable exchange of property rights between two parties: ownership of the object of sale goes from the seller to the buyer and that of the thing paid toward price from the buyer to the seller. Alternatively, one may view the loan transaction as a homogeneous exchange and trading as a heterogeneous exchange. Thus, Riba and profits relate to two different situations with their own legal implications. Accordingly any comparison between the two is unwarranted. This point also applies to profits versus interest comparisons. Economists have viewed profits as reward for risk-taking. This interpretation is only partly true. Primarily, profits arise in trading in which two parties are involved in the process of reciprocal and irrevocable exchange of then property rights. On the other hand, lending involves transfer of some of the rights related to that property only for the pendency of loan-a limited period. The claim to a reward from another party through loan transactions, albeit Riba, is not recognized in Shariah.

 

Bank interest does fall under the definition of Riba. Banks have normally two tier transactions. On the one hand, they accept money from the savers and pay them return on their savings. On the other hand, they lend money to the entrepreneurs who pay return to the banks at a rate higher than the one paid by the banks to the savers. Let us take the second tier first. The money provided by the banks to the entrepreneur is undoubtedly a loan. Any increase on the principal amount paid by entrepreneur to the bank must and does fall under the category of Riba al-Nasi’ah about the prohibition of which none has any reservation. It is besides the point whether the entrepreneur employs and invests that money in a business, commerce, trade or industrial enterprise. As long as the repayment of the principal amount is guaranteed whether because of the collateral or otherwise it will remain a loan (Qarz) and shall be subject to the principles of Shariah regulating loan (Qarz). Moreover, the concern of the banks is never to ensure the success of the enterprise or to participate in the risk at any stage in any way. There is no moral or legal justification to demand any increase over this amount. As to the money of the savers with the bank it is normally claimed to be an Amanat (Trust). Had it been really a trust it should have been regulated and managed under the law of Trust. For all practical, legal and theoretical purposes it has never been considered to be an Arnanat or Trust. It is always and has always been treated to be a loan and meets all the required ingredients of a loan (Qarz) under the Shariah; its repayment is guaranteed and the bank has full freedom to use, spend and invest it in any manner which the bank decides; the saver cannot even take it back at will without meeting certain conditions. In some cases a saver can take it back only in instalments and in other cases he has to give prior notice to the bank of his intention to withdraw his ‘Arnanat’ from the bank. Now, if it is a loan, no increase can be admissible thereon under the definition of Riba.

 

(jj) Islamic Jurisprudence---

 

----Riba---Prohibition---Hasan-i-Ada---Concept---Scope---Deposit in Government-sponsored saving schemes, Defence Savings Certificates, Treasury Bills, Federal Investment Bonds, Foreign Exchange Bearer Certificates, Prize Bonds and their likes, all being debt insialments and direct money-for money exchanges, interest, mark-up or “profit” offered on them is nothing but Riba irrespective of the name given to it---Principles.

 

Deposits in Government-sponsored saving schemes, Defence Savings Certificates, Treasury Bills, Federal Investment Bonds, Foreign Exchange Bearer Certificates, Prize Bonds and their likes, are all debt instalments’. The fact that it is the Government which is on the other side of the contract does not change the character of the transaction. A loan is a loan whether it is taken from an individual, a group or an institution. From the Shariah point of view, all these instruments represent “loan” contracts between the Government and the parties subscribing to these instruments. The holder, in each case, gives money and wants his money back, and there is no other contract governing the legal relation with the issuer of these instruments. In a technical sense, therefore, these are all direct money-for money exchanges. Accordingly, interest, mark-up or “profit” offered on them is nothing but Riba irrespective of the name given to it. The same argument also applies to zero-coupon bonds in which case buyers pay a lesser price initially but receive a greater sum equal to the face value of the bonds. Some people mix up the question of Government loans with the concept of Hasn-i-Ada or better repayment found in the Ahadith. 1t is contended that the Prophet of Islam (peace be upon him) used to please his creditors at the time of repayment of loan by paying him more than what was his due. It is pleaded that if the Government on its own pays or gives more than the amount received, it should not be considered Riba because it is not pre-fixed or predetermined. This pleat may appear to be plausible on the face of it but this increased payment cannot he called Hasn-i-Ada. A Hasn-i-Ada was never declared beforehand, was never expected by the creditor and was never allowed to him as a matter of right. Moreover, it was a personal favour by the Holy Prophet (peace be upon him) to his creditor.

 

(kk) Islamic Jurisprudence---

 

....Riba...Prohibition---Extent-Rent in a lease contract involves the transfer of usufruct of an asset while ownership remains with the lessor, therefore rent in such a case was not Riba---Principles.

 

Rent arises in a lease contract that involves the transfer of usufruct of an asset while ownership remains with the lessor This is essentially a different arrangement as compared to a loan contract Therefore, there is no point in equating rent with Riba, Alternatively, one can say that, for example, house rent is not Riba because the tenant and the landlord enter into a transaction of money for housing services-a heterogeneous exchange-whereas Riba arises in give and take back of items of the same kind.

 

(ll) Islamic Jurisprudence ---

 

----Riba---Prohibition extent ---Mudarabah and Musharakah transactions are outside the purview of Riba---Similarly Muzar’ah and Musaqaat being two special kinds of partnership is not Riba---Principles.

 

In Mudarabah and Musharakah- two forms of business partnership-the financier is also a legal party to the use of funds. Thus, these transactions are fundamentally different from a loan transaction. Accordingly, both these transactions are outside the purview of Riba. Similarly, Muzara’ah and Musaqaat-two special kinds of partnership-as such have nothing to do with Riba.

 

(mm) Islamic Jurisprudence---

 

---- Riba---Prohibition---Zulm---Riba may lead to Zulm, and thus, the prohibition of Riba would result in putting an end to exploitative practices--End of Zulm, however, is not the genesis of prohibition of Riba---Principles.

 

Riba may lead to Zulm, and thus, the prohibition of Riba would result in putting an end to exploitative practices. But it does not necessarily follow that an end of Zulm is the genesis of the prohibition of Riba. Restricting the rationale of the prohibition of Riba to the elimination of Zulm as referred to in al-Baqarah 2:279 is mistaken for two reasons. First, the verse points to the existence of some dispute between two parties that was settled through this verse, while the end-of-exploitation explanation is given independent of the nature of the dispute. Second, the factual position was that according to this verse, both creditors and debtors were directed to give each other their respective rights in the light of the Shariah. It is pertinent to note that in the earlier revelations about the prohibition of Riba, the directive was that loan transactions be contracted and debts retired on equal basis, and there is no mention of Zulm or its equivalent.

 

(nn) Islamic Jurisprudence---

 

----Riba---Prohibition---Indexation---Inflation---Paper currency---Debts denominated in paper currency are not exempted from law of Riba---No Shariat law, however, exists on taking remedial steps to neutralize the effect of inflation for loan or other debts created through credit transactions--General principle in that regard would be that not only the means but also the ends should be Shariat compatible---Recommended strategy would be to eliminate unanticipated inflation from the economy through prudent Government policies and to make anticipated inflation a part of decision making by all concerned, keeping in view their, needs and other interests--Principles illustrated.

 

According to the law of Riba, all loans and debts are to be settled on an equal basis in terms of the units of the object of loan or debt. In the case of paper currency, the exchange takes place by counting. Accordingly, the following conclusion would be drawn for loans for debts denominated in, for example, rupees: if the sum lent (or debt contracted) amounted to Rs. 1,000 the lender (creditor) may claim only one thousand rupees by counting - no more, no less. This argument may also be restated, again, in the context of Riba, as follows:

 

(i) The nature of a loan transaction does not change with inflation. So, there are no grounds for changing the scope of the application of the law in inflationary regimes.

 

(ii) Lenders already incur transaction costs associated with loan transactions. Inflation just escalates those costs. So, there are again no grounds for changing the applicability of the law.

 

(iii) A lender may get nothing if the borrower expires without leaving! behind anything because debt is not transferable from one generation to the next through inheritance. Thus, reduction in value of loans and debts to zero does not represent a new situation, vis-a-vis the original rules dealing with Riba, that merits special treatment.

 

The factual position about the other ground for indexation-putting an end to injustice to lenders and creditors - has been clarified above. It can also be substantiated by noting that when Allah the Almighty directed the creditors to give grace period to debtors in a tight situation (al-Baqarah 2:280), the extension was clearly with reference to the then existing debt obligations, not the inflation-adjusted principal in future. In view of this there are no grounds for exempting loans and debts denominated in paper currency from the law on Riba. But despite the above analysis and conclusions drawn against indexation, there is no Shariah bar on taking remedial steps to neutralize the effect of inflation for loan and other debts created through credit transactions. A general principle in this regard would be that not only the means but also the ends should be Shariah-compatible Keeping this in view, a recommended strategy would be to eliminate unanticipated inflation from the economy through prudent Government policies. and to make anticipated inflation a part of decision-making by all concerned-keeping in view their needs and other interests Thus, for example, instead of there being a loan to a needy person to fulfil his consumption or business need, there may be either a Bai’ Mu’ajjal or a partnership arrangement between the resource-owner and the needy party. While the need of the latter may be fulfilled, concerns of the former may be accommodated through the margin added in the deferred price or automatically adjusted through the realized profits.

 

(oo) Islamic Jurisprudence---

 

----Riba---Prohibition---Application---Principles---Relevant laws of Shariat which prohibit Riba are binding on individual believers as well as :on any collective entity that represents them and their Governments---Said laws also apply to non-Muslims subjects of a Muslim State---Prohibition of Riba applies to both taking and giving Riba which implies that regardless of whom one may be transacting with and where, that person or anyone representing him ought to observe and abide by the prohibition of Riba--Prohibition of Riba essentially requires that, generally speaking, all like-for-like exchanges be, executed on an equal basis in terms of the relevant units of exchange and to pursue an alternative permissible course of action if this does not suit any one.

 

(pp) Islamic Jurisprudence---

 

---- Islamic Banking---Basic principles in which the edifice of Islamic Banking and finance rests, enumerated.

 

The half a century long experience in the field of Islamic banking has brought to the fore a number of basic principles on which the edifice of Islamic banking and finance rests. Without having a clear perception of these fundamental axioms, no meaningful or worthwhile progress can be made in the direction of establishing Islamic banking. Before discussing the alternative modes of financing and investment suggested or put to operation so far, the suggested restructuring of banks and financial institutions and other necessary steps to be taken, it is appropriate that these axioms are enumerated in clear and specific terms:

 

(i) The banks under the Islamic system shall continue to perform their primary functions of receiving money from the savers and making it available lo various enterprises, entrepreneurs, business and businessmen. This exercise will be totally free from any involvement of Ribs, Qimar, Gharar and such other practices which have been prohibited by the Shariah.

 

(ii) Riba is prohibited in all its forms. There is no difference between usury and interest, simple and compound interest, interest on nominal rate and interest on exorbitant rates, All these forms of interest fall under the category of Riba and are prohibited,

 

(iii) All transactions should be in exchange of commodities, goods, services or labour, No purely monetary transaction should be made because such transactions eventually lead to opening the door of Riba.

 

(iv) Loans should be avoided as far as possible in all commercial and business transactions. Financing on the basis of loaning and lending has no place in Islamic Shariah because the enterprise undertaken on the basis of lending and borrowing creates loopholes for usurious practices,

 

(v) Lending and borrowing may be resorted to in exceptional cases to meet any emergency or contingency; but it should always be by a way of Qard-i-Hasan.

 

(vi) Banks under the Islamic system shall be primarily financial intermediaries to finance through equity, participation or partnership. Banks may also work as holding companies and may, where feasible, also directly engage themselves in commercial, industrial agricultural and other enterprises and businesses.

 

(vii) Any transaction or enterprise which is free from the fundamental prohibitions enumerated in the Shariah is Islamically allowed subject to other requirements laid down by the Shariah or the law,

 

(viii)      Banks may render their services and undertake their operations in accordance with any of the forms or alternatives hereinafter enumerated; subject to the fundamental consideration of equity and risk participation:

 

(a)        Mudarabah.

 

(b)        Musharakah.

 

(c)        Leasing.

 

(d)        Murabahah.

 

(e)        Bai Salam.

 

(f) Bai-Muajjal.

 

(g) Istisna (Pre-production sale).

 

(h)        Muzaraah.

 

(i) Musaqah.

 

(j) Agency.

 

(k) Service charges.

 

(l) Qard-i-Hasan.

 

(m)       Buy - Back Agreement (subject to certain conditions).’’

 

(n)        Hire-purchase.

 

(o)        Sale on instalments.

 

(p)        Developmental charges.

 

(q)        Equity participation.

 

(r)        Refit sharing.

 

(s)        Sale and purchase of shares in such companies which have tangible assets.

 

 

(t) Purchase of trade bills.

 

(u) Financing through Auqaf.

 

There might be some duplication and over-lapping in some of these modes mentioned above but these are some of the examples which only show how different scholars and experts tried to develop modes of financing and investment keeping in view the framework of the Shariah. These modes, even if the list is expanded, will not in any way be exhaustive because new modes and techniques will keep on coming into existence. It is always the need of the entrepreneurs and the requirements of the market which give rise to new and novel modes and techniques. The approach of Shariah is not to lay down a set of exhaustive modes or techniques and prohibit the rest. The approach of the Shariah is just the other way round. It prohibits certain practices and permits the rest. These and any other Shariah modes are to be understood and applied in the light of this observation. Alternatives do exist which are being practised in Islamic banks and can easily be developed into viable alternatives. .

 

(ix) In all transactions and dealings which involve any debt obligation the rights and privileges as well as the obligations and liabilities of both the. parties should be specified beforehand and shall not be subjected to any change or modification later without mutual consent. This will apply to the specifications of commodities and manufactured goods in the contract of Salam and Istisna and delivery in the payment of price in Bai-Muajjal.

 

(x) No debt or financial liability can be sold at a discount. The discounting of bills have, therefore, been prohibited.

 

(xi) Transfer of obligation is permissible and shall be regulated under the laws of Kafalah and Hawalah.

 

(xii) Delay in payment of debt or in the delivery of goods should be dealt with under the law of civil obligations, or if need be, under the penal law for which appropriate provisions may be made in the statute book. Any delinquency or neglect of duty or obligation shall be dealt with under the normal law and shall not, in any way, lead to the increase in the financial liability of the concerned party.

 

(xiii) No debt shall be compounded or increased because of any delay or delinquency, however long it might be.

 

(xiv) Only tangible things or legitimate entitlements shall be the subject of contracts of exchange, such as sales, rent, leasing, salam etc.

 

(xv) No one shall be authorized to sell a commodity or title thereto without taking it into his actual or constructive possession. As such forward sales not covered under the rules of Bai Salam shall be prohibited.

 

(xvi) In a Salam sale both, the delivery of the commodity and the payment of the price cannot be deferred. It amounts to the sale of debt for debt which is not allowed.

 

(xvii) Exchanges of gold for gold, silver for silver, money for money e.g. local against foreign, shall be void if it is not hand-to-hand, i.e. on the spot.

 

(xviii) All such agreements and transactions ‘in which two or more exchange contracts are interdependently combined, are void. For example, loan dependent on sale or sale dependant on a loan shall be void.

 

(xix) Benefits or usufruct accruing from the collateral is the right of the owner. Financier has no right to use or enjoy it.

 

(xx) Any uncertainty about the rights and obligations of the parties or the specification of the commodity or its value which may lead to a dispute or litigation invalidates the contract.

 

Under the Shariah no distinction can be made between interest and usury. It has been pointed out by different scholars that the distinction between usury and interest has no academic or scientific basis. It has been established that this so-called distinction is made to justify interest on weak and emotional grounds.

 

One way of winning acceptability for interest was to emphasize the common elements, if any, between profit and interest, rent and interest or hire and interest. This was done to attract legitimacy to interest by confusing it with other categories.. At the same time, the difference in the high and low elites of interest was played up to establish that it is only the high or exorbitant rate which was bad while the fair rate was something fully justified on economic grounds. Once the economic grounds were accepted at the popular level, there was no difficulty in giving them a moral .justification too. Through this device, the evil of interest, Riba or Biyaj was attributed to usury and interest was artistically extricated from the consequences of this blame. This sophistry, as it was, is devoid even of superficial sanction. Even this superficial distinction made centuries ago to tolerate sonic forms of interest, has been rendered meaningless by the emergence of bank interest and credit in a powerful and institutionalized way.

 

Man and Money by Prof. Shaikh Mahmud Ahmad quoted.

 

(qq) Islamic Jurisprudence---

 

----Riba---”Usury” and -interest”---Concept---No distinction between usury and interest---Interest is an exploitative category completely indistinguishable from what was called usury a few centuries back---Matter discussed in detail with its historical background.

 

Man and Money by Prof. Shaikh Mahmud Ahmad quoted.

 

(rr) Islamic Jurisprudence---

 

---- Riba---Prohibition---Monetary exchange and barter exchange---Law of Riba takes care of both the economies---Principles---Islam acknowledges not only the real money, namely gold and silver or anything which may represent them, but also takes into consideration the barter practices and quasi money if it meets the requirements of measurement and storage of value and usability for making deferred payments.

 

(ss) Islamic Jurisprudence---

 

---- Economy in Islam---Paper money---Nature---Fiat money is money for all practical purposes and will have to be taken as a substitute for gold and silver, the real and natural money---Bonds, securities, debentures, treasury bills which have a ready market and are negotiable and easily convertible into real money within a short time, these should be treated like a substitute of the fiat money and should be subject to those very limitations and restrictions which control the fiat and real money---Such other type of the money-of-account which have no ready market and not easily negotiable and convertible into real money, shall continue to be treated like personal instruments ‘and Sukuk---Principles developed to regulate the exchange of copper lulus will not be applicable to the paper currency and fiat money of today---Today’s paper money has practically become almost like natural money equal in terms pf its facility of exchange and credibility to the old silver and golden coins---Such money will, therefore, be subject to all these .injunctions laid down in the Qur’an and the Sunnah which regulated the exchange or transactions of gold and silver---Principles.

 

(tt) Islamic Jurisprudence---

 

----Economic in Islam---Inflation--Devaluation or demonetization---Ghabn Fahish---Meaning---Inflation which reaches the stage of hyper inflation or galloping inflation is to be treated under the principle of Ghabn Fahish and would call 1br steps to be taken for the protection of the rights of the creditor and in such a situation principle in respect of fulus would be applicable---Principle of fidus explained---If demonetization or devaluation takes place by an order or decision of the Government which substantially reduces the value of money that particular date of such change will be taken to determine the value to be paid to the creditor---Where, however, a formal devaluation or demonetization has not taken place it may not be possible to determine with certainty and exactitude as to the date on which the hyperinflation took place and in view of absence of certainty and exactitude the safest way is to fall back on the date on which the transaction had taken place.

 

(uu) Islamic Jurisprudence---

 

---- Riba---Forms of---Common element in all the forms was the stipulated increase demanded by the creditor over and above the principal amount payable in a contract of loan or sale--Various transactions prevalent as Riba during the pre-Islamic days enumerated and discussed.

 

(vv) Islamic Jurisprudence---

 

---- Riba---Punishment---Riba is an offence of. unimaginable proportions and God simply does not recognize any person as a believer unless he gives up Riba.

 

(ww) Islamic Jurisprudence---

 

---- Riba---Prohibition---Exchange should take place only when both the commodities are fully similar and exactly equal to each other in terms of weight and measure and are delivered and received then and there, hand by hand---Any increase or decrease on either side or any deferred payment or delivery will render the transaction as Riba-based and will be disallowed.

 

(xx) Islamic Jurisprudence---

 

---- Riba---Riba al Fadl---Concept and historical’ background stated with examples and illustrations.

 

(yy) Islamic Jurisprudence---

 

---- Riba---Rationale and wisdom in the prohibition of Riba exhaustively explained.

 

(zz) Islamic Jurisprudence---

 

---- Riba---Prohibition---Prohibition of Riba extends to all increases on all forms of loans i.e. those meant for personal and consumption purposes as well as those for commercial and production purposes.

 

(aaa) Islamic Jurisprudence---

 

---- Riba---Prohibition---Element of Zulm to be seen in the wide application of concept of justice in the field of distribution and resources and socioeconomic life in the society---Principles.

 

(bbb) Islamic Jurisprudence---

 

---Riba--and “interest”---Major difference.

 

(ccc) Islamic Jurisprudence------

 

Riba---Prohibition---Economic rationale and moral wisdom of the prohibition of Riba.

 

(ddd) Islamic Jurisprudence---

 

---- Riba---Prohibition---Evils of “interest” that bring into focus the contradiction and conflict between the practice of “interest” and the overall teachings of Islam categorised and exhaustively discussed.

 

(eee) Islamic Jurisprudence---

 

---- Riba---Prohibition---Riba comes into direct conflict with a number of Qur’anic dictates and precepts and as soon as interest is allowed, a number of Qur’anic Injunctions cease to operate---Illustrations.

 

(fff) Islamic ,Jurisprudence---

 

----Riba---Prohibition---Principle of mutual relation between profit and loss, discussed.

 

(ggg) Islamic Jurisprudence---

 

----Riba---Prohibition---Modern Banking System based on credit and loan--Life, dignity, property, honour and even freedom of people, not only on the national level but also at the international level is mortgaged to the creditors whose power and influence is constantly on the rise---Such situation is inconsistent with the teachings of Islam where loan and credit have been considered to be an evil which may be resorted to only in very rare and exceptional cases of extreme necessity---Principles.

 

(hhh) Islamic Jurisprudence---

 

----Riba---Prohibition---Justice---Implications---Humanitarian goals --- Realization --- Utilization of resources provided by God to mankind in such a manner that the universally-cherished humanitarian goals of general need fulfilment, full employment, equitable distribution of income and wealth and economic stability are realized which can only be achieved by providing a humanitarian strategy and an important, though not the only, element of such a strategy is the abolition of interest---Measures.

 

(iii) Islamic Jurisprudence ---

 

----Riba---Prohibition---Zulm---Meaning, scope and contours of Zulm in the context of Riba stated.

 

(jjj) Islamic Jurisprudence---

 

---- Riba---Prohibition---Muqasid al-Shariah.

 

(kkk) Islamic Jurisprudence---

 

---- Administration of justice in Islam --- Implications --- Economy --- Riba -- Elimination---Justice is a comprehensive term in Islam and covers all aspects of human interaction, irrespective of whether it relates to the family, the society, the economy or the polity and irrespective of whether the object is human being, animal, insect or the enviornment---Term “justice” has wide implications, one of the most important of these is that the resources provided by God to mankind should be treated like a trust and must be utilized in such a manner that the well being of all is ensured, irrespective of whether they are rich or poor, high or low, male or female, and Muslim or non-Muslim---Justice also demands that in the field of economics, the use of resources has to be in such an equitable manner . that the universally cherished humanitarian goals of general need fulfilment, optimum growth and full employment, equitable distribution of income and wealth, and economic stability are realized---Strategy to achieve the goals requires, among other things, the injection of a moral dimension into economics in place of the materialist and hedonist orientation of capitalism, abolition of interest is a part of this moral dimension.

 

(lll) Islamic Jurisprudence---

 

---- Riba---Prohibition---Inflation---Inflation set by as a formidable problem in the context of the elimination of Riba, analysed.

 

(mmm) Islamic Jurisprudence---

 

---- Riba---Prohibition---Indexation of loans, advances and various forms of credit---History and techniques of indexation as prevalent in different countries, outlined---Entire thinking and philosophy working behind the concept of indexation is Riba-based economic thought ---Indexation of loans, advances and various forums of credit, therefore, is not permissible in Shariah---Grounds stated.

 

(nnn) Islamic Jurisprudence---

 

----Riba---Prohibition---Indexation---Elimination of Riha---Formulation of new policy or adopting a new method or technique---Principle of Sadd al Dhariah or Foreclosure of the Door to be kept in view---Measures.

 

(ooo) Islamic Jurisprudence---

 

---- Riba---Indexation---Prohibition---Purview of prohibition on indexation covers not only loans and debts but also credit, barter, deferred exchange of currency. demonetization, delayed ,payment - of remuneration after devaluation or revaluation, indemnity and change in the unit of currency at the time of redemption of loan---Guiding illustrations provided.

 

(ppp) Bank---

 

---Functions of a Bank enumerated.

 

(qqq) Islamic .Jurisprudence---

 

----Riba---Prohibition---Modern Banking---Current accounts, fixed deposits, saving accounts, special accounts -and term deposits etc. cannot be considered as Amanat nor Wadiah---Principles---Such accounts cannot be considered to be ‘a Qard (loan) either because while a borrower is allowed to use, to invest or to spend the borrowed money, neither he is under obligation to pay any increase over and above the borrowed money nor a creditor (account holder) is allowed to receive any increase which is disallowed by Qur’an and Sunnah---Bank accounts, therefore, have to be investments within the meaning of Ra’s al-Mal of a Mudarabah or Musharkah, and banking operation will have to be in accordance with the principles that regulate the Mudarabah, Musharkah and other Islamic modes of financing.

 

(rrr) Islamic Jurisprudence--

 

---- Riba---Prohibition---Government bonds and securities in many cases represent a debt, loan or a deferred payment- --Shariah has expressly prohibited the sale or purchase of a debt for another debt---Sale or purchase of a debt in lieu of a deferred payment is not allowable under Shariah being hit by Sunnah---Open market operations involving the sale of debt for debt is also not allowed under Shariah---Such deferred payments should be sold or purchased on the basis of cash payment or, if cash payment is not possible, same may be processed through other Shariah compatible modes in the light of the law of Hawalah.

 

(sss) Islamic Jurisprudence---

 

---- Riba---Prohibition---Bank loans---Provision of loans extended by Banks to possible entrepreneurs and businessmen---Such loans are offered in the form of cash, opening of letters of credit, discounting of instruments etc.--Such loans are, to a very large extent, if not totally exclusive, advanced on the basis of interest whose payment alongwith the repayment of the principal is secured and guaranteed against a collateral; and the interest is charged in accordance with the prevalent rate---Interest charged on all these kinds of loan is to be paid by the borrower irrespective of the fate or the outcome or the duration of the loan and irrespective of the success or failure of enterprise for which the loan was advanced---Interest or increase charged on such loans fall under the category of Riba and is prohibited---Bank interest cannot be equated with profit accruing to a Musharakah---Principles.

 

(ttt) Islamic Jurisprudence---

 

--Riba---Prohibition---Bank loans---Contract of loans (Qard)---Lending transactions undertaken by Bank, are not in the nature of trust, deposit, Musharakah or sale but are in the nature of loan (Qard) pure and simple and have to be subjected to the restrictions placed by the Shariah on lending and borrowing of money and other fungible item---Any increase over and above the amount borrowed is Riba irrespective of the pretext on which the increase is claimed---Principles.

 

The true and legal position of bank loans under Islamic Shariah is that they are contracts of loans (Qard) because all the basic elements of Qard are found in these contracts. It has been held to be a Qard (loan) not only by almost all the contemporary Islamic scholars but also by the up-holders and experts of this system - even in the Western world. The repayment is guaranteed like a Qard, it is supported by a mortgage or a collateral like a Qard, the authority of the taker to use, spend, Invest or dispose it of is unlimited like a Qard; the lender has no concern with the purpose or the objectives for which it is taken. Finally, the success or failure of the enterprise of the purpose for which the loan was taken is absolutely irrelevant in both the cases. In view of all these obvious and significant facts it is not correct to claim that the lending transactions, undertaken by the banks are in the nature of trust, deposit, Musharakah or sale. It is in the nature of loan (Qard) pure and simple and has to be subjected to the restrictions placed by the Shariah on lending and borrowing of money and other fungible items. The most important of these principles is that the loan is to be returned exactly in the same quantity in which it was taken. Any increase over and above the amount borrowed is Riba irrespective of the pretext on which the increase is claimed. This principle is clearly embodied in the Qur’anic verses of Surah al-Baqarah (verse 279). It was understood by the Companions, the Followers and the later jurists to be the cardinal principle governing a loan. There is unanimity of views among all the jurists of Islam that any benefit accruing out of loan is Riba.

 

Surah Al-Baqarah (V: 279) ref.

 

(uuu) Islamic Jurisprudence---

 

--Riba---Prohibition---Banking---Letters of credit of banks---Purpose or the objective of the opening of letters of credit is not objectionable---Such Letter of Credit, if relates to the time and duration of payment and is collected to terms or percentage of the amount paid, it becomes Riba---Measures to bring the system according to Shariah, outlined.

 

The purpose or the objective of the opening of letters of credit is not something objectionable. On the other hand, it is a facility extended by the banks to the traders and the businessmen. The purpose of opening letters of credit is to facilitate quick and easy payment and the transfer of money from one place to another. This facility, being a lawful service, has to be properly compensated in terms of Shariah. If the payment of compensation or remuneration is linked with the volume of service, the Shariah has no objection.. In this case it will be a kind of service charge which has’ been already considered and approved by almost all the contemporary scholars and learned bodies. In this case it will be necessary that the rate of service charge is determined keeping in view the magnitude of the service, quickness of the payment and the level of credibility and performance of the bank concerned. Since it is related with the time or duration of payment and is collected in terms of percentage of the amount paid, it becomes Riba. There is no objection if the banks require collateral or hypothication of certain assets or securities to ensure timely repayment. provided the guarantor does not charge any interest and the mortgage is controlled by the law of Riba. The payment made by the bank 2o an importer or a purchaser under a letter of credit is again in the nature of Qard because it does not fall in any other legitimate category of transaction As such it is to be regulated under the law of Riba. It seems worthwhile if the State Bank of Pakistan determines certain fixed rates of service charge to he paid by the importer/purchaser to the bank as a compensation to the service rendered by the Bank. There ma) he different rates for different kinds of transactions provided these rates do not change with any delay in the payment and are not calculated on the basis of the amount of money involved. There may be flat rates for various kinds of transactions whenever letters of credit are needed to be opened.

 

(vvv) Islamic Jurisprudence---

 

----Riba---Prohibition---Banking---Discounting of negotiable instrument by State Bank of Pakistan has to be tackled in the light of Shariah --- Discounting of negotiable instrument is not tale but is the sale of debt for higher price and deferred payment is also involved in the sale of money for money and, therefore, is to be construed as a loan and has to be regulated as a loan-Increase ultimately earned by the Bank through the operation of discounting the instrument, thus, would fall under the category of Riba.

 

(www) Islamic Jurisprudence---

 

----Riba---Prohibition---Banking-activities undertaken by the Banks on payment of such fee, remuneration or service charges as may be fixed by the State Bank or determined by the concerned Bank under the general guidelines issued by the State Bank of Pakistan, not related to the time frame of any payment or repayment and calculated exclusively on the basis of volume of labour involved and the nature of service rendered, are allowed--Principles.

 

(xxx) Islamic Jurisprudence---

 

----Riba-- Prohibition- Analysis of interest-based banking operations in the perspective of Injunctions of Islam--- Development of Riba-free alternative modes conforming with the requirements of Shariah, suggested.

 

(yyy) Islamic Jurisprudence---

 

----Riba---Prohibition---Borrowing by the Government---Steps to be taken for interest-free economy---Summary of position taken by representative of the State Bank, the apprehension expressed, the difficulties counted, the explanation offered and the proposals mooted by the scholars, economists and bankers---Measure to be adopted outlined.

 

Federation of Pakistan through the Secretary, Ministry of Finance Government of Pakistan, Islamabad and others v. United Sugar Mill Limited, Karachi PLD 1977 SC 397; Wasi Ahmed Rizvi v. Federation of Pakistan PLD 1982 SC 20; Hakim Khan and 3 others v. Government of Pakistan through Secretary Interior and others PLD 1992 SC 595: The State v. Syed Qaim Ali Shah 1992 SCMR 2192; Zaheeruddin and others v. The Stag: and others 1993 SCMR 1718; Mushtaq Ahmad Mohal and others v. The Honourable Lahore High Court, Lahore and others 1997 SCMR 1043; Dr. Mahmood-ur-Rehman Faisal v. Government of Pakistan through Secretary, Ministry of Justice, Law and Parliamentary Affairs, Islamabad PLD 1994 SC 607; Al-Qur’an Majid: Verses 4:160-161; Surah al-Baqarah, Verses 6:57; 7:54; 278-279; Surh Al-i-Imran 111:130; 2:188; 4:29; 4:161; 9:34; 30:39; 4:161; Tafsir and Hadith by Qatadah ibn Di’amah; Islam Ke Ma’ashi Nazariyyea by Dr. Yusufuddin, VoI.II, Karachi, 1984; Unlawful Gain and Legitimate Profit in Islamic Law by Dr. Nabil A. Saleh; Flam-alMawaqqrin, VoI.II, p.154ff;”COMMERCIAL INTEREST KI FIKHI HAISIAT” by Maulana Muhammad Jaafar Shah and Syed Yaqoob Shah; English Arabic Dictionary by Stiengass, Lahore, 1’979; A Dictionary of Islam by Thomas Patrick Hughes, Lahore, 1964, p.544; Exold, xxii, 25, .Lev. XXV. 36 (Usuri); Tafsir Tabari by Imam Tabari, Vo1.III, p.64; Kitab al-Nihayah fi-Gharib alHadith wa’-Athor by Ibn al-Athir, Cairo 1322 AH, VOIAI, p.66; Ahkam alQur,’an by Ibn ‘Arabi, Cairo, 1957, Vol.I, p.242; AI-Haidayah by Allama Burhanuddin al-Maghinani; Book XIV on Sale, Chap. VIII on Riba; Hidayah (English Translation by Hamilton), Lahore, p.289; Tafsir al-Kabir by Imam Fakhar Al-Din Al-Razi; Ahkam al-Qur’an by Allama Jassas,. Istanbul, 1335, AH, Vo1.I, p.469; AIR 1944 Mad.243; Halsbury’s Laws of Fngland. 4th Edn., vol.32, para.l0o: Futuha al-Buldan by al-Baladhuri, Cairo, 1932, p.67; al-Bahr al-Muhit by Abu al-Abdulasi Vol.Ii, p.335; Commentary of the Qur’an by Tabari, Vol.IV, p.55; Futuh al-Buldan by al. Baladhuri, Leiden, p.56, Tayef; Kitab al-Amwal by Abu Ubaid al-Qasim ibn Sallam, paras.5.06-507; Kitab al-Amwal by Abu Ubaid, para.502; Book Islam Ke Muashi Nazariyyea, Karachi, 1984, pp.44--50; Tijarati Sud: Tarikhi Awr Fiqhi Nuqtah-i-Nazar Se, Aligarh, 1967, pp. 1-5 and Shorter Encyclopaedia of Islam, 1953, p:471 ref.

 

Per Justice Wajihuddin Ahmed, Member----

 

(zzz) Islamic Jurisprudence---

 

---- Riba---Concept---Brief historical survey of the position; analysis of concept of Riba at the etymological and epistemological levels; identification of foundations of the institution of Riba in Islam demonstrated through the relevant texts and Ahadith; connotations. and implications of Riba and to what extent and in what manner or form Riba interacts with modern day economies; what. foreseeable consequences would follow if the command as to Riba is duly enforced and what should be the mode and method of necessary translation of the command into actual practice---Islam does not permit Riba in any shape or form, whether amongst Muslims or between Muslims and non-Muslims (other than harbis) irrespective of the question where any of such contracting parties is domiciled or otherwise located--Prohibition applies equally to non-Muslims located within the bounds of a Muslim State---.Commandments as to Riba, inclusive of the present day practices of interest and usury, being all pervasive, transcend individuals and envelope not only groups of men or their institutions but even geographical entities such as State edifices---Concept of Riba itself has no nexus whatever either with productive or non-productive loans or the soft or hard terms upon which Riba is generated incidental to such loans---All interest-bearing loans or advances, whether between depositors and Banks, financial or other institutions or between any other category of borrowers and lenders, including Governments or their agencies, whether sovereign or otherwise, would be hit by the Islamic Injunctions concerning Riba and, as from the efflux of the time frame(s) prescribed no lender would be entitled to claim anything more than that loaned nor any borrower be liable to pay anything in excess of that borrowed--- Interest which has already accrued, accounted/paid for or otherwise standing appropriated in the context of Ribawi transactions such as postulated in the Holy Qur’an and Sunnah, would remain a matter between the offenders and their Greater---No disruption or’ irreversible chaos would follow upon a switch-over from a Ribawi economy to an Islamic economic order ---Riba-free economy may be a non-starter if the same is introduced in a continually selfish, dishonest and corrupt socio-economic milieu, such as that which prevails---Possible pre-emptive measures detailed.

 

His Lordship, after expressing general agreement with the findings and conclusions of Mr. Justice Khalil-ur-Rehrnan Khan and .qtr. Justice Maulana .Muhammad Taqi Usmani together with some explicit or implicit reservations, made the following express mention of some matters:--

 

“(i) With respect, the finding, that Riba al-Fadl was not envisioned in the Qur’an and introduced, for the first time, by the Prophet of Islam appears, both factually and historically, to be ill-founded. As dilated upon above, the concept had, broadly, found a place in the Old Testament and besides, Arabs of the time physically indulged in Riba al-Fadl, as the quoted Ahadith of Bilal (r.a.a.),. and the Prophet’s (s.a.a.w.s.) representative at Khyber would tend to demonstrate. Thus, the Qur’an cannot be assumed to have ignored either the previous revelations in the Scripture or the facts on the ground. Prophet (s.a.a.w.s.), nonetheless, has been fully credited with articulating and perfecting the institution of Riba al-Fadl. Even so. the view-, of my-learned brothers may not make any particular difference because, after the Qur’an, Sunnah is the most important source of Muslim Law and the Prophet (s.a_a.w.s.) never disc rinunated in the import or effect of either form of Riba. Thus, whatever be the rationale, Riba al-Fadl would remain as much prohibited for Muslims as Riba al-Nasiah.

 

(ii) In my humble opinion, Government, and particularly an Islamic Government, cannot be differentiated in the way of so-called “voluntary” additions and all such increases, upon the touchstone of Qur’an and Sunnah constitute nothing but Ribu. Furthermore, in so far as law-making touching the relevant Consolidated Funds and Public Accounts are concerned, two aspects need be under-scored:---

 

(a) In the absence of due fulfilinent of the Constitutional requirement w provide necessary framework on the point, all debt raising loses legal sanctity.

 

(b) After our declarations qua Riba, no law can now be framed, regulating Riba-infested borrowing by Government: Borrowing has now to be Riba-free and only if absolutely necessary, for Islam does not sanction any other form of borrowing.

 

(iii) Evidently, the objective behind some of the affirmative observations, regarding the “mark-up” system, is merely to sanction trading, upon duly and fully complying with the concepts of Bai .Muajjal and Marabaha sale, each observing the caution, administered by the Holy Prophet (s.a.a.w.s.) of physical delivery of the goods sold.

 

(iv) As regards the Shariah compliant modes and instruments of finance let it be noted that such already stand, very largely, developed. No unnecessary time should, therefore, be lost in that direction nor banks and other financial institutions should, in any manner, delay the due implementation of a Riba-free and profit and loss-oriented Islamic system.

 

(v) I have reservations about the time schedule, adopted in the Order of the Court. Besides, there are some lacunas in it. In my humble opinion comparatively smaller periods would have been sufficient. Any way, consensus, in essentials, is a prerequisite in such delicate matters and such is reflected in .the Order of the Court. Having said that, there should be no misgivings in any quarters that this or the Federal Shariat Court would brook any unnecessary delay during the implementation phase of the judgment of this Court. Thus, time schedule or not, no one, be it the Government itself, would any longer be countenanced to conduct any further avoidable Ribawi dealings, here or with the outside world. Transgressions, if any, can be appropriately brought to the notice of the Court.

 

(vi) 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 1 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.”

 

Arabic-English Lexicon by Lanes; ‘Mufiadat ul-Qur’an’ by Imam Raghib al-Isfehani;-Taj-ul-Aroos Min’Jawahar-ul-Qamoos by Md. Murtaza al-Zubaydi; Arabic English Dictionary by Stiengass; A dictionary of Islam from Thomas Patrick Hughes; Tafseer-e-Tabri by Imam Tabri; ‘Kitab alNihayah fi-Gharib al-Hadith wa’1-Athar’ by Ibn al-Athir; ‘Ahkam al Qur’an’ by Ibn ‘Arabi’s Tafsir of Kabir by Imam Fakhrud-Din Al-Razi; ‘Ahkam alQur’an by AlJassas; al-Fiqh ala al-Madhahib al-Arba’ah; II:265; XXIII:50: II: 276; XXX:39; XIII:17; XXVI:18; XVII:24; XII:5; XVI:92; LXIX:10; al-Room XXX:39; Al-Qur’an Majid: al-Nisaa IV:160--162; Aal-e-Imran III: 48--50; Aal-e-Imran 111: 130--136; al-Baqarah II: 219, 261, 275--277; 279-281; Luke 6: 32-36; Abu Daud; XXXIX:53; Muslim, 2966; 2969, 2971; Tirrttizee, 1161; Bukhari, 2145; AI-Musanif Abdur Razzaq, Vo1.8, p.26, Hadees. 14161; Kitab al Buyun; Exodus 22: 25-27; Leviticus 25: 35-38; Deuteronomy 23: 19-20; Shorter Oxford Dictionary, VOl.II, p.2326, ‘‘3rd Edn.; Messiah New Testament, Luke 6:35; A1 Burhan by Bahrani; Shorter Oxford Dictionary, Vol.l, 3rd Edn., p.1026; Encyclopaedia Americana, 1970; 39:53; Man and Money, published by the Institute of Islamic Culture, Lahore; S.IX:34-35;,S.XXX:39; S.XXXIV: 39; S.LVIL 18; S.LXXVI: 8-9; S.XC:, 13--17; S.XCIII: 6--11; II: 262--265; S.II: 274; S.11: 277; S.XXIII: 1--4; S. CVIL 1-7; S.Il: 245; S. LXIV: 17; S. lI: 177; S.III: 14; S.LIX: 7; S:XVI: 95-96; Bidayat al-Mujtahid, Vo1.2, p.163; Al-Tafseerul Kabir Razi, Vo1.7, p.91; Matba Bahria, 1938 and Ahkamul Qur’an by Imam Abu Bakar Al Jassas ref.

 

Per Justice Maulana Muhammad Taqi Usmani. Member---

 

(aaaa) Islamic Jurisprudence---

 

----Riba---Objective study of the Qur’anic verses dealing with Riba and their historical analysis tracing the time of prohibition of Riba.

 

AI-Qur’an Majid: Surah Al-Ruin (30 : 39); Surah Al-Nisa (4:161); Surah Al-Imran (3:13.0) and Surah AI-Baqarah, Verses 275--281 quoted.

 

Tafsir Jami’-al-Bayan, by Ibn Jarir, Dar-ul-Fikt, Beirut, 1984, V.21, pp.46--48; Zad-ul-Masir by Iban-al-Jauzi, Al-Maktab-al-Islami, Beirut, 1964,, V.6, p.304; Fath-ul-Bari by Ibn Hajar, Makkah, 1981, V. 8, p.205; Al-Tafsir AI-Kabir by AI-Razi., IIIrd Edn.. Iran, V.9, p.2; AI-Sunan by Abu Dawood, Hadith No.2537, V.3, p.20; Al-Muharrar-al-Wajiz by Ibn Atiyyah, Doha, 1977, V.2, p.489; Jami-al-Bayan by Ibn Jarir, Op Cit., V.3, p.107, Alwasit by AI-Wahidi, V.1, p.397; Ibn Atiyyah, Op. Cit., V.2, p. 489; Asbab-al-Nuzool by AI~Wahidi, Riyadh, 1984, p.87; Sahih Al-Bukhari Kitab-al-Tafseer, Chap. 53, Hadith No.4544 and Fathul Bari by Ibn Hajar, V.8, p.205 ref.

 

 (bbbb) Islamic Jurisprudence---

 

---- Riba---Meaning---Detailed account of Riba of Jahiliya---Riba of Jahiliya is a loan given for a stipulated period against increase on the principal payable by. the loanee.

 

Al-Qur’an Majid: Surah Al-Nisa; Surah Al-Imran; Surah AIBaqarah; Tafseer Al-Lubaab by Ibn Aadil AI-Dimashaqi, Vo1.4, p.448; AlTafseer AI-Kabeer by al-Raazi, Vol. 7, p.91, published in Tehran; Tafseer Ibn Jarir, Vol. 3, p.101; fiafseer by Ibn Jarir, Op Cit, Vol. 3, p.101; Al Suyuti, Lubab-al-Nuqool p.20; Tafseer ibn Abi Hatim, Vol. 2, p.454, Makkah, 1997 and Albahr-al=Muheet by Abu Hayan, Vo1.2, p.335 ref.

 

Al-Qur’an Majid: Deuteronomy 23:19; Psalms 15:1,2, 5; Proverbs 28:8; Nehemiah 5:7; Ezekiel 18:8,9 and Ezekiel 22:12 quoted.

 

(cccc) Islamic Jurisprudence---

 

---- Riba---Description of Riba al-Fadl with reference to the statements of Hadrat Umar, Imams and eminent Muslim Scholars on the subject.

 

Ahkamul Qur’an by Aljassas V. I, p.469; Holy Qur’an : Hand of Allah, 3:73, 5:63, 48:10; 2:223; Sahih Muslim, Karachi, V. p.25, Al- Darul-Kutub-al-Ilmiyyah by Ibn Qudamah Mughni, Beirut, V.4. pp.124--127; Albukhari, Hadith No.5266; Almusnnaf by Abdurrazzaq, Beirut, V.8, p.26; Ibn Majah, Book 12, Chap.58, Hadith No.2276, Riyadh 1999 and Tahdhibal-Tahdhib by Ibn Hajar, V.4, pp.64-65 ref.

 

(dddd) Islamic Jurisprudence---

 

---- Riba---Riba Al-Qur’an and Riba-AI-Nasiah---Nature and their prohibition.

 

(eeee) Islamic Jurisprudence---

 

----Riba---Productive and consumption loan---Nature of Qur’anic prohibitions ---Validity of such transaction of loan could not be based on the financial status of a party---Permissibility of interest can neither be based on the financial position of the debtor, nor on the purpose for which money is borrowed---Distinction between consumption loans and productive loans in this respect is contrary to the well-established principles---Banking and productive loans in the age of antiquity discussed.

 

Credit in Medieval Trade by Prof. M.M. Postan Combridge, 1944; Essays in Economic History, edited by E.M. Carus Wilson Edward Arnold, London, 1966, Vol.l, pp.61--87; Encyclopaedia Britannica, Banks, History of, V.3, p.67,’1950 Edn.; Simon and Schuster, New York, 1966, Vo1.2, p.274, Chap. XII by Will Durant; Fall of Roman Empire, Chap.44, The Institutes IV, Vo1.2, p.90 by Gibbon; Al-Balazuri, Fatooh-al-Buldan, pp.453-354, Beirut, 1983 and Murooj-al-Zahab by Al-Masoodi, Vol.2, p.333; Al-Aghani by Abdulfaraj, VOl.II, p.52; The Dinars Polished in the Land of Ceazer; ; Luwais Shikhu, Christianity .and its Culture among the Jahili Arabs, V.ol, 2, p. 387; Surah Al-Ikhlas Alnajoom Alzahirah 1:176; Sahih-al-Bukhari, Iitab-al-Manaqib, Book’ 63, Chap.19, Hadith No.3814 and Al-Baihaqi, Al-Sunan-al-Kubra, Vo1.5, p.349 ref.

 

(ffff) Islamic Jurisprudence ---

 

----Riba---Commercial loan---Prohibition of Riba is not only restricted to the consumption loans but extends to the commercial loans also.

 

AI-Qur’an, Surah Yousuf, 12:19,20; Suran Al-Imran (3:130); The Bible: Genesis, 37:25; Almufassal fi Tarikh-al-Arab Qabal-al-Islam by Dr. Jawad Ali; Alzubaidi, Taj-al-Arus 6:44; Nihayah-al-Arab 17:81, Imta’-al- asma’, V.1, p.75, Cairo, 1981; Iittta-al-A5ma, Op. Cit.; Al-Zurqani, Sharhal-Mawahib, V.1, :p.366; Al-Mufassal fi Tarikh-al-Arab, V.7, p.290; AlTabari, Jami-al-Bayan, V.3, p.107; Al-Abari, Jami-al-Bayan, V.21, p.47; Op. Cit.; Al-Haithami; Majma’-al-Zawaid V.4, p.133; Al-Bukhati, Book 39, Hadith No.2291; Fath-al-Bari, V.4, p.471; Trade through Sea, Book 34, Chap. 10, Hadith No.2063 by Imam Bukhari; AI-Suhaili, Al-Raud-al-Unuf, V.2, p.62, Multan, 1977, cf. Ibn Kathir: Al-Seerah al-Nabawiyyah, V.2, p.383, Tarikh-ul-Umam by Al-Tabari, V.2, p.137; Kitab-al-Jihad by Sahib­al-Bukhari, Book 7, Chap. 13, Hadith No.3129 and its Commentrary Fath-alBari by Haifz Ibn Hahjar-al-Asqualani, V.6, p.162; AI-Tabqat al-Kubra by Ibn Saad, Beirut, V.3, p.278; Tarikh-al-Umam by AI-Tabari, V.3, p.87, Events of the year 23 A.H.; Al-Baihaqi, AI-Sunan al-Kubra, V.10, p.184; Al-Tabaqaat by Ibn Saad„ V.3, p.163; Kitab-al-Manaqib by Sahib-alBukhari, Book 63, Chap.19. Hadith No.3814 and AI-Tabaqaat al-Kubra by Ibn Saad, V.3, p.358 ref.

 

(gggg) Islamic Jurisprudence---

 

---- Riba---Prohibition---Prohibition of Riba is not confined to an excessive rate of interest----Any amount, however little, stipulated in addition to the principal in a transaction of loan, is Riba, hence prohibited----Principles.

 

Al-Qur’an Majid: Surah AI-Imran (3:130); Al-Muwatta, Bab-alQirad by Imam Malik; Surah Al-Baraqah 2:41; Al-Noor 24:33; Tafseer Ibn Abi Hatim, V.2, p.551, Hadith No.2925; Tafseer Ibn Kathir, V.1, p.331; Al-Shaukani, Nail-al-Awtar V.5, p.198; Muwatta Imam Maalik, p.613 by Noor Muhammad, Karachi; Op. Cit.; Albaihaqi, Al-Sunan Al-Kubra, V.5, p.350; Al-Baihaqi, Al-Sunan al-Kubra, V.5, p.350; Al-Bahaiqi A1-Sunan alKubra, V.5, p.350; AI-Syuti, Al-Jame’al Saghir, V.2, p.94; AI-Munawi, Faizulqadir, V.5, p.28; Al-Azizi, AI-Siraj al-Munir, V.4, p.20, Madinah; Ibn Hajar, Al-Talkhis-al-Habir V.3, p.996, Haidth No.1227, Makkah 1997; Al-Sunan al-Kubra V.5, p.350 and AI-Baihaqi, Ma’rifah-al-Sunan wa al Athar, V.8, p.169 ref.

 

(hhhh) Islamic Jurisprudence---

 

---- Interpretation of Holy Qur’an---Principles.

 

(iiii) Islamic Jurisprudence---

 

---- Riba---Prohibition---Gift by debtor to creditor ---Permissibility--Conditions---If the debtor and creditor ‘Were on friendly terms with each other and it was their habit that one of them used to give a gift to the other, then this type of gift can be acceptable even after the recipient has advanced loan to the giver---If, however, there were no such terms between, the creditor and the debtor before the loan transaction, then the creditor should not accept same, because that will have a smell of Riba.

 

(jjjj) Islamic Jurisprudence---

 

---- Riba---Ribd-al-Fadl and Bank loans ---Ahadith on Riba Al fadl are meant to cover the transactions of sale only and have nothing to do with the transactions of loan which are covered by the rules of Riba Al-Qur’an or Riba Aljahiliya where it clearly mentioned that creditor in a transaction of loan is entitled to claim only his principial amount, and if he does so, it has never been prohibited ---Transaction of interest-bearing loan fixing an amount as interest, right from the beginning of the transaction, is not covered by the prohibition of Riba Alfadl but by the Riba Al-Qur’an--Banking interest being not a transaction-of Riba Alfadl but that of a Riba Al Qur’an, was, therefore, Haram---Principles.

 

Sahih-al-Bukhari, Book No.34, Chap.78, Hadith No.2177; Aljassas: Akham-ul-Quran, Lahore 1980 V.1, pp.482, 483 and Al-Sunan by Ibn Majah, V.3, p.154, Hadith No.2431, Beirut, 1996 ref.

 

(kkkk) Constitution of Pakistan (1973)---

 

----Art. 203-B---”Muslim Personal Law”---Law---Definition--=Statute laws, even though applicable only to Muslims 111 general, do not fall under the term “Muslim Personal Law” for the purpose of Art. 203-B of the Constitution.

 

Dr. Mahmoodurrahman Faisal v. The Government of Pakistan PLD 1994 SC 607 fol.

 

(llll) Islamic Jurisprudence---

 

----Riba---Prohibition---Basic cause of prohibitions ---lllat---Basic difference between Mat and Hikmat---Zulm (injustice)---Basic Mat of the prohibition is Zulm---Holy Qur’an has not left it to the assessment of the parties to decide what is injustice (Zulm) and what is not ---Qur’an has precisely decided. what is injustice (Zulm) for each one of the two parties in a transaction of loan--Notion that the permissibility of different transactions of interest should be judged on the basis of human assessment, would tantamount to defeating the very purpose of the revelation and is not, therefore, acceptable.

 

Al-Qur’an Majid: 5:91 ref.

 

(mmmm) Islamic Jurisprudence---

 

---- Riba---Prohibitions---Rationale--Logic of prohibition on theoratical ground; evil effects of interest on production and evil effects of interest on distribution examined with focus on nature of money and nature of loan transactions---Interest-based loans have a persistent tendency in favour of rich and against the interests of common people---Such loan carries adverse effects on production and allocation of resources as well as on distribution of wealth---Appalling situation faced by the whole world is the logical outcome of giving the interest-based financial system an unbridled ‘power to reign the economy---Commercial interest is not an innocent transaction, in fact the universal horrors brought about by the commercial interest are far greater than the individual usurious loans that used to affect only some individuals.

 

Ihya-al-Uloom, V.4, pp.88-89, Cairo, 1939; Ludwig Von Mises The Theory of Money and Credit Liberty Classics Indicanapolis, 1980, p.95; Op. Cit, P.95; Op Cit, p.102; The Report of Economic Crisis Committee, Southampton Chamber of Commerce, 1933, Part 3, (iii) para.2; John Gray, False Dawn; The Delusions of Capitalism, Grunte Books, London 1998, p.62; Bank of International Settlements, Annual Report, 1995; Michael Albert, Capitalism - Original Capitalism, London Whurr Publisher, 1993, p.188; Richard Thomson: Apocalypse Roulette: The Lethal World of Derivatives, Macmillon, London 1998, p.4; James Robertson, Transforming Economic Life: A Millenial Challenge by Green Books Devon, 1998; Iha-a-ul-Uloom by Alghazzali; Sahih-al-Bukhari, Book No.39, Chap,3, Hadith No.2295; OECD Structural Indicators, 1996, Bank of Enudand and Council for Mortgage Lenders Statistics, as quoted by Michael Rowbotham in The Grip of Death, Jon Carpenter Publishing, England, 1998, p.65; Peter Warburton Debt and Delusion by Allen Lane, London 1999, p.261; Thurow, Lester, Zero-Sum Society by New York: Basic Books, 1980, p.175; Poverty, Inequality and Development by Bigsten, Arne, in Norman Gemmel Surveys in Development Economics Oxford by Blackwell, 1987, p.156; Morgan Guarantee Trust Company of New York, World Financial Markets, January, 1987, p.7 as quoted by Dr. llmar Chapra; Statistical Bulletin of State Bank of Pakistan, September. 1999, p.47, Annexure ‘B’; Future Wealth: A New Economics for the 21st Century by James Robertson, Cassell Publications, London, 1990, pp. 130, 131; Transformation of Economic Life: A Millenial Challenge by James Robertson, Green Books, Devon, 1998, pp.51-54; The Grip of Death, A Study of Modern Money by Michael Rowbotham, Jon Carpenter, England, 1998, Chaps. 13 to 15; The Money Masters by Patric S.J. Carmack and Bill Still, Royalty , Production Company, USA, 1998; Pawns in the Game by William Guy Carr, Fla USA Chap. 6; The New World Order by Robert O’Priscoll and Margarita Ivanoff-Dubrowsky, Canada, 1993; Bank of England Releases, 1995,, 1997 as quoted by Michael Rowbotham in ‘The Grip of Death - A Study of Modern Money’, Jolt Carpenter, England, 1998, p.131; The Money Masters, How International Bankers Gained Control of America by . Patriot S.J. Carmack and Bill Still, Royalty Production Company, 1998, pp:78-79; The Grip of Death: A Study of Modern Money by Michael Rowbotham, Op Cit, pp.27, 2,8; The Challenge of the 21st Century by Prof. Khrushid Ahmad, Islamic Finance and Banking; Time, November, 3, 1997, Newsweek - January 26, 1998 and September 14, 1998 and Transforming Economic Life: A Millenial Challenge by James Robertson, Grean Books Devon, 1998, pp.51--54 ref.

 

(nnnn) Islamic Jurisprudence-

 

---- Riba ---Prohibitions---Interest and indexation ---Interest and indexation though neither Justify interest nor provides a substitute for the same in the Banking transactions, however, question of interest and indexation was left open for further study and research by the Court.

 

(oooo) Islamic Jurisprudence---

 

Riba---Prohibitions---Mark-up system-.-Permissibility---All the objections against interest are very much applicable to the mark-up system as in vogue in Pakistan and said system is not immune from being declared as repugnant to the Holy Qur’an and Sunnah.

 

(pppp) Islamic Jurisprudence-

 

Riba---Qarz and Qiraz---Term “Qiraz” is used in Islamic Fiqh as a synonym to Mudarabah and in an agreement of Mudarabah no rate of profit attributable to the investment can be allocated for the financier---Any such arrangement is impermissible.

 

(qqqq) Islamic Jurisprudence---

 

---Riba-Prohibitions---Islamic Financial System---Application of doctrine of necessity---Scope---Domestic transactions and foreign transactions--Before deciding an issue on the basis of necessity one has to be sure that the necessity is real and not exaggerated by imaginery apprehensions and that necessity cannot be met with by any other means than committing an impermissible act---Held, there was a great deal of exaggeration in the apprehension that the elimination of interest will lead the economy to collapse---Doctrine of necessity, therefore, cannot be applied to protect the present interest-based system for ever or for an indefinite period---Said doctrines, however, can be availed of for allowing a reasonable time to the Government necessarily required for the switch-over to an interest-free Islamic financial system.

 

(rrrr) Islamic Jurisprudence---

 

--Financing in Islam---Profit and loss sharing---Basic and foremost characteristic of Islamic financing is, that instead of a fixed rate of interest, it is based oil profit and loss sharing.

 

Transforming Economic Life A Millenial Challenge by James Robertson, Green Book, Devon, 1998; Honest Motley: A Challenge to Banking by John Tomlinson, Helix 1993. pp. l l5-I 18: The Grip of Death: A Study of Modern Money by Jon Carpenter, 1998 by Michael Rowbotham. p.330: Islamic Finance: A Partnership for Growth by Philip Moore, Euromoney Publishers, 1997, p.73: Theoretical Studio, in Islamic Banking and finance by Mohsin H. Khan and Abbas Mirakhor. Houston 1987, p. 168 and Debt and Delusion: Central Bank Follies That Threaten Economic Disaster by Peter Warburton, Allen Lane, 1999, pp.224-225 ref.

 

(ssss) Islamic Jurisprudence---

 

---- Financing in Islam ---Musharakah financing---Some objections---Measures to be adopted.

 

(tttt) Islamic Jurisprudence---

 

---Financing in Islam ---Murabahah transaction---Islamic Banking System is not restricted to profit and loss sharing ---Musharakah is though the ideal mode of financing that fully conforms, not only to the principles of Islamic jurisprudence. but also to the basic philosophy of an Islamic economy, yet there is a variety of instruments that may be used on the assets side of the Bank, like Murabahah, leasing, Salam, Istisna etc.---Some of these models :ire less risky and may be adopted where Musharakah has abnormal risks or is not applicable to a particular transaction---Principles illustrated.

 

(uuuu) Islamic Jurisprudence ---

 

----Riba---Financing in Islam---Domestic loan obtained by Government--Suggestions for elimination of interest---All the borrowings of the Government from domestic sources should be designed on the basis of project-related financing, which will, in addition to being compatible with Shariah, help curbing the corruption arid misappropriation of borrowed Funds---Interest cannot be taken as a necessity to continue for an indefinite period, however, area of domestic loan may justify some more time for transformation than the private banking transactions will require.

 

(vvvv) Islamic Jurisprudence-

 

---- Financing in Islam---Foreign loans obtained by Government--Elimination of interest---Doctrine of necessity, application of---Scope--Admitted difficulties in resolving the problem of foreign liabilities cannot be taken as an excuse for exempting-them from the prohibition for good or for an indefinite period on the basis of necessity---Doctrine of necessity, therefore, will be applicable to a limited extent as it cannot be denied that it will take more time than the domestic transactions---Principles.

 

The Debt Boomerang, How the Third World Harms us All by Susan George, Pluto Press, London, 1992; Faith and Credit, The World Bank’s Secular Empire by Susan George, Fabrizio Sabelli, Penguin, 1998, p.141: When Corporations Rule the Earth by David Korten, 1993 as quoted by Michael Rowbtham: The Grip of Death by Michael Rowbotham, pp. 135, 137: The Debt Trap by Cheryl Payer, Monthly Review Press (1974) quoted by Rowbotham, Op Cit, p.137; No. IFC/P-887, dated December 22, 1987, as quoted by the Report of the Prime Minister’s Committee on Self-Reliance, headed by Prof. Khurshid Ahmad, Islamabad, 1991 ref.

 

(wwww) Islamic Jurisprudence---

 

---- Riba---Concept---Any additional amount over the principal in a contract of loan or debt is the Riba prohibited by the Holy Qur’an termed as Riba-al. Qur’an.

 

(xxxx) Islamic Jurisprudence---

 

---- Riba---Riba-al-Sunnah---Categories enumerated.

 

The Holy Prophet (p.b.u.h.) has also termed the following transactions as Riba:

 

(i) A transaction of money for money of the same denomination where the quantity on both sides is not equal, either in a spot transaction based on deferred payment. ,

 

(ii) A barter transaction between two weighable or measurable commodities of the same kind, where the quantity on both sides is not equal, or where the delivery from any one side is deferred.

 

(iii) A barter transaction between two different weighable or measurable commodities where delivery from one side  deferred.

 

These three categories are termed t~ the Islamic Jurisprudence as Riba-al-Sunnah because their prohibition is established by the Sunnah of the Holy Prophet (p.b.u.h.). Alongwith the Riba-al-Qur’an, these are four types of transactions termed as ‘Riba’ in the literature of Islamic Fiqh based on the Holy Qur’an and Sunnah.

 

Out of these four transactions, the last two ones. mentioned above -is (ii) and (iii) have not much relevance to the context of modern business, the barter business being a rare phenomenon in the modern trade. However, the Riba-al-Qur’an, and transaction of money mentioned above as (1) are more relevant to modern business.

 

(yyyy) Islamic Jurisprudence---

 

---- Riba---Scope---No difference exists between different types of loans so far as the prohibition of Riba is concerned---Fact that additional amount stipulated over the principal loan or debt is small or large does not make any difference for the purpose of prohibition of Riba---All the prevailing forms of interest, either in the banking transactions or in private transactions fall within the definition of “Riba”---Any interest stipulated in the Government borrowings, acquired from domestic or foreign sources, is Riba and clearly prohibited by the Holy Qur’an---Financial system, based on interest being against the Injunctions of Islam as laid down by the Holy Qur’an and Sunnah, has to be subjected to radical changes to bring the same in conformity with Shariat---Modes of financing as developed by Islamic Scholars. Economists and Bankers can serve as a better alternative to interest.

 

There is no difference between different types of loans so far as the prohibition of Riba is concerned. It also does not make any difference whether the additional amount stipulated over the principal loan or debt is small or large, Therefore all the prevailing forms of interest either in the banking transactions or in private transactions do fall within the definition of ‘Riba’. Similarly, any interest stipulated in the Government borrowings, acquired from domestic or foreign sources is Riba and clearly prohibited by the Holy Qur’an.

 

The present financial system based on interest, is against the Injunctions of Islam as laid down by the Holy Qur’an and Sunnah, and in order to bring it in conformity with Shari’ah, it has to be subjected to radical changes.

 

A variety of Islamic modes of financing has been developed by Islamic Scholars, economists and bankers that may serve as a better alternative to interest. These modes are being practised by about 200 Islamic financial institutions in different parts of the world.

 

These alternatives being available, the transactions of interest cannot be allowed to continue for ever on the basis of necessity Many experienced bankers are unanimous on the point that Islamic modes of financing are not only feasible, but are also more beneficial to bring about a balanced and stable economy, for which they have produced detailed proof based on facts and figures. Some outstanding economists have supported this view in their detailed discourses.

 

There is ample evidence to prove that quite a substantial ground work has been done to suggest the strategy for the transformation of the existing financial system to the Islamic one and the present interest-based system cannot be retained for an indefinite period on the basis of necessity. However, the transformation may take some time which can be allowed on that basis.

 

Dr. M. Aslam Khaki in person (in C.Sh. Appeal No. 1 of 1992).

 

Hafiz S.A.Rehman. Senior Advocate Supreme Court and Ejaz Muhammad Khan. Advocate-on-Record for ADBP.

 

Syed Riazul Hasan Gilani, Advocate Supreme Court and Kh. Mushtaq Ahmad Advocate-on-Record for ABL.

 

Noorul Arfin. Advocate Supreme Court, Mansoorul Arfin, Advocate Supreme Court and Abdul Saeed Khan Ghauri. Advocate-on-Record for UBL.

 

Khalid M. Ishaque, Senior Advocate Supreme Court for MCB, National Bank of Pakistan and State Life Insurance Corporation of Pakistan.

 

Abu Bakar Chundrigar. Advocate Supreme Court and M.S. Ghauri, Advocate-on-Record for HRL.

 

Ch. Muhammad Farooq, Attorney-General for Pakistan (on notice, but slid not argue); Maulvi Anwarul Haq. Deputy Attorney-General (at initial stage). Syed Riazul Hassan Gilani, Advocate Supreme Court (appeared froth 213-6-1999 to 2-7-1999 and thereafter did not appear despite notice to him); Ch: Zafar Iqbal, Advocate Supreme Court (appeared on behalf of the Federal Government but not argued), Ch. Akhtar Ali, Advocate-on-Record and Mehr Khan Malik ; Advocate-on-Record for Federation of Pakistan.

 

Ejaz Muhammad Khan, Additional Advocate-General and M.A. Qayyum Mazhar, Advocate-on-Record for the State/N.-W.F.P. Government.

 

Altaf Elahi Sheikh, Additional Advocate-General, Punjab and Rao Muhammad Yousaf Khan, Advocate-on-Record for the State/Punjab Government.

 

Muhammad Iqbal Vehniwal, Advocate Supreme Court and Ch. Mehdi Khan Mehtab, Advocate-on-Record for Nawab Industries etc.

 

Respondent No. 1 in person (in S.A, No. 1 of 1992).

 

Muhammad Ismail Qureshy in person with Syed Abul Aasim Jaferi, Advocate-on-Record.

 

Syed Afzal Haider, Advocate Supreme Court (in S. As. Nos.96 to 102 of 1992,).

 

Dr. Waqar Masood Khan. Director-General (Planning). International Islamic University’ Islamabad. Dr. Syed Muhammad Tapir. International Islamic University, Abdul Jallbar Khan. firmer President, National Bank of Pakistan. Dr. Umar Chapra. Ibrahim Sidat, Dr. S. Muhammad Hussain, Dr. Irshad zaman, (‘bartered Accountants/Economists, Maqbool Soomroo, Dr. Shahid Hussain, Abdul Wadood Khan, ‘Hafiz Abdur Rehman Madni, Chairman Islamic Research Council, Dr. Aslam Khaki, Prof. Khurshid Ahmad. H.U Beg (Retired Finance Secretary, Government of Pakistan), Prof. Syed Nawaz Haider Naqvi. Muhammad Yahya (Deputy Secretary-General. Mutahida Ulema Council of Pakistan Maulana Gauhar Rehman, Iqbal Khan (Foreign Expert Managing Director Global Islam Finance: HSBC Investment Bank Plc. United Kingdom). Dr. Ahmad Muhammad Ali (President, Islamic Development Bank, Jeddah) alongwith his delegation namely, Muad Ali Umar. (Vice-Presedent. I.D.B.). Dr. M. Alfatah (Legal Adviser I.D.B.). D.M. Qureshi (Adviser Treasury. I.D.B.), Muhaad Al-Jehri (Director, I.D.B.), Dr. Hussain Hassan (Head of Shariah Board, Dubai Islamic Bank) and Adrian A1 Bahr, Managing Director and Chairman, International Investment Company, Kuwait), Ismail Qureshi, Advocate Supreme Court. Faheem Ahmad (Marketing Coordinator, Financial Research and Analysis, Credit Rating Company Ltd., Pakistan, Karachi) and Maulana Abdul Sattar Niazi: Experts on Court’s Notice.

 

Dates of hearing: 22nd to 26th February; 1st to 5th, 8th, 9th (Islamabad), 17th to 19th, 22nd to 26th (Karachi) March: 3rd to 7th, 17th to 21st, 24th to 28th, May; 14th to 18th, 28th, 29th, June; 1st, 2nd: 5th and 6th, July, 1999.

 

ORDER OF THE COURT

 

For the detailed reasons recorded in the three separate, judgments authored by Khalil-ur-Rehman Khan, J., Wajihuddin Ahmed, J. and Muhammad Taqi Usmani, J., it is hereby held that any amount, big or small, over the principal, in a contract of loan or debt is “Riba” prohibited by the Holy Qur’an, regardless of whether the loan is taken for the purpose of consumption or for some production activity. The Holy Prophet (p.b.u.h.) has also termed the following transactions as Riba:

 

(i) A transaction of money for money of the same denomination where the quality on both sides is not equal, either in a spot transaction or in a transaction based on deferred payment.

 

(ii) A barter transaction between two weighable or measurable commodities of the same kind, where the quantity on both sides is not equal, or where the delivery from any one side is deferred.

 

(iii) A barter transaction between two different weighable or measurable commodities where delivery from one side is deferred.

 

These three categories are termed in the Islamic jurisprudence as Riba-al-Sunnah because their prohibition is established by the Sunnah of the Holy Prophet (p.b.u.h.). Alongwith the Riba-al-Qur’an, these are four types of transactions termed ac ‘Riba’ in the literature of Islamic Fiqh based on the Holy Qur’an and Sunnah.

 

Out of these four transactions, the last two ones, mentioned above as (ii) and (iii) have not much relevance to the context of modern business, the barter business being a rare phenomenon in the modern trade. However, the Riba-al-Qur’an and transaction of money mentioned above as (i) are more relevant to modern business.

 

In the light of the detailed discussion above, there is no difference between types of loan, solar as the prohibition of Riba is concerned. It also does not make any difference whether the additional amount stipulated over the principal loan or debt is small or large. It is, therefore, held that all the prevailing forms of interest, either in the banking  transactions or in private transactions do fall within the definition of Riba. Similarly, any interest stipulated in the Government borrowings, acquired from domestic or foreign sources, is Riba and clearly prohibited by the Holy Qur’an. 

 

The present financial system, based on interest, is against the Injunctions of Islam as laid down by the Holy Qur’an and Sunnah, and in order to bring it in conformity with Shariah, it has to be subjected to radical changes.

 

A variety of Islamic modes of financing has been developed by Islamic scholars, economists and bankers that may serve as a better alternative to interest. These modes are being practised by about 200 Islamic financial institutions in different parts of the world.

 

These alternatives being available, the transactions of interest cannot be allowed to continue for ever on the basis of necessity. Many experienced bankers, to name a few, such as Dr.Ahmad Muhammad Ali, President, Islamic Development Bank, Jeddah, Mr.Adnan al-Bahr, Chief Executive International Investor, Kuwait, Mr.Iqbal Ahmad Khan, Chief Executive Islamic emit of the Hong Kong Shanghai Banking Corporation (HSBC) based in London from outside Pakistan and Mr.Abdul Jabbar Khan, the former President of the National Bank of Pakistan, Mr.Shahid Hasan Siddiqi and Mr.Maqbool Ahmad Khan from Pakistan are the bankers who have long experience of banking in different parts of the world, appeared before us. All of them were unanimous on the point that Islamic modes of financing are not only feasible, but are also more beneficial to bring about a balanced and stable economy and in support of this view material containing facts and figures was produced Some outstanding economists like Dr.Umar Chapra, the economic advisor Saudi Monetary Agency, Dr.Arshad Zaman, the former Chief Economist of the Ministry of Finance, Government of Pakistan, Prof- Khurshid Ahmad, Dr. Nawab Naqvi, and Dr. Waqar Masood Khan also supported this view in their discourses.

 

We have also gone through the detailed reports of the Council of Islamic Ideology submitted in 1980, the Report of the Commission for Islamization of Economy constituted in 1991, and the Final Report of the same. Commission, reconstituted in 1997 which was submitted in August, 1997. We have also perused the, report of the Prime Minister’s Committee on self-reliance submitted to the Government in April, 1991.

 

There is, thus, ample evidence to prove that quite a substantial ground work has been done to suggest strategy for the transformation of the existing financial system to the Islamic one, and the present interest based system need not be retained for an indefinite period on the basis of necessity. However, the transformation may take some time which can be allowed on that basis.

 

We now proceed to examine the provisions of the statutes in the context of the reasoning given in the impugned judgment.

 

1. The Interest Act, 1839

 

This enactment confers power on the Court to allow interest to the creditor, upon all debts or ascertained sum payable which the Court gets recovered. The Federal Shariat Court has declared the Act repugnant to Injunctions of Islam as even the Council of Islamic Ideology had recommended its repeal in its Session held on 11th November, 1981.

 

The question of allowing interest by the Court while granting decree has been exhaustively dealt with by the Negotiable Instruments Act, 1881 and the Civil Procedure Code, 1908 as amended from time to time and as such there is no need to retain the Interest Act, 1839 on the Statute Book, so the same for this reason alone needs to be repealed. Even otherwise an undefined, naked and generalized power to allow interest on a debt is repugnant to Injunctions of Islam for the reasons already discussed above. We would, therefore, hold that Interest Act, 1839 being repugnant to Injunctions of Islam was rightly directed to be repealed.

 

II. The Government Savings Bank Act, 1873

 

This Act provides for nomination and payment of deposit on death of the depositor and such payment to be a full discharge- However, it provides for the savings of rights of executor and creditor etc.

 

Section 10, as challenged, reads as under:---

 

“Any deposit made by, or on behalf of, any minor may be paid to him personally if he made the deposit, or to his guardian for his use if the deposit was made by any person other than the minor, together with the interest accrued thereon.”

 

The provision, on account of the use of the word “interest” which is payable alongwith the amount of deposit was held as repugnant to Injunctions of Islam. Learned Judges of the Federal Shariat Court did not examine the nature of the amount, which is to accrue to the deposit made. If the accrual is caused through permissible mode of investment, obviously no objection can be taken. The emphasis should be on adoption of Islamic modes of finance and conduct of business following Islamic principles. We would, therefore, recommend that the word `interest’ appearing in section 10 of the Act is repugnant to the Injunctions of Islam and shall be substituted with the words ‘Shariah compliant return’.


III. Negotiable Instruments Act, 1881

 

The discussion on various provisions of the Negotiable Instruments Act, 1881 is contained in paragraphs 242 to 278 of the impugned judgment. Sections 79 and 80 of this Act, as amended, adopted the concept of “markup” system, which system as in vogue has been held to be repugnant to the Injunctions of Islam and the direction made is that the words “mark-up” be deleted from the provisions of sections 79 and 80 of the Act. The opinion of one of us (Mr. Justice Maulana Muhammad Taqi Usmani) expressed in a booklet on the “mark-up” system as is in vogue and is being practised in the banks and the effect of it is that it obviously amounts to Riba (interest prohibited in Islam, has been referred to. This opinion as quoted reads as under:-----

 

So, what has been pointed out is that the practice adopted in the garb of “mark-up” is violative of the conditionalities attaching to Bai-Muajal as the permissibility of such a transaction is dependent on fulfilment of the above conditions. The other thing pointed. out is that change of heart and commitment to follow the Qur’anic Injunctions in letter and spirit is not only needed but is necessary for enforcement and implementation of the Islamic economic system. Neither lip service nor mere use of nomenclature will bring the desired change.

 

It is apparent that errors of omission and commission which crept into the PLS operation have been the cause for suggesting removal of “Bai’ Mu’ajjal” from the list of permissible methods following the principle that anything leading to that which is prohibited stands itself prohibited. It is therefore, argued that anything which leads to “Ribs” must be foreclosed and disallowed. Jurists, it will be noted, have prescribed following conditions for the validity of Murabaha/Bai’ Mn’ajjal:---

 

(i) The time of payment of consideration must be known; and


Institution      

 

Total

 

Finance

 

(US$MN)       

MURABAHA

MUSHARAKA         

MUDHARABA         

LEASING       

OTHER

 

MODES

 

Al Baraka Islamic Bank for investment       

119     

82       

7         

6         

2         

3

 

Bahram Islamic Bank

320     

93       

5         

2         

0         

1

 

Faisal Islamic Bank Ltd         

945     

69       

9         

6         

11       

5

 

Bangladesh Islamic Bank Ltd           

309     

52       

4         

17       

14       

14

 

Dubai Islamic Bank   

1300   

88       

1         

6         

0         

6

 

Fasial Islamic Bank Egypr    

1364   

73       

13       

11       

3         

0

 

Jordan Islamic Bank  

574     

62       

4         

0         

5         

30

 

Kuwait Finance House         

2454   

45       

20       

11       

1         

23

 

Berrhard Islam  Malaysia Bank        

580     

66       

1         

1         

7         

24

 

Qatar Islamic Bank   

598     

73       

1         

13       

5         

8

 

Total (Ten Banks)      

8563   

 

Weighted Average                                        

           

66       

10       

8         

4         

13       

 

(ii) the seller has to possess the commodity involved before it is delivered to the purchaser.

 

The Council of Islamic Ideology in its report on the Elimination of Interest had approved the use of the mark-up system, Bai’ Mu’ajjal, to a limited extent in unavoidable cases in the process of switching over to an interest-free system and warned against its wide or indiscriminate use in view of the danger attached to it viz. of opening a backdoor for dealings on the basis of interest. It is unfortunate that this warning was not properly Heeded and the system of mark-up adopted in January, 1981 did not conform to the standard stipulations of Bai’ Mur’ajjal. It is, however, pertinent to note that Bai’. Mu’ajjal/Murabaha is one of the most popularly used modes of financing used by the Islamic Banks in the world. The following table demonstrates that Murabaha is the most widely used mode of financing by the Islamic Banks. The weighted average of the share of that mode in total financing provided by Islamic Banks, as per data provided to the Bench by the Islamic Development Bank amounts to 66 per centum. A Table showing Distribution of Financing provided by Islamic Banks among the Various Modes Average during 1994-1996, reads as under:---

 

Table Missed 308

 

Murabaha mode of Finance or the “mark-up” system with the conditions attached thereto is permissible mode of Islamic finance and this mode cannot, therefore, be held to he repugnant to the Injunctions of Islam if the conditions prescribed are not being practised by some of the parties. It is to be noted that such violations occurred as there was no monitoring system in existence to check such errors of omission and commission and H violations. In the system proposed to be adopted with Shariah Board in existence in the State Bank of Pakistan as well as in the financial institutions themselves, such violations as and when noticed shall be pointed out and eradicated. Moreover, such errors will be eliminated where the system as a whole will be geared up to enforce Islamic Laws with commitment and dedication. The adoption of the mark-up system within the limits prescribed appears m he the need of the economic system in the transitional period and till the time more and adequate number of Shariah-compliant financing modes are developed In the light of the foregoing, let us examine the provisions of Negotiable Instruments Act, 1881 (hereinafter referred to as Act, 1881). ,

 

The first section hit by the aforesaid judgment is section 79 of the Act, 1881. which reads as follows:

 

“Subject to the provisions of any law for the time, being in force relating to the relief of debtors and without- prejudice to the provisions of section 34 of the Code of Civil. Procedure. 1908,---

 

(a) when interest (or return in any other form) at a specified rate is expressly made payable on a promissory note or bill of exchange and no date is fixed from which interest (or return in any other form) is to be paid, interest (or return in any other form) shall be calculated at the rate specified, on the amount of the principal money due thereon. from the date of the note or  in the case of a bill, from the date on which the amount becomes payable, until tender or realization of such amount, or until the date of the institution of a suit to recover such amount;

 

(b) when a promissory note or bill of exchange is silent as regards interest or does not specify the rate of interest, interest on the amount of the principal money due thereon shall, notwithstanding any collateral agreement relating to interest between any parties to the instrument, be allowed and calculated at the rate of six per centum per annum from the date of the note, or; in the case of a bill, from the date on which the amount becomes payable, until tender or realization of the amount due thereon, or until the date of the institution of a suit to recover such amount:

 

Provided that in the case of alt amount due on an instrument where the return is on basis other than interest, the return on the amount due, when no rate of return is specified in the instrument, shall be calculated at the following rate:---

 

(i) In the case of return on the basis of mark-up in price, lease, hirepurchase or service charges, at the contracted rate of mark-up, rental, hire or service charges, as the case may be; and

 

(ii) In the case of return on the basis of participation in profits and loss, at such rate as the Court may consider just and reasonable in the circumstances of the case, keeping in view the profit-sharing agreement entered into between the banking company and the judgment-debtor when the loan was contracted:

 

(c) notwithstanding the provisions of clauses (a) and (b), return on an amount due on an instrument where the return is on basis other than interest shall be allowed from the date it becomes due till the date it is actually paid.

 

The learned Federal Shariat Court has ordered that the provision of “Interest or return in any other form” in subsections (a) and (b) be deleted from these provisions. We agree with the learned Federal Shariat Court. Any return on a promissory note or a bill of exchange as contemplated in subsections (a) and (b) of section 79 is Riba and unlawful according to Shariah. Both these subsections are, therefore, held to be repugnant to the Injunctions of Islam as laid down in the Holy Qur’an and Sunnah.

 

However, Federal Shariat Court has not properly analysed the provision contained in clause (i) to the proviso of section 79 and as such the view recorded therein needs correction. Clause (i) to the said proviso specifies different ways to calculate a return on a promissory note or a bill of exchange where they are based on mark-up, leasing, hire-purchase or service charge. The learned Federal Shariat Court has based its judgment about this clause on the permissibility or otherwise of the transactions of mark-up, leasing, hire-purchase and service charge. `Mark-up’ as in vogue, was held by the learned Federal Shariat Court as invalid transaction, and, therefore, the word `mark-up’ was ordered to be deleted, while the same provision about leasing, hire-purchase and service charge has been retained and not declared against Islamic Injunctions.

 

A careful reading of section 79 with all its provisions, analyzed in the correct context would show that purpose of section 79 is not to validate or invalidate a certain return in the transactions of mark-up, leasing etc. The basic purpose of clause (i) is that once a promissory note or a bill of exchange is drawn on the basis of these transactions, and the issuer of the note or of the bill could not pay their amount on the date of their maturity, the Court may order a certain return in favor of the holder of the note or the bill for the period in which the amount remained unpaid after its maturity.

 

 

 

Looked at from this perspective, this provision, in its present form is totally against the Injunctions of Islam, regardless of whether or not, the transactions underlying the instrument (mark-up, leasing etc.) are in accordance with Shariah. The reasons are as follows:

 

 

 

Section 79 in the Act of 1881 was originally designed for the instruments of interest-bearing loans or debts. The nature of interest is such that it is calculated on daily basis and keeps on increasing for the whole period of non-payment. On the basis of this principle, Section 79 has visualized different situations where the amount of a note or a bill was not paid by the debtor on the stipulated date. Taking for granted that every day from the period of non-payment must give the creditor an additional amount as interest or return, subsection (a) has provided that if the instrument has specified a certain rate of interest for the original period of loan, the same rate will be applied to the whole period of further non-payment. Subsection (b) visualizes a situation where no rate of interest was specified in the instrument, either because the original transaction was free from interest, or because the amount of interest was built in the lump sum mentioned in the instrument. In this situation the rate of interest applied after maturity, has been fixed by law as six per cent. per annum.

 

 

 

When, in 1980, the Government announced the elimination of interest and the State Bank of Pakistan allowed some alternative modes of financing including mark-up, leasing, hire-purchase and service charge, some amendments were brought in certain laws. It is in this background that this proviso in section 79 was inserted, and the provisions relating to the notes and bills of exchange drawn on the basis of interest were applied to the transactions of mark-up, leasing etc. in the manner specified in sub-clauses of the proviso, without having regard to the fact that all these’ transactions are essentially different from an interest-based debt and they cannot be subjected to the same rules as govern the interest-based instruments. Each one of these four transactions has its own peculiarities, and should have been dealt with differently.

 

 

 

Let us now analyse each one of these transactions separately. The first transaction mentioned in sub-clause (i) is that of mark-up in price. What is meant by this term is the transaction of Murabaha or `Bai’ Mu’ajjal’, the details of which have been explained in paras. above as well as in paras. 189 and 218 of judgment of Mr. Justice Muhammad Taqi Usmani. It has been mentioned there that this technique was suggested by the Council of Islamic Ideology but was distorted to the worst extent by the banks when they applied it in practical terms. The learned Federal Shariat Court, therefore, observed that “mark-up system, as in vogue, is held to be repugnant to the Injunctions of Islam” (para. 262 of the judgment of the FSC) and consequently, it ordered that the words “mark-up” be deleted from this sub- clause.

 

 

 

We have already held that although the mark-up system as in vogue in our banks is repugnant to the Injunctions of Islam, yet it is not correct to assert that the transaction of Murabaha or Bai’ Mu’ajjal in itself is prohibited:. If the transaction fulfils the necessary conditions spelled out above, it cannot be held repugnant to the Injunctions of Islam. But the reference of this transaction in this clause, in the context of a return on a promissory note or a bill of exchange is not according to the basic principle of a Murabaha transaction. The reason is that Murabaha or Bai’ Mu’ajjal is a transaction of sale effected on the basis of deferred payment. One of the basic conditions of this transaction, like any other sale, is that the price is fixed at the time of the original contract of sale. This price may include a margin of mark-up (profit) added on the cost incurred by the seller. To determine the amount of mark-up, the seller may take different factors into consideration, including the deferred payment, but as already explained once the price is fixed, it will be attributable to the commodity and cannot be increased or decreased unilaterally, because as soon as the sale is accomplished, the price of the commodity became a debt payable by the purchaser. If this debt is evidenced by a promissory note or a bill of exchange, it is not different from a note or a bill evidencing a loan, and no return, whatsoever, can be charged over that note or bill, because it will amount to charging interest on the debt.

 

 

 

 Sub-clause (i) of the proviso to section 79 provides that if the purchaser in a Murabaha or Bai’ Mu’ajjal transaction did not pay the price, evidenced by a promissory note or a bill of exchange, a further return at the original rate of mark-up shall be payable by the purchaser for the whole period within which the price remained unpaid after its maturity. For example A purchased a commodity for Rs. 100, B agreed to purchase it from him on a mark-up of 10%. The commodity is, thus, sold to B for a price of Rs.110 to be paid after one year, say, on 31st January. A promissory note in the amount of Rs. 105 is signed by B in favour of A. Now, this promissory note is nothing but an instrument evidencing a debt payable by B to A, which includes the original mark-up allowed by the Shariah. If B doesn’t pay Rs. 110 to A on 31st January, sub-clause (i) of the proviso to section 79 of the Act, 1881 provides that a further return on the same rate of mark-up i.e. 10% in the above example, shall be payable by B to A for the whole period of non-payment after 31st January. This provision is repugnant to the Injunction of Islam, because after the sale price becomes a debt, no return on it can be claimed by the seller from the purchaser. If the purchaser could not pay at the due date because of his poverty, the Qur’anic command is very clear that he should be given more time till he is able to pay. The Holy Qur’an says:             

 

 

 

And if lie (the debtor) is poor, he must be given respite till he is well-off. (2:280)

 

 

 

However, if the purchaser has delayed the payment despite his ability to pay, he may be subjected to different punishments, but it cannot he taken to be a source of further `return’ to the seller on per cent. per annum basis as contemplated in section 79. It is discussed in para. 51 of the judgment of Mr. Justice Muhammad Taqi Usmani that the following Qur’anic verse was revealed in the background of a similar transaction:----

 

 

 

We, therefore, agree with the finding of the Federal Shariat Court that the words “mark-up price” occurring in sub-clause (i) of the proviso of section 79 are repugnant to the Injunctions of Islam, but not because the transaction of mark-up in itself is impermissible, but because after a sale is effected on the basis of mark-up, and the price is evidenced by a promissory note or a bill of exchange, including the original mark-up, no further return on the note or the bill is permissible in Shariah on the basis of the original mark-up.

 

 

 

The second transaction mentioned in sub-clause (i) is lease. The I learned Federal Shariat Court has held that lease being a permissible transaction, no change is necessary in this sub-clause with regard to lease But, as observed earlier, the learned Federal Shariat Court did not attend to the fact that this clause is not meant merely to legalize  the transaction of lease. It goes further. It says that if the obligation to pay rental in a leas transaction is evidenced by a promissory note or a bill of exchange and, the amount of rent is not paid by the lessee at its due date, the note or the bill will automatically subject the lessee to the payment of a further return to the lessor at the same rate at which the original rent was contracted. Let its take a concrete example: A has leased an equipment to B on 1st February, 1999 for a period of five years. The aggregate amount of rent agreed between the parties is Rs. 1,00,000 to be paid in monthly instalments. B has signed a promissory note in the sum of Rs. 1,00,000 to be paid on 31st January. 2004. While fixing the rental, the lessor had amortized the cost of the equipment alongwith a margin of his profit at the rate of 5% per annum. If B does not pay the full amount of Rs. 1,00,000 up to 31st January. ?004, the sub-clause (i) provides that A will be entitled to claim further return on the promissory note at the same rate of 5 % per annum that was taken into account while fixing the original rental, and thus, the debt will keep on increasing on daily basis until he pays off the full amount.

 

 

 

The correct position according to Shariah is that once the lessee has enjoyed the usufruct of the leased asset for the period of lease the amount of rent has become a debt due on him and it will be subjective to all the rules relevant to a loan or debt, and as mentioned in the case of mark-up, if the lessee is unable to pay on account of his poverty, he will, have to be given further time according to the clear Qur’anic command and if he is purposely delaying the payment, he will be subjected to punitive steps. But his delay will not be taken as an automatic source of return to the lessor, as contemplated in clause (i).

 

 

 

It should be remembered, however, that if the lessee neither pays rent nor delivers the asset back to the lessor and keeps it in his possession even after the lease period, he will he subjected to the same rent as was fixed during the lease period for the days he kept possessing the asset, but it is on the basis of his further enjoying the asset after maturity and not for delaying the previous payable rent.

 

 

Hire-Purchase

 

 

 

The third transaction mentioned in the said sub-clause is hire-’ purchase. The learned Federal Shariat Court has commented on it as follows:--

 

 

 

“Another term used in this provision is hire-purchase. Under this system banks may finance the purchase of these items under a Joint-ownership arrangement with or without security. The would receive, in addition to repayment of the principal a share in the net rental value...”

 

 

 

We are afraid, the learned Federal Shariat Court did not define the agreement of hire-purchase correctly and has confused it with the concept of ‘diminishing partnership’. The correct nature of hire-purchase is explained by Chitty in the following words:----

 

 

 

“A hire-purchase agreement may be defined as an agreement under which an owner lets chattels of any description out on hire and further agrees that the hirer may either return the goods and terminate the hiring or elect to purchase the goods when the payments for hire have reached a sum equal to the amount of the purchase price stated in the agreement or upon payment of a stated sum. The essence of the transaction is, therefore, (i) bailment of goods by the owner to the hirer, and (ii) an agreement by which the hirer has the option to return or purchase the goods at some time or another. “

 

 

 

Chitty: On Contracts, Sweet and Maxwell, London, 24th Edition, 1977, v.2, p.461, para.3212.

 

 

 

This transaction, as practised in the market, has different forms, some of which may have elements not conforming to Shariah, but it is not the right place to go into these details. Even if the hire-purchase is adopted as mentioned by Chitty in its purest form with no violation of a principle of Shariah, the question in the clause under discussion a not of the validity of the transaction in itself. The question here is one of payment of a `return’ on the promissory note or a bill evidencing the obligation to pay rent in a hire-purchase agreement. Therefore, it is subject to the same finding as recorded in the case of lease.

 

 

Service Charges

 

 

 

Next mentioned in clause (i) is the service charge. It is rightly held by the learned Federal Shariat Court that a service charge based on the actual (secretarial) expenses incurred by the financier in advancing a loan can be claimed by him from the borrower. This principle is derived from the following Qur’anic verse:

 

 

 

And the indebted person shall dictate (the document evidencing the’ debt). (2:82)

 

 

 

Here the preparation of the document of loan has been held to be the responsibility of the borrower which naturally means that if this documentation involves some expenses, they will be borne by the borrower.

 

 

 

See Al-Jassas: Ahkam al-Qur’an. Lahore, 1980, v.1, p.485.

 

 

 

It lays down the principle that the expenses of secretarial nature in a transaction of loan can be claimed by the financier on condition that they are really based on actual expenses and are not a mere ruse for charging interest.

 

 

 

But again, the question in the clause in discussion is not whether service charge is or is not permissible. The clause contemplates that if the obligation of a service charge is evidenced by a promissory note or a bill, and its amount is not paid on the due date, the note or the bill will automatically obligate the debtor to pay a `return’ on the note or the bill at the same rate as at which the original service charge was calculated.

 

 

 

It is now obvious that the service charge is allowed only on the basis of actual expenses and not on the basis of a `return’ at a specific rate. The secretarial expenses in advancing a loan are normally incurred only at the beginning when the loans are advanced. They are included in the original service charge evidenced by the promissory ‘note. These arc not normally recurring expenses, and if some additional expenses are incurred after the default through sending reminders etc. they are not necessarily at the same rate at which the original service charge was calculated. They can be less, and they can be more if the financier has to take a legal action against the borrower.

 

 

 

Sub-clause (ii)

 

 

 

Now, we come to sub-clause (ii) of the proviso of section 79 of the Act, 1881 which reads as follows:--

 

 

 

“‘In the case of return on the basis of participation in profit and loss, at such rate as the Court may consider just and reasonable in the circumstances of the case, keeping in view the profit sharing agreement entered into between the banking company and the judgment-debtor when the loan was contracted.”

 

 

 

Proceeding on the assumption that this clause is speaking of profit and loss sharing, which is in conformity with Shariah, the Federal Shariat Court did not touch upon it here, but has expressly declared- about a paralleled provision in section 80 that it does not appear to be repugnant to the Injunctions of Islam. The clause, however, needs some clarification.

 

 

 

Firstly the words “when the loan was contracted” at the end of the clause are misleading. Financing on the basis of profit and loss sharing is not a loan. This word therefore, is misconceived.

 

 

 

Secondly the proportions of profit agreed to be distributed between the partners may be applicable as long as the Musharakah is not finally settled or liquidated, and so far this provision is correct. But the language used in the clause may cover a situation where a certain amount of profit is deserves by the financier after the liquidation and remained unpaid for a certain period. The words used in the clause may allow the financier to claim a further ‘return’ on the unpaid amount at the same rate at which the profit was declared for the financier. This is again objectionable, because if the business is totally liquidated and what remains with the client is only the amount which the financier is entitled to receive as a debt, any `return charged thereupon is not permissible, being interest charged on a debt.

 

 

 

The upshot of the above discussion is that even though the transactions of mark-up, leasing, hire-purchase, service charge and Musharakah are permissible subject to certain conditions, yet the way a, further ‘return’ on the pronote or a bill of exchange is provided in section 79, which contemplates a return over a debt is nothing but interest. It, i5, therefore, held that section 79 is repugnant to the Injunctions of Islam in its entirety. Although clause (ii) of the proviso of section 79 speaks of a Musharakah and a profit and loss sharing, this type of transaction does not  normally require a promissory note or a bill of exchange, because the rate of return in a Musharakah is unknown, and the pronote and a bill of exchange arc basically designed for a specific amount payable by the debtor. Therefore; retention of this truncated clause will make it applicable to a situation about which we have held that no further return is permissible in that situation. So far the amount of profit deserved by the financier remains in the business of the client a further return on the basis of actual profits accrued to the business will be deserved by the financier, but the provisions of the agreement of Musharakah can take care of it, its mention in the present context is not called for. The whole of section 79 is, therefore, held to be repugnant to the Injunctions of Islam.

 

 

Section 80

 

 

 

Section 80 of the Act of 1881 is almost analogous to section 79. The learned Federal Shariat Court has, therefore, subjected it to the same findings as recorded by it about section 79. We have the same comments on the findings of the learned Federal Shariat Court as detailed by us with regard to section 79. Like section 79, it is held that the whole of section 80 is repugnant to the Injunctions of Islam.

 

 

 

Sections 114 and 117 (c)

 

 

 

The learned Federal Shariat Court has also declared sections 114 and 117 (c) of the Act of 1881 as repugnant to the Injunctions of Islam, because both these provisions provide for interest.

 

 

 

Section 114 confers a right on the payer for honour of a bill of exchange to recover his paid amount alongwith interest from the original debtor. Similarly, section 117 (c) entitles an indorser who has paid the amount of the bill to recover it alongwith an interest at the rate of six per cent. per annum. Both provisions provide for charging of interest. The learned Federal Shariat Court has rightly declared them as repugnant to the Injunctions of Islam. The finding of the FSC about these provisions is upheld. However, it is to be noted that if a party has paid the amount due, inclusive of the interest payable on instrument prior to the date of coming into force of this judgment, the amount so paid by the payer for honour will in all fairness have to be allowed to be received by the party paying for honour.

 

 

 

Before parting with our discussion on the Act of 1881, we would like to observe that the definition of a “negotiable instrument” as given in section 13 does not, in itself, provide that it will be traded in, or that it will be transferred or indorsed at a discount. But the practice prevalent in the financial market is that it is discounted on the basis of interest. This practice is against the Injunctions of Islam and involves Riba. A promissory note or a bill of’ exchange represents a debt payable by the debtor to the holder. This debt cannot be transferred to anybody except at its face value. Discounting of a bill or a note or a cheque, therefore, involves interest In an Islamic financial market, the papers representing money or debt cannot be traded. However, the papers representing holder’s ownership in tangible assets, like shares, lease certificates, Musharakah certificates etc. cant be traded in, and a viable secondary market can be developed on that basis.

 

 

IV. The Land Acquisition Act, 1894

 

 

 

Sections 28, 32, 33 and 34 of the Land Acquisition Act, 1894 to the extent these contain the provisions relating to “interest” have been held, as per discussion contained in paragraphs 279 to 296 of the impugned judgment, to be repugnant to the Injunctions of Islam as laid down in the Holy Qur’an and Sunnah of the Holy Prophet (p.b.u.h.). Section 28 of the Land Acquisition Act reads as under:--

 

 

 

“28. Collector may be directed to nay interest on excess compensation----If the sum which; in the opinion of the Court, the Collector ought to have awarded as compensation is in excess of the sum which the Collector did award as compensation, the award of the Court may direct that the Collector shall pay interest on such excess at the rate of six per centum per annum from the date on which he took possession of the land to the date of payment of such excess into Court.”

 

 

 

A bare perusal of section 28 manifests the intention of the provision i.e. to compensate the landowner who was deprived of the land without payment of the true price payable. The deprivation so made is sought to be calculated through the prescribed mechanism i.e. compensation is being assessed at the rate of 6 per cent. per annum difference of the amount payable for the period that the landowner was deprived of the usufruct of the land. The principle sought to be given effect is that an owner cannot be deprived of his property except by paying adequate and proper price/compensation thereof and that the rights’ in the property are not to be treated as transferred unless proper compensation is not paid. Section 28 as amended/substituted for Balochistan by Baluchistan Act 13 of 1985 reads as under:--

 

 

 

“In addition to the compensation fixed on the basis of market value as prevailing on the date of notification under section 4, an additional amount of fifteen per cent per annum of the compensation so fixed shall be paid from the date of the notification under section 4 to the date of payment of compensation. “

 

 

 

Similar provision for additional compensation was made in Sindh by adding/inserting section 28-A after section 28 in the Land Acquisition Act by Sindh Ordinance No.23 of 1984.

 

 

 

Section 32 of the Land Acquisition Act reads as under:-----

 

 

 

“32. Investment of money deposited in respect of land belonging to persons .incompetent to alienate--(I) If any money shall be deposited in Court under subsection (2) of the last preceding section and it appears that the land in respect whereof the same was awarded belonged to any person who had no power to alienate the same, the Court shall---

 

 

 

(a) order the money to be invested in the purchase of other lands to be held under the like title and conditions of ownership as the land in respect of which such money shall have been deposited was held, or

 

 

 

(b) if such purchase cannot be effected forthwith, then in such Government or other approved securities as the Court shall think fit;

 

 

 

and shall direct the payment of the interest or other proceeds arising from such investment to the person or persons who would for the time being have been entitled to the possession of the said land, and such moneys shall remain so deposited and invested until the same be applied-

 

 

 

(i) in the purchase of such other lands as aforesaid; or

 

 

 

(ii) in payment to any person or persons becoming absolutely entitled thereto.

 

 

 

(2) In all the cases of moneys deposited to which this section applied the Court shall order the costs of the following matters, including therein all reasonable charges-and expenses incidental thereto, to b.: paid by the Collector, namely:--

 

 

 

(a) the costs of such investments as aforesaid;

 

 

 

(b) the costs of orders for the payment of’ interest or other proceeds, of the securities upon which such moneys are for the time being invested, and for the payment out of Court of the principal of such moneys, and of all proceedings relating thereto, except such as may be occasioned by litigation between adverse claimants.”

 

 

 

This section regulates the amount of compensation which for the reasons given in the previous section i.e. section 31 of the Land Acquisition Act could not be paid to the rightful owner. Such amount lying with the Court is to be invested in the purchase of other land to be held under the like title and conditions of ownership as the land in respect of which such money has been deposited was held, or if such purchase cannot be effected forthwith, then in such Government or other approved securities. This section further provides that the interest or other proceeds arising from such investment shall be paid under the direction of the Court to the person/persons who are found entitled to the possession of the land acquired.

 

 

 

Then comes section 33, which reads as under:---

 

 

 

“33. Investment of money deposited in other cases.---When any money shall have been deposited in Court under this Act for any cause other than that mentioned in the last preceding section, the Court may, on the application of any party interested or claiming an interest in such money, order the same to be invested in such Government or other approved securities as it may think proper, and may direct the interest or other proceeds of any such investment to be accumulated and paid in such manner as it may consider will give the parties interested therein the same benefit therefrom as they might have had from the land in respect whereof such money shall have been deposited or as near thereto as may be.”

 

 

 

This section provides for regulation of the money deposited in the Court for any cause other than the one mentioned in section 32 of the Land Acquisition Act and provides that such money deposited with the Court is to be invested in Government or other approved securities and the interest or the proceeds of any such investment are to be paid to the person/persons found entitled on the basis of their interest in the land and their entitlement to receive benefit from the land in respect of which the money had been deposited.

 

 

 

Section 34 may now be taken up. This section, as originally enacted was as under:-----

 

 

 

“34.Payment of interest. ---When the amount of such compensation is not paid or deposited on or before taking possession of the land, the Collector shall pay the amount awarded with interest thereon at the rate of six per centum per annum from the time of so taking possession until it shall have been so paid or deposited.”

 

 

 

This section as amended by West Pakistan Act III of 1969 substituting the words “interest thereon at the rate of six per centum” with the words “Compound interest at the rate of eight per centum” and adding a proviso thereto was reproduced in the impugned judgment, in the following words:----

 

 

 

“34. Payment of interest. ---When the amount of such compensation is not paid or deposited on or before taking possession of the land, the Collector shall pay the amount awarded with compound interest thereon at the rate of eight per centum per annum from the time of so taking possession until it shall have been so paid or deposited:

 

 

 

Provided that any waiver of the above right by the landowner shall be void and he shall be entitled to the said interest notwithstanding any agreement to the contrary.”

 

 

 

Section 34 was omitted altogether from the Land Acquisition Act as regards its application in Province of Balochistan vide Balochistan Act XIII of 1985 (section 11). It is further to be noted that both these amendments in section 34 were. made not applicable to the Province of Sindh vide Land Acquisition (West Pakistan Amendment) (Repeal) Ordinance, 1971 (Ordinance VI of 1971). As for N.-W.F.P., vide N.-W.F.P. Ordinance (V of 1983) in the Land Acquisition Act, 1894, for section 34, the following section was substituted:--

 

 

 

“When the amount of such compensation is not paid or deposited on or before taking possession of the land, the Collector shall pay the amount awarded with simple interest thereon at the rate of’ six per centum per annum from the time of so taking possession until it shall have been so paid or deposited.”

 

 

 

It appears that learned Judges of the Federal Shariat Court were not assisted properly by presenting before them the provisions of section 34 as amended and in force in the four Provinces. This section as amended came under consideration before the Peshawar High Court and the Lahore High Court. In the case of Government of N.-W.F.P. through Collector, Land Acquisition, Nowshera v. Muhammad Sharif Khan (PLD 1975 Peshawar 161), learned Judges of the Peshawar High Court observed that the amount of compensation includes the amount payable in consideration for compulsory acquisition by way of interest. In Islamia University, Bahawalpur through its Vice-Chancellor v. Khadim Hussain and 5 others (1990 MLD 2158 - Lahore), learned Judges of the Lahore High Court observed, “that the right to receive the interest under sections 28 and 34 is a right to receive the compensation on account of deprivation of one’s land under compulsory acquisition proceedings under the Act. The award of interest is neither a repayment of additional amount on loan nor it is an accretion on compensation in favour of landowner on account of loss of land under coercive statutory proceedings. It is in fact giving an equivalent or a substitute of equal value. It is in fact “that compensation” by which an injured party is restored to its formal position”. This second case was noticed in the impugned judgment.

 

 

 

This Act, as noted in the impugned judgment, came up for consideration before the Council of Islamic Ideology for the first time in its meeting held on 19-10-1976 and the Council observed as under:--

 

 

 

It again came up for consideration before the Council of Islamic Ideology on 14-3-1982 under the Chairmanship of Dr. Tanzil-ur-Rahman, J., as he then was, wherein the following opinion as regards these sections was expressed:--

 

 

 

“The acquisition of land is against awarding compensation to the landowner or persons holding interest therein. The various steps taken in this direction, being procedural, do not seem to offend any provision of Islamic Law. The provisions regarding `interest’ as contained in sections 28, 32 and 34 are in conflict with Shari’ah.”

 

 

 

It is further noted in the impugned judgment that the Council of Islamic Ideology agreeing with the above opinion resolved that the Land Acquisition Act should be amended accordingly.

 

 

 

This Act (Land Acquisition Act) was also considered by the Federal Shariat Court in S.S.M. No. 14/P of 1983 and judgment was delivered by it on 27-3-1984. The said judgment was set aside by the Shariat Appellate Bench of the Supreme Court in Shariat Appeal No.22 of 1984 and the matter was remanded to the Federal Shariat Court vide judgment of this Court dated 13-I-1988 for fresh decision. The remand matter came up before the Full Bench of the Federal Shariat Court on different dates and the same was adjourned from day to day and was still pending when the impugned judgment was delivered by the three learned Judges of the Federal Shariat Court.

 

 

 

It is pertinent to note that the contention of the learned counsel for the Federation was that the amount of compensation awardable under sections 28 and 34 of the Land Acquisition Act represents the compensation on account of deprivation of the land under compulsory acquisition proceedings and so does not qualify to be treated as ‘Riba’ as laid down by the Holy Qur’an and Sunnah of the Holy Prophet (p.b.u.h.) and in support of this contention reliance was placed on the judgment of the Lahore High Court (1990 MLD 2158) wherein notice was also taken of the three judgments of the High Courts of Allahabad, Patna and Madras rendered before partition. Learned Judges of the Federal Shariat Court surveyed these judgments and commenting on Behari Lal’s case observed that the considerations which weighed with the Courts to determine whether interest or damages could be classified as taxable income within the purview of Income Tax Act were different from the criteria to be employed for ascertaining whether interest payable under sections 28 and 34 is Riba. Therefore, it would appear inappropriate to apply the tests of finding out a sum to be income under the income Tax Act for judging it -to be Riba or otherwise. The true tests for adjudicating the real nature of an amount in the domain of Riba can come from the Holy Qur’an. Sunnah of the Holy Prophet (p.b.u.h.) and time tested opinions of the jurists and scholars well versed in Islamic Law and Shari’ah. Consequently, the process of reasoning employed in the judgments for dubbing the interest payable under sections 28 and 34 to be something else than Riba is difficult to justify in Shari’ah. The increase or addition in the form of interest under sections 28 and 34 over the debt payable in the form of compensation by acquiring authority to the land-owners obviously falls in the category of Riba”.

 

 

 

As regards section 32 of the Land Acquisition Act which provides for investment of the amount of compensation deposited with the Collector either in purchase of the land or other approved securities, it was observed that the said securities should be those which are non-interest bearing. To this view obviously no objection can be raised as the financial institutions have schemes and securities which are non-interest bearing and the Courts while making directions should regulate the investments in Shariah Compliant Modes of Finance.

 

 

 

Learned Judges of the Federal Shariat Court also noticed the judgment of this Court in Qazilbash Waqf and others v. Chief Land Commissioner, Punjab, Lahore and others (PLD 1990 SC 99) to the effect that the third condition of compulsory acquisition/purchase is that compensation is to be paid either before taking over the possession or within such period that cannot be considered to be delayed payment but under section 13 this payment has been ordered to be made bearing bonds. The principle, thus, deducible from this observation is that the payment of the price of the land has not only to be adequate and properly counter-valued but also to be made before or simultaneously with taking over of the possession of the land purchased or otherwise if the payment is not so made, the same is required to be made within reasonable time which cannot be termed as delayed payment.

 

 

 

The question requiring determination is whether sections 28 and 34 of the Land Acquisition Act are based on such a concept. The judgments of Peshawar High-Court and the Lahore High Court noted above have taken the view that the compensation which the Court has been empowered to award under these two sections is compensation on account of deprivation of the use of the land and does not fall within the definition of ‘Riba’ as contemplated by Holy Qur’an and Sunnah of the Holy Prophet. The three Indian cases noticed in the impugned judgment under the Income-tax Law also held the amount received on account of interest as compensation and damages for loss of right to retain possession of the property. It was further observed in Allahabad High Court’s case [Behari Lal Bhargava v. Commissioner of Income-tax, C.P. and U.P. (AIR 1941 Allahabad 135)[ that section 28 of the Land Acquisition Act was designed as convenient method of measuring such damages in terms of interest. In the Patna High Court’s case [Commissioner of Income-tax, Bihar and Orissa v. Rani Prayag Kumari Debi (AIR 1939 Patna 662)[ it was held that the amount received by the assessee by way of damages is not income amenable to assessment under the Income-tax Act, 1922. Though it came to the conclusion, in the peculiar circumstances of the case, that the amount was not income but merely an amount received on account of damages for the detention of the properties was also not accepted. In the Madras High Court’s case [Revenue Divisional Officer, Trichinopoly v. Venkatarama Ayyar and another (AIR 1936 Madras 199, wrongly noted as AIR 1932 Madras 199, in the judgment of the Federal Shariat Court)] it was observed that right to receive interest under section 34 of the Land Acquisition Act took the place of the right to retain possession and that the foundation of the Land Acquisition At was that when compensation was payable and had not been paid, interest for non-payment must be given from the date of taking possession.

 

 

 

Learned Judges of the Federal Shariat Court in the impugned judgment have not accepted the aforesaid pleas for the reason that it is inappropriate to apply test of finding out a sum to be income under the Income-tax Act for judging it to be Riba or otherwise as the real test is one which is provided by Holy Qur’an and Sunnah of the Holy Prophet (p.b.u.h.). It was held in the impugned judgment that increase or addition in the form of interest under sections 28 and 34 over the debt payable in the form of compensation by acquiring authority to the landowners falls in the category of Riba.

 

 

 

The nature and purpose of the payment of additional amount under both the sections merits in our view further consideration. The reasoning given in the Allahabad case (AIR 1941 Allahabad 135) which is also the basis of the judgment delivered in Madras case (AIR 1936 Madras 199) came to be considered by the Indian Supreme Court in the case of Dr.Sham Lai Narula v. The Commissioner of Income-tax, Punjab Jammu and Kashmir, Himachal Pradesh and Patiala (AIR 1964 SC 1878) and was specifically overruled. The reasoning recorded by the Supreme Court of India is as follows:----

 

 

 

“S.34. Land Acquisition Act itself makes a distinction between the amount awarded as compensation and the interest payable on the amount so awarded. The interest has to be paid on the amount awarded from the time the Collector takes possession until the amount is paid or deposited. A perusal of the provisions of section . 23 shows that interest is not an item included in the compensation for any of the matters mentioned therein; nor it is mentioned as a consideration for the acquisition of the land. Under clause (2) of section 23, the Legislature in express terms states that in addition to the market value of the land the Court shall in every case award a sum of 15 per cent. of such market value in consideration of the compulsory nature of the acquisition. If interest on the amount of compensation determined under section 23 is considered to be a part of the compensation or given in consideration of the compulsory nature of the acquisition, the Legislature would have provided for it in section 23 itself. But instead, payment of interest is provided for separately under section 34 in Part V of the Act under the heading `Payment’. It is so done, because interest pertains to the domain of payment after the compensation has been ascertained. It is a consideration paid either for the use of the money or for forbearance from demanding it after. It has fallen due. Therefore, the Act itself makes a clear distinction between the compensation payable for the land acquired and the interest payable on the compensation awarded. “

 

 

 

This judgment was followed by the Supreme Court of India in AIR 1970 SC 1702 and AIR 1972 SC 260.

 

 

 

Learned Judges of the Federal Shariat Court were right in observing that the test of finding out whether a sum is income under the Income-tax Act cannot be applied for determining the nature of the said amount to be Riba or otherwise. This question, as pointed out in the impugned judgment itself is to be answered according to the touchstone of the principles deduced by the jurists and scholars in Islamic Law and Shariah. The first principle applicable is that in case of compulsory: acquisition the compensation or the value of the land and the property acquired is to be paid either before taking over of the possession of property or simultaneously with the taking over of the possession or within such period of time after taking over of possession that the time involved may not be considered as real (mentionable) delay in making payment. If there is any delay, then it will be considered and treated that interest in the ownership of the land to that extent has not been passed. This is so treated so as to impress upon the necessity of making of the payment of the due price/counter-value and it is for this reason that section 28 of the Land Acquisition Act provides for awarding an amount with reference to the amount of compensation which was less paid or assessed or fixed by the Collector.

 

 

 

From the viewpoint of Shariah, the acquisition is a compulsory purchase of a property from the owner and the compensation awarded to him is the price of such purchase. One of the necessary conditions of a permissible acquisition, as laid down by this Court in the case of Qazalbash Waqf v. Chief Land Commissioner (PLD 1990 SC 283) is that the owner is given a fair market price of the property before or at the time of taking possession. If the Collector has paid less than the fair market price, it means that he has compelled the owner, not only to surrender his property without a fair price, but also to face the hardships of litigation. The function of the Court in this case is to fix a fair price of the property. While discharging this function the Court can take into consideration the injustice done to and the hardships suffered by the owner of the property and may, thus, increase the price so as to make it more than the normal market price. Instead of adopting this simple mode, section 28 of the Act, 1894 has first fixed the price by specifying the `excess”, then it has allowed an additional amount in the name of interest at the rate of 6% per annum. That is why the Federal Shariat Court has declared it repugnant to the Islamic Injunctions; because once the price is fixed and it became a debt, any increase over it calculated at per cent. per annum basis makes it interest, hence prohibited. On the contrary, if the price itself is increased for the considerations mentioned above, it will not entail interest, because the price of a property may be fixed on the basis of many considerations, including the hardship suffered by the seller at the hands of the purchaser in the same transaction.

 

 

 

Hence, awarding of compensation and the mechanism adopted in original section 28 as well as provided in Provinces of Punjab, Sindh and N.-W.F.P. is objectionable from Sharjah point of view. This section as is enacted in Baluchistan vide section 9-A, Baluchistan Act 13 of 1985 also does not provide permissible mechanism to allow proper and adequate compensation. These sections shall be substituted by a provision to the following effect:---

 

 

 

“In addition to the compensation fixed on the basis of market value as prevailing on the date of notification under section 4, an additional, sum at the rate of fifteen per centum per annum (or the rate fixed from time to time) of the compensation so fixed shall be added to the compensation due and payable from the date of notification under section 4 till the date of payment of compensation finally. “

 

 

 

As regards section 34, the amount awarded, as rightly observed in the Indian Supreme Court judgments, is not compensation paid to the owner for depriving him of his right to possess the land acquired but is given to him for- deprivation of the use of money representing the compensation for the land acquired and as such is “interest” paid for the delayed payment of the compensation amount.

 

 

 

As in the case of section 28, the finding of the learned Federal , Shariat Court about this section is justified with regard to the language used and the manner ,specified for imposing an additional amount over the original awarded amount. But, while correctly analysing the nature of this additional amount we should not overlook the fact that the landowner has been deprived of the possession of his rightfully owned property without any compensation. As we have already mentioned in our discussion on section 28, acquisition from the point of view of Sharjah is a compulsory purchase by the Government. One of the basic conditions for the validity of such a compulsory purchase, as held by this Court in the case of Qazalbash Waqf v. Land Commissioner (PLD 1990 SC 283) is that the fair market price is given to the landowner before or at the time of taking possession or immediately after it. It means that a valid sale, in the case of acquisition, takes place only when the price is actually paid by the Government to the landowner. Taking possession without the payment of the price, in the case of acquisition, does not in itself amount to effecting a valid sale. The landowner, therefore, is entitled to claim a rent for the period commencing from the date of possession to the date of the payment of the price (the awarded amount) whereby the actual valid sale shall have taken place. This rent should not be less than the fair market rent in the relevant period.

 

 

 

What is wrong in section 34 is, firstly, the use of the word `interest’ and secondly, determining the rate of eight per cent. per annum, with no fegard to the rental value of the acquisitioned property. However, it may be provided that the landowner shall be paid the fair rental value, or an amount equal to 8 % per annum of the awarded amount, whichever is higher, from the time of taking possession to the time when the amount of l compensation is actually paid to him.

 

 

 

With these observations and the direction noted above the judgment of the Federal Shariat Court with regard to Land Acquisition Act, 1894 is upheld.

 

 

V. Code of Civil Procedure, 1908

 

 

 

The provisions of Code of Civil Procedure wherein the word “interest” appears have been discussed in paragraph 297 to paragraph 311 of the impugned judgment. In paragraph 304 it is mentioned that the Sharjah position in relation to interest, mark-up, lease, hire-purchase and service charges has been dealt with while examining the provisions of Negotiable Instruments Act, 1881 and the same observations do equally apply to the provisions of the Code of Civil Procedure. Sections 34(1) & (2), 34-A (1) & (2) and 34-B(1)(a) of the Code of Civil Procedure were declared repugnant to the Injunctions of Islam following the discussion on the question of prohibition of the interest.

 

 

 

Section 34, provides that where a decree is for the payment of money, the Court may, in the decree, order “interest” at such rate as the Court deems reasonable to be paid on the principal amount adjudged, from the date of the suit to the date of the decree, in addition to any interest adjudged on such principal sum for any period prior to the institution of the suit, with further “interest” at such rate as the Court deems reasonable on the aggregate amount so adjudged, from the date of the decree to the date of payment, or to such earlier date as the Court thinks fit. 

 

 

 

Section 34-A has been newly added by Ordinance X of 1980. It deals with interest on public dues. It provides that where the Court is of opinion that a suit was instituted with intent to avoid the payment of any public dues payable by the plaintiff or on his behalf, the Court may, while dismissing such suit, make an order for payment of `interest’ on such public dues at the rate of two per cent., above the bank rate.

 

 

 

Subsection (2) of section 34-A deals with a different situation. It provides that if the Court is of opinion that the recovery of any public dues from the plaintiff was unjustified, the Court may, while disposing of the suit, make an order for payment of interest on the amount recovered at the rate of two per cent., above the bank rate.

 

 

 

Section 34-B has been newly added by Ordinance LXIII of 1980: It deals with interest on dues of a Banking Company. It provides that where a decree is for payment of money due to a Banking Company in repayment of a loan advanced by it, the Court shall, in the decree, provide for interest or return, as the case may be, on the judgment debt from the date of decree till payment. It further provides that in case of interest-bearing loans, the Court shall award a decree for interest at the contracted rate or at the rate of two per cent. above the bank rate, whichever is the higher.        

 

 

 

Clause (b) of the said section provides that in the case of loans given on the basis of mark-up in price, lease, hire-purchase or service charges for the contracted rate of mark-up, rental hire or service charges, as the case may be, the Government shall provide for interest or return at the contracted rate or at the latest rate of the Banking Company for similar loans, whichever is higher.

 

 

 

Clause (c) of section 34-B provides that in the case of loans given on the basis of participation in profit and loss, for return at such rate, not being less than the annual rate of profit for the preceding six months paid by the Banking Company on term deposits of six months accepted by it on the basis of participation in profit and loss, the Court shall in the decree provide for such return and at such rate, not less than the annual rate of profit for the preceding six months as stated above, which the Court ma consider just and reasonable in the circumstances of the case.

 

 

 

Section 34-B (b) and (c) relates to the recovery of money owed to a Banking Company by a client who entered into a transaction of mark-up, leasing, hire-purchase, service charge or profit and loss sharing. The learned Federal Shariat Court has subjected these provisions to the same comment as it has made in relation to sections 79 and 80 of the Negotiable Instruments Act. We have already explained the shortcoming in the finding of the Federal Shariat Court in this respect while discussing sections 79 and 80 of the Negotiable Instruments Act. The same comments are applicable here with greater force, because these provisions of the Code are meant in more express terms for the recovery of the previous obligations.

 

 

 

Consequently, subsections (b) and (c) of section 34-B of the Code are hereby held to be repugnant to the Injunctions of Islam.

 

 

 

 The provisions of sections 34 and 34-A conferred a power on the Court to grant additional sum over and above the decreed amount and the sums to be allowed have been named as interest. We have already held that any amount over and above the principal amount of debt is Riba, hence prohibited. Therefore, any additional amount contemplated in these provisions does fall within the definition of `Riba’. However, it is appropriate at this stage to take due notice of some of the submissions emphatically canvassed by the economists and bankers, particularly of Mr. Muhammad Umar Chhapra and Mr. Shahid Siddiqui to the effect that no banking system can successfully operate and particularly the Islamic Finance if the lending institutions, corporate bodies, firms and individuals do not on their own abide by their commitments in time in making repayments and are not otherwise made to repay financial assistance/loan received by them according to the agreed upon time limit. They emphasized that recovery system through legal means and Courts should necessarily be so designed as to make possible recovery within weeks. Mr. Chhapra was of the view that if the repayment schedule is not adhered to by the borrowers themselves or they are not made to abide by the repayment schedule by the legal system and the Courts, Islamic Finance cannot flourish and that is why the moral hazard involved in the Islamic economic system has to be taken care of by the law Courts. Mr.Shahid Siddiqui in his address submitted that firstly the borrowing is to be resorted to by a Muslim as a last resort as otherwise Islamic economic system contemplates for other arrangements like Masharaka, Mudarabah and profit and loss sharing systems for growth of business and industry. He added that veil of incorporation should not be allowed to be used as a shield to commit fraud and avoid the liabilities incurred. The concept of a company being a separate and independent entity has to be curtailed in its scope and the persons forming that legal entity have to be held responsible for the failure of the business concern, company or the venture, and the representation made in the feasibility reports and other allied documents, on consideration of which the financial assistance was received should be taken on the failure of the business of the venture to be fraudulent and false representations entailing penal consequence under the penal law of the land. He argued that the burden should be on the persons forming the ostensibly failed venture to prove that the representations made by them in feasibility reports and other documents were true and that the failure was on account of factors beyond their control as otherwise such defaulters after devouring national wealth would continue to flourish inside and outside the country as is the case of the present defaulters of banks and financial institutions. The religious scholars as well as the economists can provide such legal measures which will make the recovery of the dues from the defaulters effective as well as timely.. They pointed out that the Holy Prophet (p.b.u.h.) did not join Sala-tul-Janazah of a person who died leaving his debt unpaid. It is for such a reason that at the Janazah prayer, legal representatives of a deceased person make a declaration that if any one has any monetary demand against the deceased he may come forth with his claim so that it may be paid and discharged by heirs or they should remit/give up the loan in the name of Allah Almighty. Such an offer/declaration is made in the Janazah prayers of knowledgeable Muslims and people do make claims and receive satisfaction of their claim/debt or they give-up their claim or loan in the name of Allah Almighty so that the deceased soul may rest in peace, but such a declaration is never seen to have been made in case of persons of wealthy class most probably for the reason that they make distinction between personal liability and liability of the venture of the company being separate legal entities though in most of such cases they have executed the documents guaranteeing personally return of the amount involved.

 

 

 

It is also pertinent to note that in our legal system the difficulties of the decree-holders compound when the decree is sought to be executed. The obtaining of decree itself is not an easy task as all sorts of frivolous objections and delaying tactics are adopted/used for delaying completion of the trial. In addition to the delaying tactics adopted by the litigants the heavy work load of the Courts also contributes in delaying early and timely decision of causes. The number of cases daily fixed for hearing is so numerous that Presiding Officers cannot afford to give more than a few minutes to each case. The cases keep on lingering for years together due to all these factors.

 

 

 

The provisions of the Code of Civil Procedure are, therefore, to be viewed in the aforenoted perspective in addition to the legal question whether the power conferred by these provisions on a Court to grant additional amount over and above the amount decreed, though the said additional amount is called interest, falls within the definition of Riba.

 

 

 

It may be noted that the power conferred on the Court by law to grant additional sum is not premised on any act of the party to the transaction yet this grant of additional sum is without a counter-value and is a payment receipt of which law permits over and above the principal amount. Thus, indirectly Riba al-Nasiah has been allowed to be practised as it is Riba that is paid and received in a loan transaction and this is the Riba that has been prohibited by the Holy Qur’an. If the said provision is taken to be conferring a power on the Court to allow compensation to the lender/decree-holder for the loss caused to him by not returning the amount of liability through vexatious pleas and dilatory tactics after the filing of the suit or even after passing of the decree then granting of such power to allow compensation cannot be objected to but the compensation at a fixed rate to be awarded in each and every case based on opportunity cost of money is not permissible as in each case such a power will have to be exercised in consideration of the circumstances prevailing in that particular case. The Legislature can also confer a power on the Court to impose penalty on a party who makes a default in meeting out his liability or who is found guilty of putting up vexatious pleas and adopting dilatory tactics with a view to cause delay in decision of the case and in discharging his liabilities and from, the amount of such penalty a smaller or bigger part depending upon the circumstances can be awarded as solatium to the party who is put to loss and inconvenience by such tactics. The amount of penalty can be received by the State and used for charitable purposes and in the projects of public interest including the projects intended to ameliorate economic conditions of the sections of the society possessing little or nothing i.e. needy people/peoples without means. The provisions of the Code of Civil Procedure, quoted above, are therefore, held to be repugnant to they Injunctions of Islam as laid down in the Holy Qur’an and Sunnah of the Holy Prophet (p.b.u.h.) for the reasons given above and these sections may, therefore, be suitably amended keeping in view the observations given above.

 

 

 

Following are the other provisions of the Code of Civil Procedure commented upon in the impugned judgment:---

 

 

 

(i) Section 2(12);

 

(ii) Section 35(3);

 

(iii) Section 144(1);

 

(iv) Order XXI, Rule 11 (2)(g)

 

(v) Order XXI, Rule 38;

 

(vi) Order XXI. Rule 79(3);

 

(vii) Order XXI, Rule 80(3);

 

(viii) Order XXI, Rule 93;

 

(ix) Order XXXIV, Rule 2(1) (a)(i), (iii), (c) (i). and (ii):

 

(x) Order XXXIV, Rule 2(2);

 

(xi) Order XXXIV, Rule 4;

 

(xii) Order XXXIV, Rule 7(1)(a) (i)&(iii) and (c)(i)&(ii);

 

(xiii) Order XXXIV, Rule 7(2);

 

(xiv) Order XXXIV, Rule 11;

 

(xv) Order XXXIV, Rule 13(1);

 

(xvi) Order XXXVII, Rule 2;

 

(xvii) Order XXXIX, Rule 9;

 

 

 

The word “interest” wherever appearing in these provisions shall also be deleted and substituted appropriately.

 

 

 

Order XXXVII, Rule 2 (2) (a) and (b) are similar to the provisions of sections 79 and 80 of the Negotiable Instruments Act, 1881 and are subject to the same findings as recorded by us with regard to that Act. Both these provisions (i.e. sub-rules (a) and (b) of Rule 2, Order XXXVII), of the Code are hereby declared repugnant to the Injunctions of Islam.

 

 

 

Rule 79 (3) of Order XXI of the Code provides that if, in pursuance of a decree of recovery, a debt receivable by the defendant is sold, the Court shall prohibit the original creditor of that debt from receiving the debt or any interest thereon, and the debtor from making payment thereof to any person except the purchaser.

 

 

 

Similarly, Rule 80(3) of the Order XXI of the Code contemplates the transfer of a negotiable instrument, required for the purpose of recovery, and provides as under:

 

 

 

“Until the transfer of such negotiable instrument or share, the Court may, by order, appoint some persons to receive any interest or dividend due thereupon and to sign a receipt for the same...”

 

 

 

Here again the appointed person has been allowed to receive interest. That is why the Federal Shariat Court has included it in the objectionable provisions.

 

 

 

The judgment of the Federal Shariat Court about these two provisions is upheld to the extent noted above.

 

 

 

VI. Cooperative Societies Act, 1925

 

 

 

Section 59(2)(e) of the Cooperative Societies Act, 1925 and Rule 14(1)(h), Rule 22 and Rule 41 alongwith Appendices I to IV have been discussed in paragraphs 312 to 321 of the impugned judgment and declared repugnant to Injunctions of Islam (PLD 1992 FSC 1). Section 71 (2), clause (ee) of the Cooperative Societies Act, 1925 as well as sub-bye-law (6) of Bye-law (3) of the National Industrial Cooperative Finance Corporation Limited to the extent that such provide for “interest” have also been declared repugnant to the Injunctions of Islam vide PLD 1992 FSC 537 and PLD 1992 FSC 535 respectively.

 

 

 

The word “interest” appearing in these provisions has been ordered to be deleted on the ground that charging, levying and recovery of interest is not permissible under the Injunctions of Shariah. The impugned judgments of the Federal Shariat Court to that extent are upheld.

 

 

 

(VIII) The Insurance Act, 1938

 

 

 

The following provisions of the Insurance Act, 1938, were challenged before the Federal Shariat Court and the same to the extent that these provide for range of rate of interest, guarantee as to the interest amount, payment of interest on instalments and other conditions as to interest, were held to be repugnant to the Injunctions of Islam in paragraphs 322 to 324 of the impugned judgment:---

 

 

 

S.3-BB(1)(b).---Prepare statement of yield indicating the range of rates of interest or yield on the investment of the insurers’ funds.

 

 

 

Subsection (3) of section 27.---In computing the assets required by the section to be kept invested by an insurer, a sum equal to the amount of his liabilities to persons who are not citizens of Pakistan m respect of life insurance policies issued in Pakistan in favour of such persons but expressed in a currency other than the Pakistan rupee may, if such sum is invested in securities of, and guaranteed as to principal and interest by, the Government of the country in whose currency such policies are expressed, be taken into account.

 

 

 

S.29(8)(b).--- :he loan is of such amount that the instalment of capital and interest does not exceed one-fourth of the basic salary of the employee or one-fourth of the renewal commission or overriding commission of an agent or an employer of agents, as the case may be, during a year;

 

 

 

(c) (iii) .---the loan does not exceed such amount as may be prescribed and is subject to such conditions, including conditions as to interest and the time allowed for its payment, as may be prescribed.

 

 

 

S.47-B.---(1) Where payment on a policy issued by an insurer becomes due and the person entitled thereto has complied with all the requirements, including the filing of complete papers, for claiming the payment, the insurer shall, if he fails to make the payment within a period of ninety days from the date on which the payment becomes due or the claimant complies with the requirements, whichever is later, pay interest as specified in subsection (2) on the amount so payable unless he proves that such failure was due to circumstances beyond his control.

 

 

 

(2) The interest under subsection (1) shall be payable for the period during which the failure continues and shall be calculated at monthly rests at the rate five per cent. higher than the prevailing bank rate.

 

 

 

S.81(2)(d).---The report of the actuary shall contain an abstract in which shall be stated:---

 

 

 

(d) the rate of interest assumed.

 

 

 

In the first provision the words “rates of interest” may be deleted in consonance with the objectives of prohibition of interest under Shariah. The word “interest” appearing in subsection (3) of section 27 need not be omitted as this pertains to securities of, and guarantees as to principal and interest, by the Government of the country in whose currency such policies are expressed. This as such pertains to the assured of foreign origin and securities of foreign Government. This amount, however, is to be taken notice in computing the investment required to be invested by an insurer. This aspect was not taken note of and merely as the word “interest” appeared, its deletion was directed. The word “interest” appearing in the other provisions may however, be deleted but it should be substituted with suitable amendments keeping in view the purposes and the policy of the law on the lines indicated in this judgment. The purpose should be to effectively implement the objectives of eliminating Riba from the economy of the society without hampering the economic activities and also ensuring at the same time the growth and progress of the economy together with fairness to meet the obligations and liabilities. However, the question whether Insurance business as in vogue is in accord with Injunctions of Islam is a different question, which is not under-consideration in these appeals.

 

 

 

(IX) State Bank of Pakistan Act, 1956

 

 

 

Section 22(1) of the State Bank of Pakistan Act, 1956 has been scrutinized in paragraphs 325 to 328 of the impugned judgment and purchase of bills and other commercial instruments like Debentures, Bonds etc. on the basis of interest has been declared to be repugnant to the Injunctions of Islam by the Federal Shariat Court. This view is maintained and upheld. Obviously, the mode of transacting these financial products/instruments has to be changed to a mode compatible with the Islamic modes of finance. We would, therefore, leave it to the economists and bankers to adapt to the new situation keeping in view the Qur’anic prohibition of Riba:---

 

 

 

(X) The West Pakistan Money-Lenders’ Ordinance, 1960

 

(XI) The West Pakistan Money-Lenders’ Rules, 1965.

 

(XII) The Punjab Money-Lenders’ Ordinance, 1960.

 

(XIII) The Sindh Money-Lenders’ Ordinance, 1960.

 

(XIV) The N.-W.F.P. Money-Lenders’ Ordinance, 1960.

 

(XV)    The Balochistan Money-Lenders’ Ordinance, 1960.

 

 

 

These laws pertaining to money-lending and money-lenders have been dealt with in paragraphs 329 to 331 of the impugned judgment. These laws, it was rightly observed, being alien to Islamic Injunctions and the concept of Islamic social justice, can have no place on the statute book of the land and these laws or the rules framed thereunder were rightly declared to be repugnant to the Injunctions of Islam.

 

 

 

(XVI) Agricultural Development Bank Rules, 1961

 

 

 

Paragraphs 332 to 336 of the impugned judgment deal with the vires of Rule 17 of the Agricultural Development Bank Rules, 1961 and the provisions of sub-rules (1), (2) and (3) on the question of interest have been declared .to be repugnant to the Injunctions of Islam and have been directed to be deleted. Sub-rules (1) (2) and 3 of Rule 17 read as  under:---

 

 

 

“Rule 17. Interest, fees, commission_and incidentals. ---(1) Loans shall be granted by the Bank at such rate or rates of interest as the Board may from time-to-time specify.

 

 

 

(2) In specifying the rate or rates of interest under sub-rule (1), the Board may also specify a higher rate of interest which the Bank shall charge in the event of default of repayment of loan or any instalment thereof, not being a default due to any natural calamity.

 

 

 

(3) In addition to interest, the Bank may also charge such commission and incidental charges as the Board may from time to time specify.”

 

 

 

Obviously the levy, charging and recovery of interest cannot be allowed to continue in view of the Shariah prohibition. These rules should, therefore, be suitably amended on lines indicated in this judgment.

 

 

 

(XVII) Banking Companies Ordinance, 1962

 

 

 

The learned Federal Shariat Court has declared section 25(2) of the Banking Companies Ordinance, 1962 (hereinafter referred to as ‘Banking Ordinance’) repugnant to the Injunctions of Islam to the extent of interest and mark-up. The section empowers the State Bank of Pakistan to give certain directions to Banking Companies, including a direction about the rates of interest, charges or mark-up to be applied on advances, or prohibiting the giving of loans to any borrower on the basis of interest.

 

 

 

So far as the provision of interest in this section is concerned, it is against the Injunctions of Islam in the light of the detailed discussion already undertaken about Riba. However, the learned Federal Shariat Court has also directed to delete the word “mark-up” from this section, keeping in view the distorted method in which the concept is applied in the banks today. We have already held in the preceding paragraphs that the way ‘mark-up’ is applied at present is nothing but Riba, hence prohibited. But at the same time we have held that the concept of a real sale, based on mark-up, is not impermissible in its origin, subject to the conditions mentioned in judgments specially in paras. 191 and 219 of the judgment of Mr, Justice Muhammad Taqi Usmani. The major condition for the permissibility of a mark-up transaction is that it should not be charged on lending or advancing money. It must be based on the genuine sale of a commodity with all its substantive consequences. But section 9 of the Banking Ordinance prohibits a bank from trading. It is provided in section 9 that:

 

 

 

“Except as authorized under section 7, no Banking Company shall directly or indirectly deal in the buying or selling or battering of goods or engage in any trade or buy, sell or barter goods for others, otherwise than in connection with bills of exchange received for collection or negotiation.”

 

 

 

When the word ‘mark-up’ used in section 25 is read in juxtaposition with section 9, it is certainly repugnant to the Injunctions of Islam, because a valid mark-up transaction cannot be imagined without a genuine sale effected by the bank. Therefore, the provision of mark-up and the provision of section 9 cannot stand together. Either of the two must be struck down.

 

 

 

We are conscious of the fact that the transaction of a sale of Murabaha based on mark-up, even after fulfilling its necessary conditions is not an ideal mode for the extensive use of Islamic banks. Still, the banks will have to resort to this transaction in certain cases, especially in the initial phase of transformation. It is, therefore, more necessary to strike down section 9 as it stands at present, instead of striking down the transaction of `mark-up’ totally, because provisions of section 9 are an obstacle in the way of a true Islamic banking. These not only invalidate the transaction of Murabaha or Bai’ Mu’ajjal according to Shariah, but also hamper the natural function of. leasing, hire-purchase, Musharaka or Mudaraba transactions. Section 9 was, in fact designed in the context of interest-based banking in which the banks deal in money and papers only, while a true Islamic financing is always backed by real assets, and this is the basic distinctive feature of Islamic banking which can rid the economy from many evils of the interest-based banking already detailed before. The concept of Islamic banking cannot be translated into reality unless it is realized that the hanks are not meant only to deal in money and papers, but their financing is based on and firmly related with real business activities. The elimination of interest can neither be effective nor feasible without lifting the bar imposed on the banks by section 9 of the Banking Ordinance. We are of the firm view that the correct, just and practicable decision about the concept of mark-up provided in section 25 is not possible unless the bar imposed by section 9 is relaxed.

 

 

 

Although the learned Federal Shariat Court has not touched upon section 9, yet the principle laid down by this Court in the case of Province of the Punjab v. Amin Jan Naeem and 4 others (PLD 1994 SC 141 at 156) is as follows:-

 

 

 

“We have held in a number of cases that where a proper and just settlement of the issues involved in a law under challenge is not possible without striking another provision of the same law, the Court has the jurisdiction to hit that provision also. Reference may be made to the case of Qazalbash Waqf v. The Land Commissioner, Punjab (PLD 1990 SC 99, para. 187, p. 280) where sections 60-A of the Punjab Tenancy Act, 1887 has been struck down without an appeal from the public”. (Para. 30)

 

 

 

In the light of the principle laid down in the above case, we are satisfied that a just decision about the `mark-up’ envisaged in section 25 of the Banking Ordinance is not possible without striking down section 9. It is therefore, held that the word ‘mark-up’ in section 25 may be retained, however, section 9 of the same Ordinance is repugnant to the Injunctions of Islam in so far as it prohibits banks from purchase and sale of goods and other trading activities necessary for adopting the Islamic modes of financing like Bai’ Mu’ajja1 and Murabaha based on mark-tip, leasing, hire-purchase and Musharaka in their true and genuine forms. Section 9 shall be substituted to accommodate all the Islamic modes of financing with their necessary requirements.

 

 

 

(XVIII) Banking Companies Rules, 1963

 

 

 

Relevant part of Rule 9 reads as under:---

 

 

 

“R.9.Intrest on deposits.----(1)

 

 

 

(2) Interest on foreign approved securities shall on realization be credited, if so desired by the Banking Company concerned, as soon as possible, to an account at the place where the office of the National Bank of Pakistan holding the securities under sub-rule (1) of rule 5 is located, subject to the usual charges; and, in other cases, such interest shall be remitted by the office of the National Bank of Pakistan to the principal office of the State Bank at the prevailing rate of exchange after deducting the usual charges:

 

 

 

(3) The principal office of the State Bank shall credit, as soon as possible, the current account of the company maintained with it with the interest realized on rupee securities, subject to the usual charges, and with the amounts, if any, remitted from abroad by the office of the National Bank of Pakistan under sub-rule (2).”

 

 

 

Sub-rule (2) provides for crediting of interest on foreign approved securities on realization while sub-rule (3) relates to crediting of interest realized on rupee securities. In paragraph 342 of the impugned judgment it is stated that in the face of the detailed discussion held, sub-rules (2) and (3) of rule 9 in- so far as they pertain to interest are held to be repugnant to the Injunctions of Islam as laid down in the Holy Qur’an and Sunnah of the Holy Prophet (p.b.u.h.). The retention of interest on foreign approved securities already realized need not be refused. The amount so received is to be credited to Baitul Mal and can be used for discharging the foreign debt and meeting out the other liabilities. Such a transitory and provisional course of action is allowed by Shariah. Same way, the interest received on Rupee securities already issued and held can be similarly dealt with. However, in future such transactions which involve interest shall not be permitted.

 

 

 

(XIX) The Banks (Nationalization) Payment of Compensation Rules, 1974

 

 

 

Rule 9 which provides for reckoning of interest froth the date of acquisition of the shares and’ its annual payment and the procedure of payment of interest have been dealt with in paragraph 343 to paragraph 350 and these provisions referring to interest have been held to be repugnant to the Injunctions of Islam. We are of the view that instead of merely deleting the word “interest” from the various clauses of Rule 9, a new rule should be framed on the lines indicated to this judgment ensuring effective enforcement of prohibition of interest in future. However, the return or the profit relatable to the shares shall be managed through Shariah Compliant modes.

 

 

 

(XX)    The Banking Companies (Recovery of Loans) Ordinance, 1979

 

 

 

Section 8 of the Ordinance had come under scrutiny in paragraphs 351 to 354 of the impugned judgment and whole of section 8(2)(a) relating to interest and section 8(2)(b) relating to mark-up have been held repugnant to the Shariah injunctions. These provisions should be dealt with on the lines indicated in this judgment while discussing the relevant provisions of Code of Civil Procedure.

 

 

 

We have held in paras. above that the framing of the laws and economic and monetary policies is the function of concerned organs and institutions of the State and not of this Court but as the Government has insisted in its application that guidelines be provided in respect of the issues raised and as the economists, religious scholars etc. have expressed their opinion with respect to these issues and with ‘respect to the infrastructure needed to successfully practice Islamic economic system, we hereby proceed to record guidelines for the consideration of the concerned quarters.

 

 

 

The scholars, economists, and auditors to name a. few of them Dr. Muhammad Umer Chhapra, Dr. Shahid Husan Siddiqui, Mr. Ibrahim Sidat, Syed Muhammad Hussain, Mr.Iqbal Khan and Mr.Faheem Ahmad of Vital Information Services (Pvt.) Limited, were unanimous in the submission that elimination of Gharar, deceit and fraud is necessary by providing effective and necessary legal framework in order to ensure success of any economic system. It was added that the small investors who invested either in the stock markets or in bank deposits have been losers for the reasons that their savings have been eroded partially or fully because of presence of Gharar and speculative characteristics of our stock markets. A reduction of nearly Rs. 300 billion in the market capitalization has gone unheeded. Similarly, defaults on bank loans amounting to approximately Rs.300 billion restricted these institutions to offer a reasonable return on deposits of small investors. It was added that loopholes in the economic system allow defaulters to get away without any resistance and as such stringent measures/regulations are required to check speculative activities in the stock markets as also by formulating and administering monetary policy by an independent body which is competent and powerful enough to seek compliance of the monetary policy including borrowing activity prescribed under the laws/regulations to be framed and enacted in terms of the Constitutional mandate of Article 79 of the Constitution. Dr. Muhammad Umar Chhapra, a renowned Muslim economist, laid stress on the recovery of the defaulted loans within a reasonable time, which according to him, should not be more than one month, by enacting proper laws and creating adjudicatory process, efficient and competent to secure recovery from the defaulters within the prescribed time frame, if the success of the Islamic economic system is to be ensured. He was of the view that if the cases of default of the financial institutions are allowed to linger on for months and years, the availability of funds for the economic activity cannot be ensured and the whole system would collapse. He, therefore, suggested that measures will have to be adopted to ensure elimination of deceit so as to meet the moral hazards likely to arise in the actual working of the Islamic banking system as well as to ensure transparency and regulation of the economic system on sound and practicable norms. Mr. Faheem Ahmad particularly referred to the laws, prudent regulations and other measures being adopted by the United States for the purposes of elimination of Gharar, deceit and fraud. It was pointed out that the monetary policy is administered in America by the Federal Reserve (FED of the USA similar to the central bank of a country which is an autonomous body outside the influence of President, Congress and Courts in USA, to regulate supply of money and credit in the economy. The Freedom of Information Act, 1966 (FOIA - 1966) enjoins all US Government Agencies to disclose records upon request. The right so conferred has also been made enforceable through Court. All agencies of the Government are required to disclose their records upon receiving written request for the same except for such records as are protected from disclosure by the nine exemptions and three exclusions provided for in the Act itself. The Privacy Act of 1974 prescribes safeguards for the protection of records the Government collects and maintains on United States citizens and lawfully admitted permanent residents.’ Security Exchange Commission of the United States maintains public and non-public records such as registration statements and reports filed by regulated companies and individuals. The laws provide for regulating trading and commerce to eliminate fraud, manipulation and dissemination of false information to ensure just and equitable trading. It is also provided that short sales must be made on an ‘uptick’ to regulate the use of credit for trading, including insider trading. The beneficial owners of 10 per cent. or more are considered `insiders’ and to prevent unfair use of information by insiders, profits realized from security transactions within a period of 6 months are forfeited to the corporation.

 

 

 

In United States even for members of bureaucracy i.e. employees of the Executive Branch, standards of ethical conduct have been provided by the Ethics in Government Act, 1978 and the Regulations issued by the U.S. Office of Government Ethics. These Regulations provide that Public--Service is public trust, requiring employees to place loyalty to the Constitution, the laws and ethical principles above personal gain; and that employees shall not hold financial interests that conflict with conscientious performance of duty; employees shall not knowingly make unauthorised commitments or promises of any kind purporting to bind the Government and shall not use public office for private gain; they shall not engage in outside employment or activities that conflict with official duties and responsibilities. A gift even of the value of 20 Dollars in a given situation is not to be accepted. The senior employees after leaving service are prohibited for a period of one year in certain situations, even if they were not paid for their work from contacting their former department or Agency to seek official action on any matter or assisting a foreign Government or foreign political party. In this manner for a period of one year after leaving Government job, employment with the foreign or local employer is sought to be prohibited. The ethical standards, thus, are designed to protect national interests and to ensure transparency and fair dealing. Such-like prudential measures of good governance, fair dealings and transparency arc conspicuously absent in our laws as in our land, senior employees exchange places frequently i.e. from the employment of Federal Government to foreign Agencies e.g. World Bank and International Monetary Fund and vice versa and the people keep on watching the change of places silently but ask questions to themselves as to whom these experts are supposed to serve, Pakistan or foreign Agencies.

 

 

 

The laws in Pakistan on these subjects do exist but these need to be made comprehensive and also to be implemented in true spirit. It may further be pointed out that effort to eliminate only Riba. in isolation from Banking system would be more harmful than helpful due to intricate inter dependence of different vital economic sectors, and that the efficient course will be to first identify and strengthen the existing critical economic sectors falling under Shariah, thus, isolating Riba based system for its proper treatment. It was argued that the economy in this way will be strengthened and a strong foundation will be laid to promote Riba-free economy. An important fall out of this approach will cause the major savings of citizens to be channeled into Shariah Compliant sectors. This situation, it was emphasized, will automatically put pressure on our Riba-based Banking system to innovate itself into Islamic system to attract depositors investing in parallel Shariah-based sectors. It was explained that the reason for the under-development of Shariah-based instruments in our Banking system is due to inefficient and unregulated parallel major Shariah compliant (stock markets) economic sectors in existence.

 

 

 

Four major engines of economy identified by the economists which fueled the West’s economic growth are following:---

 

 

 

(i) Banking/Financial Sector;

 

(ii) Share market;

 

(iii) Debt/Bond Market; and,

 

(iv) Government Borrowing/Lending.

 

 

 

The following statistics were cited to illustrate the most important sectors among the abovementioned areas:---

 

 

 

“USA               Malaysia                       Pakistan

 

 

 

GDP                                                    8 trI                  72 bn                           60 bn

 

 

 

Share Market                                       10 trl                100 bn                         6 bn

 

 

 

Debt Market                                        10 trl                22 bn                           40 m

 

 

 

All figures are approx. and in US$; Debt Market figures are for corporate borrowings only. “

 

 

 

The above figures demonstrate the importance of regulated public participation in most important sectors which have given a solid foundation to these economies and created better distribution of wealth among the masses. It is to be noted that creation of large middle class is also a touchstone of Islamic Financial model to fight concentration of wealth in few hands.

 

 

 

The other pertinent thing to be noted is 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 these reforms would be effective to check corruption in all the sectors. The disinter mediation will also trigger competition within our banking sector towards promoting Islamic products. The regulatory framework to control unlawful conduct including Gharar is designed to maximize Justice and fairplay at all levels of investors’ interaction. The regulatory agencies eliminated Gharar by bringing as much transparency/fairplay as possible in all public dealings. The disclosure requirements are so elaborate that speculative activities are minimized. This is achieved, inter alia, through the following measures:---

 

 

 

(1) Individual’s Credit History

 

 

 

No individual is allowed to get utilities connections, open any bank account, or obtain a loan unless his credit report received from a credit bureau is clean. These bureaus are non-government entities and by paying a nominal fee any organization can access the databases for requisite information.

 

 

 

(2) Industries’ Rating

 

 

 

Four rating agencies namely, (i) Standard and Poor’s (ii) Moody’s (iii) DCR, and (iv) Fitch-IBCA are referred to by the Financial Institutions and Lending Institutions for reporting about credit ratings of the borrowers before extending loans, whether the borrower is a corporate body or other institution. The Security Exchange Commission, USA grants them licence and monitors their quality of work. In Pakistan to regulate the business of credit rating companies, the Credit Rating Companies Rules, 1995 were framed by the Federal Government under section 33 of the Securities and Exchange Ordinance, 1969, but these rules have not been usefully applied whereas in USA individuals, Corporations, Banks and Financial Institutions and even the municipalities are all rated by the Credit Companies and their credit rating is relied upon by the investors before investing into the bonds or other instruments floated or offered for investment to the public. These ratings are instituted on the philosophy of right to know.

 

 

 

Even in England various statutes provide for prudential regulations and disclosure of necessary information. The Financial Services Act, 1986 and the regulations framed thereunder provide protection for the investors with the “securitisation” of the investment industry in order to provide a system intended to make effective and to enhance London’s position as a financial centre. The Serious Fraud Office (S.F.O.) was established as an integral part of the criminal justice system. The S.F.O. is responsible for investigation and prosecution of some of the biggest cases of fraud in British history. The S.F.O. is an independent Government Agency headed by a Z Director who exercises his powers under the superintendence of the Attorney-General, maintains liaison with Government departments and regulatory bodies such as the Department of Trade and Industries, Bank of England, International Stock Exchange, Securities and Investment Board, etc. These and other organizations report to the S.F.O. allegations of serious and complex abuse and misuse of powers and white-collar crimes.

 

 

 

The distinctive feature of the S.F.O.’s approach to investigations is the use of multidisciplinary teams; a team of Lawyers, Accountants, Police Officers, etc. appointed in each case, headed by a lawyer, who acts as a case controller being responsible for ensuring expeditious investigation and effective prosecution. It is through such measures that the West has effectively adopted Islamic teachings of justice, fair-play and proper disclosure to minimize Gharar. These measures are to be adopted by providing proper legal framework so as to bring about fundamental changes in the fabric of our society as transparency will put the economy on the right track quickly. It is due to absence of this regulatory legal framework and transparency and prudential measures, that the investors in Pakistan were deprived of billions in the shape of Taj Company and Cooperatives Scams. There has been a quick growth of companies at Stock Exchange as the corporate managers are least bothered to take investors into confidence by sharing company information and do not feel any moral obligation to share profits with investors. All this is due to absence of strict regulations, third party ratings and risk assessment. A comparison between the ‘size of the economy, and number of listed companies can be a guide to the loose regulatory framework that encourages rogues to fleece investors and creditors in the disguise of “Limited Liability” Laws. The number of companies at Karachi Stock Exchange Market are 750 while the number of listed companies at New York Stock Exchange is five times larger whereas .economy of USA is more than 100 times bigger than Pakistan’s economy. Unlike western countries there are no laws in Pakistan against insider, trading (trading in shares by owners) by major shareholders, which is conflict of interest, a crime in West.

 

 

 

The market indexes in the West like DOW JONES (USA), FTSE (UK), and Nikkei (Japan) were developed by third parties. In Pakistan the KSE (Karachi Stock Exchange) 100 index is maintained by the stock market itself and has come under adverse comment from Minister of Finance due to its speculative characteristics. It is said that this index serves the purpose of few players in the market by luring innocent investors into investment, thus, cyclically depriving them of their hard-earned money, This also requires transmission by introducing independent transparency.

 

 

 

(3) Debt markets in Pakistan

 

 

 

We’ have an inactive debt market and its savings have been repeatedly wiped out as unlike western markets during melting down of stocks, debt markets are not in a position to provide the necessary “hedge” to the investors. The result of this under-developed debt market is the promotion of Riba through savings being channeled into Banking system as industries want long-term finance, they have to resort to the Banking system which in turn results in promoting Riba transactions. If the concept of Islamic debt through Musharakah certificates is adopted on urgent basis lot of equity/funds can be made available through developed debt markets and in that way- reliance on banks can be reduced. Infrastructure can be provided by advising provinces/municipalities/corporate bodies to connote Qirad certificates/diminishing Musharakah certificates, thus, reducing reliance on foreign exchange borrowings and this is how local funds can be generated.

 

 

 

(4)  Establishment of data collection firms

 

 

 

The financial institutions should encourage, experts, lawyers and others to establish firms for keeping track of the clients, individuals, corporations who commit default so that they could be brought before the competent Courts by facilitating service of the process of the Courts on them and also trace their properties and assets whether standing in their names or benami to facilitate recovery through execution of decrees.”

 

 

 

(5) Recovery system

 

 

 

The laws pertaining to recovery of the defaulted loans are to be streamlined alongwith establishment of requisite number of Courts presided over by competent Judges of unquestioned integrity. These Judges should not be over burdened and only such number of cases should be assigned to them which can be disposed of within a period of three months. The tendency to institute recovery proceedings only when the borrowing company or the individual have almost squandered away their assets requires to be curbed and defaulters must be brought to book by instituting proper proceedings within reasonable time of default when the borrower as well as his assets are still traceable and realizable.

 

 

 

(6) Training of Officers and Staff

 

 

 

The education of the officers and staff of the financial institutions so its to make them aware of the rudimentary or essential principles of Islamic economy is imperative. They should have necessary knowledge of the modes and the products to be used by them. These training institutions should include courses in accounting and audit procedures suited and conforming to the principles of Shariah. Such an education will be objective oriented and should inculcate commitment with the objectives of Shariah.

 

 

 

(7) Audit and Accounts

 

 

 

The development of audit and accounts system and procedures conforming to the principles of Injunctions of Islam and capable of achieving objectives of Shariah is also essential. Such standards and procedures have been laid down in detail in the book titled “Accounting and Auditing Standards for Islamic Financial Institutions” published by Accounting and Auditing Organization for Islamic Financial Institutions P.O.Box 1176, Manama, Bahrain. Institute of Chartered Accountants and Auditors with the assistance of the representatives of the State Bank of Pakistan and Finance Division should study these standards, procedures for introducing any modification, changes, alterations if any required to suit the requirements and the needs of Financial Institutions and Banks in Pakistan.

 

 

 

In a nutshell measures needed to be taken, the infrastructure and legal framework to be provided may be summarized as under:---

 

 

 

(1) Strict austerity measures to drastically curtail the Government expenditure should be adopted and implemented and deficit financing should be controlled as therein lies the solution to economic revival.

 

 

 

(2) An Act to regulate the Federal Consolidated Fund and Public Account, Provincial Consolidated Fund and Public Account requires to be enacted by the Parliament and the Provincial Assemblies respectively. This law will have to take care of borrowing powers, purpose and the scope of borrowing, its utilization, regulation and monitoring process including all ancillary matters.

 

 

 

(3) Law providing for necessary prudential measures ensuring transparency be enacted. These laws may include laws like Freedom of Information Act, the Privacy Act and Ethics Regulations of United States, Financial Services Act of Britain.

 

 

 

(4) Establishment of Institution like Serious Fraud Office to control white collar and economic crimes.

 

(5) Establishment of credit rating agencies in the public sector.

 

(6) Establishment of evaluators for scrutiny of feasibility reports.

 

(7) Establishment of special departments within the State Bank -

 

 

 

(a) Shariah Board for scrutiny and evaluation of Board’s procedures and products and for providing guidance for successfully managing; the Islamic economics.       

 

(b) A Board for arranging exchange of information, financial institutions about feasibility of projects, evaluation thereof and credit rating of institutions, corporations and other entities.

 

 

 

(c) A board for providing , technical assistance to the financial institutions/banks with regard to the anomalies emerging in the  practical operation of the financial institutions or difficulties arising  during operation of financial products, transactions or arrangement between the financial institutions and the consumers/clients. This may also take the shape of Islamic Financial Service Institution. Such Institutions will also work in the field of shares and investment certificates underwriting promotion and market making to help in activation of primary and secondary markets ‘the rise of such institutions, whose functions include the promotion of financial instruments and to work as their catalysts in the financial market, would be of great help and support to Islamic Banking. Among the factors which would help the creation and spreading of such institutions is the extension of tax incentives to their operation as well as to Islamic banks to benefit from their services.

 

 

 

The establishment of aforenoted Infrastructure is considered necessary by the economists for operation of the Islamic Banking system with success.

 

 

 

Keeping all these aspects in view, we have decided to appoint different dates for different phases of the transformation. We; therefore, direct that:---           

 

 

 

(1) The Federal Government shall, within one month from the announcement of this judgment; constitute in the State Bank of B Pakistan a high-level Commission fully empowered to carry out, control and supervise the process of transformation of the existing financial system to the one conforming to Shariah. It shall comprise Shariah scholars, committed economists, bankers and chartered accountants.

 

 

 

(2) Within two months from the date of its constitution, the Commission shall chalk out the strategy to evaluate, scrutinize and implement the reports of the Commission for Islamization of the Economy as well as the report of Raja Zafarul Haq Commission after circulating it among the leading banks, religious scholars, economists and the State Bank and Finance Division, inviting their comments and further suggestions. The strategic plan so finalized shall be sent to the Ministries of Law, Finance and Commerce, all the banks and financial institutions to take steps to implement it.

 

 

 

(3) Within one month from the announcement of this judgment, 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 of the Islamization of Economy, to:

 

 

 

(a) Draft a new law for the prohibition of Riba and other laws as proposed in the guidelines above.

 

 

 

(b) To review the existing financial and other laws to bring them into conformity with the requirements of the new financial system.

 

 

 

(c) To draft new laws to give legal 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 SBP, after which the Federal Government shall, promulgate the recommended laws.

 

 

 

(4) Within six months from the announcement of this judgment, all the banks and financial institutions shall prepare their model agreements and documents for all their major operations and shall present them to the Commission for transformation in the SBP for its approval-after examining them.

 

 

 

(5) All the joint stock companies, mutual funds and the firms asking in aggregate finance above Rs.5 million a year shall be required by law to subject themselves to independent rating by neutral rating agencies.

 

 

 

(6) All the Banks and financial Institutions shall, thereafter, arrange for training programmes and seminars to educate the staff and the clients about the new arrangements of financing, their necessary requirements and their effects.

 

 

 

(7) The Ministry of Finance shall, within one month from the announcement of this judgment, 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. The certificates of the existing bonds of the existing Government savings schemes based on interest shall be converted into the units of the proposed mutual fund.

 

 

 

(8) The domestic inter-Government borrowings as well as the borrowings of the Federal Government from State Bank of Pakistan shall be designed on interest-free basis.

 

 

 

(9) Serious efforts shall be started by the Federal Government to relieve the nation from the burden of foreign debts as soon as possible, and to renegotiate the existing loans. Serious efforts shall also be made to structure the future borrowings, if necessary, on  the basis of Islamic modes of financing.  

 

 

 

(10) The following laws being repugnant to the Injunctions of Islam shall cease to have effect from 31st March, 2000:--- .

 

 

 

1.The Interest Act, 1839;

 

2. The West Pakistan Money-Lenders’ Ordinance, 1960;

 

3. The West Pakistan Money-Lenders’ Rules, 1965;

 

4. The Punjab Money-Lenders’ Ordinance, 1960;

 

5. The Sindh Money-Lenders’ Ordinance, 1960;

 

6. The N.W.F.P. Money-Lenders’ Ordinance, 1960;

 

7. The Balochistan Money-Lenders’ Ordinance, 1960;

 

8. Section 9 of Banking Companies Ordinance, 1962;

 

 

 

(11) The other laws or the provisions of the laws to the extent that those have been declared to be repugnant to the Injunctions of Islam shall cease to have effect from 30th June, 2001.

 

 

 

The appeals stand disposed of accordingly.

 

 

 

(Sd.)

 

Justice Khalil-ur-Rehman Khan, Chairman.

 

(Sd.)

 

Justice Munir A. Sheikh, Member.

 

 

 

Agreeing with the bulk of the above findings and conclusions, I have, respectfully, subscribed a note of my own, where, explicitly or implicitly, my reservations, as to some of the findings and conclusions of the majority, stand incorporated.

 

 

 

(Sd.)

 

Justice Wajihuddin Ahmed, Member.

 

(Sd.)

 

Justice Maulana Taqi Usmani, Member.

 

 

 

JUDGMENT

 

 

 

JUSTICE KHALIL-UR-REHMAN KHAN (CHAIRMAN). ---This .Judgment will dispose of 55 appeals filed as of right under Article 203-F of the Constitution of the Islamic Republic 6f Pakistan, 1973 against a number of judgments of the Federal Shariat Court, detail of which is given in the title of this judgment, whereby certain provisions relating to “interest” as contained in various laws, have been declared to be repugnant to the Injunctions of Islam as contained in the Holy Qur’an and Sunnah of the Holy Prophet (peace be upon him), with direction to delete the said provisions by amending the said laws. The first of these judgments rendered on 14-11-1991, reported as PLD 1992 FSC is has been assailed in Shariat Appeals Nos. l/92 to 231.92, 36/92 to 58/92 and 91/92 whereby findings with regard to some of the impugned Acts/Rules have been particularly challenged while in Shariat Appeal No.73/92, the appeal filed by Federation of Pakistan, all the findings on all the laws recorded by the learned Judges of the Federal Shariat Court have been brought under challenge. The laws containing provisions as to “interest”, “return” or “mark-up” subject-matter of the impugned judgment are as under:

 

 

 

(1) The Interest Act, 1839.

 

(2) The Government Savings Banks Act, 1873.

 

(3) The Negotiable Instruments Act, 1881.

 

(4) The Land Acquisition Act, 1894.

 

(5) The Code of Civil Procedure, 1908.

 

(6) The Cooperative Societies Act, 1925.

 

(7) The Cooperative Societies Rules, 1927.

 

(8) The Insurance Act, 1938.

 

(9) The State Bank of Pakistan Act, 1956.

 

(10) The West Pakistan Money-Lenders’ Ordinance, 1960.

 

(11) The West Pakistan Money-Lenders’ Rules, 1965.

 

(12) The Punjab Money-Lenders’ Ordinance, 1960.

 

(1:3) The Sindh Money-Lenders’ Ordinance, 1960.

 

(14) The N.-W.F.P. .Money-Lenders’ Ordinance, 1960.

 

(15) The Balochistan Money-Lenders’ Ordinance, 1960.

 

(16) The Agricultural Development Bank of Pakistan Rules, 1961.

 

(17) The Banking Companies Ordinance, 1962.

 

(18) The Banking Companies Rules, 1963.

 

(19) The Banks (Nationalization) (Payment of Compensation) Rules, 1974.

 

(20) The Banking Companies (Recovery of Loans) Ordinance, 1979.

 

 

 

Shariat Appeals Nos.96/92 and 100/92

 

 

 

In these Shariat Appeals, judgments dated 22-6-1992 of the Federal Shariat Court (PLD 1992 FSC 538), whereby two circulars bearing Nos.603-22-RCS dated 31-2-1969 and RCS/B&C/4869-5018 dated 5-12-1979 issued by the Registrar, Cooperative Societies, Punjab, Lahore, to the extent they provide for charging interest have been declared repugnant to the Injunctions of Islam, have been challenged.

 

 

 

Shariat Anneals Nos. 99/92 and 101/92

 

 

 

In these Shariat Appeals judgments dated 22-6-1992 of the Federal Shariat Court (PLD 1992 FSC 537), whereby clause (ee) of subsection (2) of section 71 of the Cooperative Societies Act, 1925 in so far as it relates to the provision of “interest” was declared repugnant to the Injunctions of Islam, has been challenged.

 

 

 

Shariat  Appeals Nos.97/92, 98/92 and 102/92

 

 

 

In these Shariat Appeals judgment of Federal Shariat Court dated 30-6-1992 (PLD 1992 FSC 535), whereby  sub-bye-law (6) of Bye-Law 3 of the National Industrial Cooperative Finance Corporation Limited, to the extent that it provides for  “interest” was declared repugnant to the Injunctions of Islam, has been challenged.

 

 

 

It is pertinent to note that the Federal Shariat Court with a view to elicit views/opinions of the distinguished Ulema, Scholars and Economists issued a Questionnaire relating to the impugned fiscal laws and the issues arising for consideration. The Questionnaire reads as under:--

 

 

 

“(1) What is the definition of Riba according to the Holy Qur’an and Sunnah of the Holy Prophet (p.b.u.h.)? Does it cover the simple and compound interest existing in the present day financial transactions?

 

 

 

(2) If banking is based on interest-free transactions, what would be its basic practical shape in conformity with the Injunctions of Islam?

 

 

 

(3) (i) Does the interest on loans floated by the Government to meet national requirements come under Riba?

 

 

 

(ii) What alternatives can be suggested for the banks in case they grant loans without interest for various requirements”

 

 

 

(4) Can, in the light of the In junctions of Islam, any differentiation be made between private and public banking in respect- of charging of interest on banking facilities or services rendered”

 

 

 

(5) (i) Can the capital, according to the Injunctions of Islam, be regarded as an agent of production thus requiring remuneration for its use?

 

 

 

(ii) Does devaluation of the currency affect the payment of loans taken before such devaluation?

 

 

 

(iii) Can inflation causing rise in the cost/value of gold and consumer goods in terms of currency have any effect on the sum borrowed?

 

 

 

(6) What would be the alternatives in the context of present day economic conditions to carry on domestic and foreign trade efficiently without availing of banking facilities based on interest?

 

 

 

(7) Is interest permissible or otherwise on the transactions between two Muslim States or a Muslim and non-Muslim State?

 

 

 

(8) Is it possible to carry on insurance business otherwise that on the basis of interest?

 

 

 

(9) Does interest accruing on Provident Fund come under Riba ?

 

 

 

(10) Can the payment of prize money on Prize Bond or Saving Bank Account or other similar Schemes be regarded as Riba?

 

 

 

(11) Would it be lawful under Islamic Law to differentiate between business loans on which interest may be charged and consumption loans which should be free of interest?

 

 

 

(12) If interest is fully abolished, what would be the inducements in an Islamic Economic System to provide incentives for saving and for economising the use of capital?

 

 

 

(13) Can an Islamic State impose any tax on its subjects other than Zakat and Ushr?”

 

 

 

A consolidated statement of the question-wise opinion prepared and compiled by Research Section of the Federal Shariat Court has been appended as Appendix `A’ to the main impugned judgment delivered by the Federal Shariat Court. The Scholars, Ulema, Economists and Bankers, who had submitted replies to the Questionnaire have been listed in paragraph 19 of the impugned judgment.

 

 

 

This Court also prepared a Questionnaire highlighting the issues requiring determination and sent it to distinguished Ulema, Scholars, Bankers, and Economists of the country and abroad for their opinions. The Questionnaire reads as under:--

 

 

 

“Q.1. The Holy Qur’an has prohibited `Riba’. What is meant by this term? What is its true definition and connotation in the light of the Holy Qur’an and Sunnah of the Holy Prophet (p.b.u.h.)?

 

 

 

Q.2. What is the true scope of the transactions to which the bar of Riba is applicable? Can the term Riba be also applied to the commercial or productive loans advanced by the banking and financial institutions and to the interest charged thereon”?

 

 

 

Q.3. The Pakistani banks and some financial institutions finance their clients on the basis of buy back on mark-up agreements According to this method the client of the Bank purports to sell a particular commodity to the bank, and simultaneously buys it back on a high price on deferred payment basis. A certain rate of mark-up (per cent. per annum) is applied to the second sale. Does this arrangement fall within the ambit of Riba?

 

 

 

Q.4. Is there any difference between a M_ uslim and a non-Muslim in the matter of prohibition of Riba? Can the prohibition of Riba be extended to the loans obtained from non-Muslim, or for that matter, from Muslim foreign countries whose laws and national policies, together with international monetary laws and policies, are not within the control of the State of Pakistan?

 

 

 

Q.5. The Government of Pakistan and some institutions under its control acquire loans by issuing bonds and certificates etc. and pay a fixed period-wise `profit’ to the holders of such securities. Does this profit fall within the definition of Riba?

 

 

 

Q.6. It is evident that the value of the paper currency has a trend of decrease in the inflationary situation. If a debtor who has borrowed a particular amount of paper currency repays the same amount to his creditor after a substantial time, the creditor can suffer the effects of inflation. If he demands his debtor to pay more in order to compensate him for loss of value he has suffered, can this demand be treated as a demand of Riba?

 

 

 

Q.7. If all the forms of interest or mark-up are held to be repugnant to the Islamic Injunctions, what modes of financing do you suggest for: (a) financing trade and industry; (b) financing the budget deficit; (c) acquiring the foreign loans; and (d) similar other needs and purposes?

 

 

 

Q.8. If you are of the view that all the forms of interest are prohibited by Shariah, then what procedure will you suggest for eliminating it from the economy? If you prefer a gradual process, what strategy do you suggest for the purpose which may fulfil the requirements of the Holy Qur’an and Sunnah?

 

 

 

Q.9. If all the transactions based on interest are held to be violative of the Islamic Injunctions, what will be the treatment of the past transactions and agreements? Especially what procedure should the Government adopt with regard to the previous foreign loans?

 

 

 

Q.10.   Whether a creditor can fix time and rate of profit while the debtor saying Insha Allah, he will be liable to earn and pay the same in time; failing which the guarantor may give profit asked  for plus also a bonus or compensation for delayed payment, if any, also according to other arrangements regarding the loan What will be the position if the system of insurance for the said profit is introduced?”

 

 

 

Following Ulema, Scholars and Economists, amongst others, submitted written answers to the Questionnaire issued by this Court:--

 

 

 

(1) Mr.Sartaj Aziz, the then (at the time of submission of replies) Minister for Finance and Economic Affairs, Government of Pakistan, answering the Questionnaire in his capacity as an expert and not in his official capacity as Finance Minister, as it was stated that the response of the Government of Pakistan on the Questionnaire involved is to be submitted to the Court by the Attorney General.

 

 

 

(2) Islamic Development Bank, Jeddah.

 

 

 

(3) Prof. Khurshid Ahmad, Institute of Policy Studies.

 

 

 

(4) Dr.Ziauddin Ahmed, Karachi.

 

 

 

(5) Mr.Zafar Ishaque Ansari, Director-General, Islamic Research Institute; International Islamic University, Islamabad.

 

 

 

(6) Dr.Nawazish Ali Zaidi, Rawalpindi.

 

 

 

(7) Dr.Arshad Zaman, Karachi. .

 

 

 

(8) Mr.Abdur Rauf Sheikh, Lahore.

 

 

 

(9) Prof. Dr. Muhammad Najatullah Siddiqui, International Islamic Economics Centre, Malik Abdul Aziz University, Jeddah.

 

 

 

(10) Mr. Alsiddique Muhammad al-Amin, Teacher, Al-Shariah Al Islamia Law Department, Khartoom University, Sudan.

 

 

 

(11) Report containing answers prepared under supervision of Prof. Dr. Jamila Shaukat, Dean, Faculty of Islamic and Oriental Learning, University of the Punjab, Lahore.

 

 

 

In addition to the above answers/opinions, different individuals and organizations addressed letters and sent material containing their views on the question of `Riba’ which shows keen interest of the people in the matter. It is neither possible nor appropriate to mention the views so expressed by everyone of them. However, material sent and the views expressed by the prominent scholars and writers have been thoroughly examined. They have, in the material sent by them, dealt with the issues relevant to the question of elimination of `Riba’. The following scholars have sent the material, books or copies of their published articles:--

 

 

 

(1) Syed Maroof Shah Shirazi, Shariah Academy, International Islamic University, Islamabad.

 

(2) Mr.Anwar Ahmad Minai, Karachi.

 

(3) Syed Naseeb Ali Shah, Nazim Majlis-e-Fiqhi, Jamiat Ulami Pakistan.

 

(4) Mr.G.M. Saleem, Advocate, Karachi.

 

(5) Mr. Mehmood Ashraf, Chartered Management Accountant, Karachi.

 

(6) Mr.Abdul Moin Ansari, Latifabad, Hyderabad.

 

(7) Prof. Dr. Muhammad Tahir ul Qadri, Lahore.

 

(8) Dr. Attaullah Khan Niazi, Economic Expert.

 

(9) Mr.Abdul Hafeez Khokhar, Advocate.

 

(10) Mr. Aqdas Ali Kazmi, Chief/Director Tax Policy, Central Board of Revenue.

 

(11) Mr.Aurangzeb Haque.

 

(12) Prof. Ziauddin Ahmad.

 

 

 

Besides learned counsel for the parties, the following Scholars. Economists and Bankers appeared and made their submissions:--

 

 

 

(1)  Dr. Syed Muhammad Tahir, International Islamic University;

 

 

 

(2) Dr.Waqar Masood Khan, Director-General, (Planning), International Islamic University, Islamabad;

 

 

 

(3) Mr.Abdul Jabbar Khan, former President, National Bank of Pakistan;

 

 

 

(4) Dr.Umar Chapra;

 

 

 

(5) Mr.Ibrahim Sidat;

 

 

 

(6) Dr.S. Muhammad Hussain;

 

 

 

(7) Dr.Irshad Zaman, Chartered Accountants/Economists;

 

 

 

(8) Mr. Maqbool Soomroo;

 

 

 

(9) Dr.Shahid Hasan Siddiqui, Eeconomist;

 

 

 

(10) Mr.Abdul Wadood Khan;

 

 

 

(11) Hafiz Abdul Rehman Madni, Chairman, Islamic Research Council, Lahore;

 

 

 

(12) Dr.Aslam Khaki, Advocate, Islamabad;

 

 

 

(13) Prof. Khurshid Ahmad;

 

 

 

(14) Mr.H.U.Beg (Retired Finance Secretary, Government of Pakistan);

 

 

 

(15) Prof. Syed Nawaz Haider Naqvi;

 

 

 

(16) Mr. Muhammad Yahya (Deputy Secretary-General, Mutahida Ulema Council of Pakistan);

 

 

 

(17) Maulana Gauhar Rehman;

 

 

 

(18) Mr. Iqbal Khan (Foreign Expert--Managing Director, Global Islamic Finance; HSBC Investment Bank Plc, United Kingdom);

 

 

 

(19) Dr. Ahmad Muhammad Ali (President, Islamic Development Bank,  Jeddah) alongwith his delegation namely, Mr.Muad Ali Umar (Vice-President, I.D.B.) Dr.M.Alfatah (Legal Adviser I.D.B.) Mr.D.M.Qureshi (Adviser Treasury, I.D.B.) Mr.Muhaad Al- Jehri (Director, I.D.B.), Dr.Hussain Hassan (Head of Shariah Board, Dubai Islamic Bank) and Mr.Adnan A1 Bahr, Managing Director and Chairman, International Investment Company, Kawet);

 

 

 

(20) Mr.Ismail Qureshi, ASC;

 

 

 

(21) Mr. Faheem Ahmad (Marketing Coordinator, Financial Research and Analysis Credit Rating Company Ltd., Pakistan, Karachi);

 

 

 

(22) Maulana Abdul Sattar Niazi;

 

 

 

(23) Mr. Khalid M. Ishaque, Senior Advocate, Karachi.

 

 

 

The impugned judgments were examined with the assistance of the then learned Deputy Attorney-General Maulvi Anwarul Haque. A scrutiny of the main impugned judgment would show that opinions of experts, bankers and Ulema as expressed before the learned Federal Shariat Court are contained in paras. 22 to 32 thereof. In their view, time related fixed monetary return on a loan, however, conceived or planned, is to be considered as Riba prohibited in Islam; that there is no difference between  the consumption loans and productive loans so far as the prohibition of interest in Islam is concerned; that the bank interest comes within the definition of ‘Riba’; and that Musharakah and Mudarabah arc workable systems for interest-free banking. Two former Vice-Presidents of UnitecE Bank Limited and Habib Bank Limited appearing before the learned Federal Shariat Court expressed the opinion that there is no distinction whether the addition on the capital sum of loan is based on simple interest or on compound interest, as any increment in money capital in respect of nothing but time is ‘Riba’. They and the other experts were further of the view that Mudarabah and Musharakah are viable alternatives to the banking system. They suggested restructuring of the banking system according to the Report submitted by the Council of Islamic Ideology on the Elimination of Interest from the National Economy to 1980 as well as the Reports of the Permanent Commission for the Islamization of Economy submitted in 1988 and in the later years. They are further of the view that the interest on loans floated by the Government to meet the national requirements also falls under ‘Riba’ and is prohibited, These experts expressed the opinion that the devaluation or inflation of currency would not affect the payment of loans taken before such devaluation or inflation as long as the loan was repaid in that very currency particularly when the parties to the loan transactions operate in the same currency area. Devaluation of a currency is generally directed at its value in relation to foreign currency, though this may and often does affect its purchasing power at home, especially with reference to imported goods Experts were clear that in domestic borrowing the borrower, whether an individual or the Government shall pay back the same amount which was borrowed with no increase on any pretext because the inflation causing rise in cost and value of gold and consumer goods in terms of currency is the result of circumstances beyond the control of the borrower and he cannot be held to be personally responsible for the loss of purchasing power to the lender. These experts were also of the view that interest-based transactions between two Muslim countries or between a Muslim and a non-Muslim country is not permissible because the Qur’anic prohibition of Riba is absolute and does not permit any such exception. Some of the experts, however, conceded that in cases of extreme necessity recourse to interest based borrowing or dealings may be ,permissible as far as international transactions with non-Muslim countries are concerned. Most of the experts were of the view that insurance business can be easily Islamized as according to Dr. Hasanuzzaman, Islamizing insurance business is much easier to Islamize than the banking system. In this context reference was made by several experts to the Takaful system developed in Malaysia and Islamization of insurance experience in Sudan. The experts, however, differed in their opinion whether the interest accruing on the Provident Fund comes under Riba or not. Some Ulema and scholars, relying on the views of late Mulana Mufti Kitayataullah and late Maulana Ashraf Ali Thanvi and Maulana Ahmad Raza Khan Barelvi, held that the interest on Provident Fund was not Riba. On the other hand, according to most of the bankers and economists such interest absolutely falls under the category of Riba. There was no dispute among the scholars, experts and Ulema that the payment of prizes on Prize Bonds and saving bank accounts and other schemes falls under the category of Riba. There appears also a unanimity of the view that in Shariah there is no difference between interest charged on personal loans and the interest charged on consumption loans. Some scholars provided historical evidence in their respective answers to show that commercial and productive loans were not only known in pre-Islamic Arabia but the Riba prohibited by the Qur’an was charged mostly on commercial and productive loans. There was also unanimity of views that interest is no incentive for saving as people save for many reasons other than the desire to make more money. They save for their children; they save for their own old age; they save to meet possible contingencies; they save for many other reasons. Savings were made when the banks did not exist. Savings are made by those who do not take interest on their savings and do not accept any return on their holdings. However, the Shariah modes of financing will replace the interest and will continue to serve as an inducement for saving.

 

 

 

The contentions of the learned Advocates for the parties have been summarized in paragraphs 34 to 54 of the main impugned judgment. The contentions of Mr.Khalid M. Ishaque, noted in paragraph 38, inter alia, are that there is considerable juristic opinion available to the fact that an increase to offset the inflation has legal justification and cannot be counted as Riba; and that there is juristic opinion available to meet the fact that Bank interest does not fall in the category of prohibited Riba as the Banks participate in the productive process, make productive labour possible, increase social wealth and take only a fraction of the profit that accrues to them which is not Riba.

 

 

 

The contentions urged and the issues raised by Mr. S.M.Zafar, appearing for the Banking Council and the Federation were noticed in paragraphs 48 to 53 and 130 to 133 of the main impugned judgment. As regards contention that ‘Riba’ falls within the area of ‘Mutshabehat’, learned Judges of the Federal Shariat Court discussed the meaning of ‘Mutshabehat’ in the Qur’an and concluded that ‘Riba’ did not fall under the area of ‘Mutshabehat’ and its prohibition was clear and expressed. The literal and technical meaning of ‘Riba’ in paragraphs 65 to 129 was discussed and elaborated. A number of definitions of ‘Riba’ given by the earlier writers on Islamic Law as well as the relevant Qur’anic verses (Ayats) and Ahadis of the Holy Prophet (p.b.u.h.) have been noticed in the impugned judgment to answer the question whether the interest on commercial loans falls under the category of Riba and the view recorded is that the purpose for which a loan is advanced does not create any distinction as far as the prohibition of ‘Riba’ is concerned. The misgivings expressed by certain quarters have been dealt with in paragraphs 134 to 139 of the main impugned judgment. The concept of public policy (Maslaha) and its impact on the legality or otherwise of the bank interest has been discussed in paragraphs 140 to 152 of the main impugned judgment and it was concluded, after quoting the well-known authorities on Islamic Law and Jurisprudence such as Imam Ghazah that the rule of public policy (Maslaha) cannot be invoked in support of the plea that bank interest should be permissible. The questions of inflation and indexation have been examined in detail in paragraphs 153 to 168, 174 to 177, 198 to 205, 212 to 221, 226 to 234 of the main impugned judgment. It is pertinent to note that while discussing the question of indexation the question of coins or fulus and their legal status and allied questions have been dealt with in paragraphs 169 to 173, 189 to 196, 206 to 211, 225 and 226 of the main impugned judgment. Important rules governing loans and credit and the fact of coins becoming stagnant or the value of the currency getting depreciated or devalued have been discussed in paragraphs 178 to 197 of the main impugned judgment. The examination of the laws impugned before the Federal Shariat Court is to be found in paragraphs 234 to 354. The subject of previous and existing contracts and obligations has been dealt with in paragraphs 355 to 365 and the discussion on the excuses/reasons advanced on the basis of international situation is contained in paragraphs 366 to 378. This completes the survey of the main impugned judgment in these appeals.

 

 

 

At this stage it would be appropriate to give a comparative statement quoting question-wise opinion/answers submitted by Mr.Sartaj Aziz who was, at the time of filing of replies, Finance Minister, though the said opinion was given in his personal capacity, but as it is representative of the view-point of the opinions expressed by one shade of Economists/ Scholars, as well as the answers/opinions submitted by Islamic Development Bank, Jeddah, which represents the views/opinions of the opposite group of scholars/economists, are being reproduced hereunder:---

 

 

Question No. l

 

 

 

The Holy Qur’an has prohibited ‘Riba’. What is meant by this term? What is its true definition and connotation in the light of the Holy Qur’an and Sunnah of the Holy Prophet (p.b.u.h.)?

 

 

Reply of Mr. Sartaj Aziz

 

 

 

RIBA: There is no doubt that the Holy Qur’an has prohibited Riba. The term Riba has been variously defined by different schools of thoughts. There is need for an authoritative definition of the term ‘Riba’.

 

 

 

In Arabic language ‘Riba’ means an increase but every increase, on money lent does not automatically become Riba. In order to come within the term Riba, such return would have to reflect exploitation of the borrower by the lender.

 

 

 

Any form of exploitation is repugnant to teachings of Islam and that includes exploitation of the lender by the borrower. The lender has been permitted in Qur’an to receive back the principal sum (pas-al-Mal). The introduction of paper currency has made it difficult to protect the real value or purchasing power of money. Inflation systematically and continuously erodes the purchasing power of paper currency and, therefore, it would be unfair to the lender if the borrower were to return the same amount of money, with reduced purchasing power to the lender after a period of time. This would amount to exploitation of the lender by the borrower. If the principle of protecting the value or purchasing power of money is accepted, then any payment which is made in addition to the principal amount, in order to compensate for the fall in value, cannot be termed excess or `Riba’.

 

 

Reply of Islamic Development Bank

 

 

 

In its decision No.3 for 1406H, the OIC Fiqh Academy defined the Sharia’h prohibited Riba.

 

 

 

Question No.2

 

 

 

What is the true scope of the transactions to which the bar of Riba is applicable? Can the term Riba be also applied to the commercial or productive loans advanced by the banking and financial institutions and to the interest charged thereon?

 

 

Reply of Mr.Sartaj Aziz

 

 

 

Interest charged by banks and financial institutions has three main elements;

 

 

 

(a) Compensation for the loss of purchasing power in the value of money. In most countries, the rates of interest prevalent for banking transactions closely follow the rates of inflation;

 

 

 

(b) Charges for services rendered. In addition to providing loans, the Banks generally render a wide range of services to their clients; and

 

 

 

(c) Some return or profit on the amount lent. A portion of this, in turn, is passed on to depositors who keep their money in Banks.

 

 

 

Each of these components can be estimated and charged separately but in practice these are averaged in the light of prevailing trend and revised periodically in response to the demand and supply of money in the market.

 

 

 

If the principle of protecting over time, the real value of money advanced by a bank as loan, is accepted, then interest charged by banking and financial institutions in Pakistan to that extent should not come within the definition of Riba.

 

 

 

Interest charged by Banks is also controlled directly or indirectly by the Central Bank. In Pakistan, this function is performed through State Bank of Pakistan which takes into account several factors of national importance i.e. need to control inflation, sustained economic growth and orderly monetary expansion. If the principles are judiciously observed, there will be no element of exploitation of the borrower by banks and financial institutions.

 

 

Reply of Islamic Development Bank

 

 

 

For an answer to this question, Decision No.3 for 1406H of the OIC Fiqh Academy should be consulted.

 

 

Question No. 3

 

 

 

The Pakistani banks and some financial institutions finance their clients on the basis of buy .back on mark-up agreements. According to this method the client of the Bank purports to sell a particular commodity to the bank, and simultaneously buys it back on a higher price on deferred payment basis. A certain rate of mark-up (per cent. per annum) is applied to the second sale. Does this arrangement fall within the. ambit of Riba?

 

 

Reply of Mr.Sartaj Aziz

 

 

 

As regards buy-back and mark-up, the Federal Shariat Court has ruled that the system of mark-up, as in vogue in Pakistan, is repugnant to the Injunctions of Islam (Para. 262 of the judgment).

 

 

 

The mark-up system is based on the well known Islamic concept of Bai Maujjal which is accepted by all Fiqahs as permissible. After the Federal Shariat Court Judgment, and, taking into account the observations of the Shariat Court, the Commission for Islamization of Economy appointed a Working Group to review the existing practices. They have now come up with recommendations for modifying the system. Under the revised system, banks will not buy the goods from the customer and sell them back to him. The bank will finance transactions where the customer intends to buy goods from the market (including import from foreign countries. He will provide a list of the required goods to the bank and the bank will purchase and supply them to the customer on deferred payment (Bai ffuajjal) basis. The price at which the bank sells the goods to the customer on deferred payment will be worked out on cost-plus or marked up basis. Under the proposed system the objections raised by the Shariat Court will be rectified as there will be no sale of goods by the customer to the bank and its buy-back from the bank by the customer as in the present practice.

 

 

Reply of Islamic Development Bank

 

 

 

In a similar transaction, the OIC Fiqh Academy put as a condition on . the legitimacy of the second sale transaction that it should be concluded with a party other than the party in the first sale transaction. As an example, if a person sold a specific commodity in cash, then he happened to have found the same commodity with another person and brought it from him on credit, both contracts are legitimate and correct.

 

 

Question No.4

 

 

 

Is there any difference between a Muslim and a non-Muslim in the matter of prohibition of Riba? Can the prohibition of Riba be extended to the loans obtained from non-Muslim, or for that matter, from Muslim foreign countries whose laws and national policies, together with international monetary laws and policies, are not within the control of the State Bank of Pakistan?

 

 

Reply of Mr Sartaj Aziz

 

 

 

This is a matter which needs discussion with religious Scholars. However, Injunctions of Islam cannot be imposed on non-Muslims. If a Muslim has to borrow from a non-Muslim, he must accept the lender’s terms and in the present.-day-world, all money-lending transactions are interest-based. Even in the times of Holy Prophet (peace be upon him), there we-re instances of interest having been paid to non-Muslim lenders. This supports the view that in case a Muslim (or an organization in an Islamic country) has to borrow, out of necessity, from a non-Muslim person or organization, the terms of the transactions should be governed by the agreement entered into by the parties.

 

 

Reply of Islamic Development Bank

 

 

 

Regarding interest-based borrowing from other foreign countries, we mentioned earlier the cases in respect of which the prohibition is waived under the general juristic rule of “Necessity”.

 

 

Question No.5

 

 

 

The Government of Pakistan and some institutions under its control acquire loans by issuing bonds and certificates etc. and pay a fixed period-wise `profit’ to the holders of such securities. Does this profit fall within the definition of Riba?

 

 

Reply of Mr.Sartaj Aziz

 

 

 

A “fixed period-wise profit” does not automatically fall within the definition of `Riba’ if it does not share other characteristics of ‘Riba’, the most important of which is its exploitative nature. Government, as the borrower, cannot be exploited by the lender (public) as Government is more powerful. All the Government borrowings are at a rate fixed by the Government i.e. the borrower. Lender i.e. the public is in no position to dictate or impose its terms on the Government. It would be difficult for the Government to borrow on Musharika or other Islamic modes because most citizens who want to invest their savings in Government Savings Schemes or bonds want a predetermined and fixed return.

 

 

Reply of Islamic Development Bank

 

 

 

The answer to this questions has been given in the decision of the OIC Fiqh Academy No. 60 (5/11) for 14 1 OH.

 

 

Question No.6

 

 

 

It is evident that the value of the paper currency has a trend of decrease in the inflationary situation. If a debtor who has borrowed a particular amount of paper currency repays the same amount to his credit after a substantial time, the creditor can suffer the effect of inflation if he demands his debtor to pay more in order to compensate him for loss of value he has suffered, can this demand be treated as a demand of Riba”.

 

 

Reply of Mr.Sartaj Aziz

 

 

 

As explained in answer to Question 1, the introduction of paper currency has led to persistent inflation in the modern world, thereby continuously eroding the real value or purchasing form of money. There are other causes of inflation also. In an inflationary situation, compensation for depreciation of money over time in a period of inflation would be justified. If compensation is not given in such a situation it would tantamount to penalizing creditors or savers, including those with small means. A clear consensus on the subject of indexation is, therefore, necessary to clarify that any compensation paid for the loss of value is not ‘Riba’. The concept of compensatory cost as provided in section 35 of C.P.C. has not been held by the Federal Shariat Court to be contrary to Injunctions of Islam.

 

 

Reply of Islamic Development Bank

 

 

 

For an answer to this question, please refer to the answer of the Fifth Question addressed to the Islamic Development Bank.

 

 

Question No.7

 

 

 

If all the forms of interest or mark-up are held to be repugnant to the Islamic Injunctions, what modes of financing do you suggest for: (a) financing trade and industry; (b) financing the budget deficit; (c) acquiring the foreign loans; and (d) similar other need and purposes?

 

 

Reply of Mr.Sartaj Aziz

 

 

 

(a) As far as trade and industry are concerned, Pakistani banks have already introduced non-interest-based modes of financing which arc being constantly modified and improved to meet the objections of Shariah experts. The latest modifications being introduced at the instance of the Commission for Islamization of Economy will bring about further improvements.

 

 

 

(b) Budget deficit is financed by Government borrowings in the shape of various instruments floated by the State Bank of Pakistan and under the Savings Schemes. As discussed in reply to Question No.5 above borrowings by the Government on interest or fixed pre determined rate of return should not come within the definition of Riba.

 

 

 

(c) As far as foreign loans are concerned, we are in no position to dictate terms to the foreign lender and have to accept loans on their terms or go without them. These foreign loans are always interest based and it is not possible for Pakistan to insist that they give us loans without interest. Pakistan has total outstanding foreign loans of about $17 billion on which the annual debt servicing liability is about $1.6 billion. This is expected to increase to over $2.0 billion in the next 3 years. Pakistan has to borrow at least $2 billion a year in the next few years to service these loans since it is not in a position to become a capital exporting country.

 

 

 

(d) Pakistan has already made good progress in introducing various Islamic modes of financing for different financing transactions. Further improvements will be introduced on the basis of the Report of the Commission for Islamization of the Economy referred to above. However, a clearer and more flexible definition of `Riba’, on the lines suggested in answers to. Questions Nos. 1, 2, 4, and 5 is necessary to maintain a viable financial system which can co-exist with and do business with the rest of the world.

 

 

Reply of Islamic Development Bank

 

 

 

Distinction should be made between interest-based transactions on the one hand, for which decision of the OIC Fiqh Academy No.3 for the year 1410H should be consulted, and those based on mark-up added to the actual cost of the commodity sold, on the other. This second category of transaction is one of the Shari’ah-complaint modes of financing; it is embodies in a legitimate Murabaha contract, in addition to Istisna’, Salam, leasing, Musharaka and Mudharaba contracts, as we explained in our previous answers.

 

 

 

Essentially, all Islamic modes of financing are, by definition, interest-free. Thus the door is open for utilizing legitimate modes of financing, whether to finance trade, industry, budget deficit or to obtain  foreign financing. These modes are based on one of three principles partnerships, leasing contracts and instalment sale contracts. In the following paragraphs, we intend to recommend particular modes for financing particular transactions, although the door is wide open to select, without any restrictions, any of these modes. For more details, please refer to our response to the second question of the questions addressed to the Islamic Development Bank.

 

 

A. MODES FOR FINANCING COMMERCE AND INDUSTRY

 

 

 

1. Murabaha

 

 

 

Under this mode, the financier buys, at a specific cash price, a certain commodity, which is then purchased by the bank’s client at a higher price (i.e. at a profit mark-up), but on credit.

 

 

 

2. Salam

 

 

 

A sale contract between two parties, in which the payment in respect of a fully described commodity is advanced against a specific future delivery date of such commodity.

 

 

 

3.  Instalment Sale

 

 

 

A sale contract between two parties, the subject-matter of which is a fully described commodity, in which the commodity is delivered immediately at the time of contracting and the price is deferred until a specific future date.

 

 

 

4.  Istisna’

 

 

 

This is a contract of manufacture between two parties, where one requests the other to deliver him a manufactured commodity according to agreed-on description/specifications, delivery date, price and date of payment. In this contract, the price may be deferred.

 

 

B.         MODES FOR FINANCING BUDGET DEFICIT

 

 

 

1. Mudharaba

 

 

 

A contract in which the capital extended is given a pre-agreed and specific share in the profits; such share is expressed in proportional terms, such as one-third, half or one-quarter. This modes could also be realized through the issue of Mudharaba (investment) certificates.

 

 

 

2. Musharaka

 

 

 

This is the same as a Mudharaba contract, with the difference that in Musharaka both parties participate in management and the provision of capital.

 

 

 

3. Leasing

 

 

 

In this mode of financing the financier purchases equipment or fixed assets that generate services in order to lease them to his client.

 

 

 

4.  Murabaha, Salam, Instalment Sale and Istisna’

 

 

 

As it is the case in private companies, Government-owned enterprises can be financed by way of Mudharaba or Musharaka certificates.

 

 

 

In addition to the above, certificates could be issued to purchase equipment or service-generating assets in order to lease them to clients.

 

 

 

Certificates could also be issued to finance instalment sale, either on the basis of Murabaha, Salam or Istisna’.

 

 

 

As joint stock companies obtain financing, the Government could do the same, utilizing the same modes. Government could also finance its purchases on the basis of instalment sale.

 

 

C. ALTERNATIVE TO FOREIGN LOANS

 

 

 

To provide an alternative to foreign loans, arrangements could be made to issue Musharaka and Ijara certificates to finance projects, especially development projects.

 

 

D. MODES OF FINANCING FOR OTHER PURPOSES

 

 

 

Any of the above modes of financing could be utilized to suit the purpose.

 

 

Question No- 8

 

 

 

If you are of the view that all the forms of interest are prohibited by Shariah, then what procedure will you suggest to eliminate it from the economy? If you prefer a gradual process, what strategy do you suggest for the purpose which may fulfil the requirements of the Holy Qur’an and Sunnah?

 

 

Reply of Mr.Sartaj-Aziz

 

 

 

It is my considered opinion that all forms of interest is not ‘Riba’ and only interest with an element of exploitation of the borrower by the lender is `Riba’. However, even if the Court were to accept a broader definition of `Riba’, its elimination would have to be gradual process. The financial system of country in the modern world is one a large and complex scale and would not be able to withstand drastic changes that violate the basic laws of economics. Also the financial system cannot be evolved in isolation from the world and also in deviation from prevailing political, economic and moral values and norms in a society. For example, a bank will find it difficult to expand its lending on the basis of Musharaka, in the absence of proper Islamic business ethics and correct accounting procedures. The switch over from conventional to Islamic Banking would have to be pursued gradually keeping in view the positive response of the society to Islamic modes of financing and the costs of transactions and of monitoring. Simultaneously greater flexibility in the definition of Riba on the lines indicated above would make the task more manageable.

 

 

Reply of Islamic Development Bank

 

 

 

For the various types of interest and the Sharia’h rules regarding them, please refer to the decision of the OIC Fiqh Academy No.3 for the year 1406H.

 

 

 

Graduation in implementing Sharia’h Injunctions is well recognized in Sharia’h for the general juristic rule on the matter states that “What cannot be entirely attained should not be entirely left”. Such graduation, however, requires the existence of a well-conceived plan and successive or parallel steps, without disturbing the country’s economic system. Also, it requires exerting special efforts to protect the integrity of this economic system, its institutions and structure in accordance with the conditions of each country.       

 

 

 

Any proposed strategic plan for gradual and safe transformation should consist of the following phases:

 

 

 

(1) The first phase would involve examination and modification of those laws related to the future of building an interest-free economy. It also involves establishing the institutions necessary for developing Islamic banking in an integrated manner, assimilating its modes of financing and building an Islamic capital market. During this phase, dealings would be based on the old and the new interest-free system. Shari’ah-based transactions should be given incentives. Orientation seminars should be held, at all levels, to familiarize people with the Islamic modes of financing.

 

 

 

(2) The second phase involves a gradual and balanced cessation of interest-based transactions at the national levels (i.e within the State’s territory). Islamic banks and financial institutions would start to find alternatives for investing their surplus liquidity, and for companies and other organizations in need of financing to find alternatives in the market for exchanging their debts with interest- free modes. This would be undertaken while honouring past obligations embodied in repayment of the principal amounts and the interest charged thereon, for Muslims must honour their contractual obligations, ‘ as pointed out in our answers to sixth question addressed to the Islamic Development Bank.

 

 

 

(3) The third phase involves encouragement of the utilization of Islamic modes of financing in all foreign transactions, cessation of new interest-based financing (unless in cases of absolute necessity, as said earlier), honouring past obligations and commencing application of an interest-free financing system to replace the old interest-based one.

 

 

 

More details on this issue could be found in IDB’s response to the fourth question addressed to it.

 

 

Question No.9

 

 

 

If all the transactions based on interest are held to be violative of the: Islamic Injunctions, what will be the treatment of the past transactions and agreements? Especially what procedure should the Government adopt with regard to the previous foreign loans?

 

 

Reply of Mr.Sartaj Aziz

 

 

 

All the past transactions were based on agreements voluntarily entered into between the banks and their customers which provided for payment of interest. The customer had the choice of taking the money or not and, having chosen to do so and agreed to pay interest, cannot now go back on his agreement and refuse to pay interest having already availed the facility and taken full advantage of the resources provided by the bank. It is also an Injunction of Islam that people who made commitments and entered into agreements must honour them.

 

 

 

Accordingly, if people who try to avoid their obligation to pay interest are themselves committing breach of Islamic Injunctions.

 

 

 

Accordingly, with due respect it is suggested that all the past transactions must be honoured as enjoined by the Holy Qur’an. Banks have been working on the basis of earned income and not recovered income. Thus, all the interest earned by the bank on advances, whether recovered or not, is accounted for in the books of the bank and on that basis returns have been paid to depositors whose money was involved in advances. Thus banks having already paid to their depositors interest on their deposits need to recover interest on advances and if they are prevented from doing so, no bank in Pakistan will be able to survive and the entire economy of the country will risk a total collapse.

 

 

 

As regards foreign loans, this involves not only the sanctity of the agreements made but also the credibility of the country. If Pakistan defaults in payment of interest to its foreign lenders, no further assistance or investment will be forthcoming. Almost every development programme undertaken by Pakistan in public or private depends on foreign loans and assistance which will not be forthcoming if we do not honour our past commitments.

 

 

Reply of Islamic Development Bank

 

 

 

Negotiating with creditors may be considered regarding previous interest-based debts; it would be fine if they accept exchanging such debts with new project Musharaka or Ijara certificates. If such swaps are not acceptable to those creditors, then the principals and interest charged thereon should be paid as this is dictated by the interests of the debtor countries; this would enable them to avoid economic shocks or losing their credibility. The necessity of honouring all previous outstanding financial obligations has been made earlier in our response to the fourth question addressed to the Islamic Development Bank.

 

 

Question No. 10

 

 

 

Whether a creditor can fix time and rate of profit while the debtor saying Insha Allah, he will be liable to earn and pay the same in time; failing which the guarantor may give profit asked for plus also a bonus or compensation for delayed payment, if any, and also according to other arrangements regarding the loan. What will be the position if the system of insurance for the said profit is introduced?

 

 

Reply of Mr.Sartaj Aziz

 

 

 

Reply of this question was given by Mr.Sartaj Aziz in two parts describing the portion Whether a creditor can fix time and rate of profit while the debtor saying Insha Allah, he will be liable to earn and pay the same in time; failing which the guarantor may give profit asked for plus also a bonus or compensation for delayed payment, if any, and also according to other arrangements regarding the loan to be Question No.10 and portion What will be the position if the system of insurance for the said profit is introduced to be Question No. 10-A. His Reply to Question No. 10 reads as under:--

 

 

 

“In Musharika transactions the sleeping-investing partner can fix a share from the income of the joint-venture and a period at the end whereof accounts would be made and mutual rights and liabilities settled. Third party guarantees, depending on circumstances, are permissible provided elements of ghemar and Ghararare not present in such agreements.”

 

 

 

Reply to Question No. 10-A reads as under:--

 

 

 

The question pertains to the possibility of insuring the losses. If the banks were to work as Baitul-Ma’1 in partnership with the borrowers after examination of the business that the borrower had decided to set-up, then it is quite likely that in ordinary times 70% of the businesses would prosper, 20% might suffer losses and 10% might break-even. The banks would receive their share from each. But to secure themselves against losses the idea of insurance of business losses could be initiated. However, the procedures could be dif; cult. There has been some thinking about insuring the banks against bad loans but no system has yet been developed. However, insurance against losses would appear lawful according to Shariat.

 

 

Reply of Islamic Development Bank

 

 

 

Although this question is not quite clear, two issues might be deduced from it, if our interpretation of it is correct:

 

 

 

(1) If the debtor of a legally contracted debt resulting from Murabaha, for example, delayed repayment of his debt and requested its rescheduling, is it legal in this case to recalculate the amount of profit based on a longer repayment period?

 

 

 

(2) In case there is a guarantor for the debt contracted, when the debtor fails to repay on maturity day, leading the creditor to claim his dues from the guarantor, who requests rescheduling the debt amount, is it possible to extend the repayment period in return for increasing the debt amount?

 

 

 

Answer to these two questions was stated in the decision of the OIC Fiqh Academy No. 10 (2/10), which was mentioned earlier.

 

 

 

Regarding the practice of the Islamic Development Bank, in case of Murabaha and instalment sale operations, no additional amount is charged for delay in repayment by the debt or according to the repayment schedule agreed upon. The Bank is currently studying the means through which it could face the losses incurred as a result of such delays in repayment. Regarding leasing operations, the lessee is obliged to pay rent in respect of the entire period during which he benefited from the lease property.

 

 

 

At this stage, it is pertinent to mention that after completion of the ‘reading of the judgment of the Federal Shariat Court, Maulvi Anwarul Haq, learned Deputy Attorney-General, requested that arguments on behalf of the Federation may be allowed to be addressed after hearing the contentions and views of the Economists, Jurisconsults and Religious Scholars as well as the learned counsel for the respondents so that all such pleas and contentions could altogether be replied. This request was not opposed and as such we proceeded to hear the scholars, jurisconsults and economists who chose to attend the hearing.

 

 

 

The contentions urged by the scholars may now be noticed.

 

 

 

Dr. Sayyid Tahir of Institute of Islamic Economy, International Islamic University, Islamabad contended that interest in every form is `Riba’ and a lender is entitled to the exact amount he has advanced as loan, under the Shariah, no matter whatever expenses was made in advancing a loan or its recovery. Regarding the loan contracts which had already been executed on the basis of interest, he contended that those should be treated as past and closed chapter. He contended that under the Islamic Injunctions, the contract already executed had to be honoured minus Riba; that contract for debt between two individuals must be based on equality.

 

 

 

Dr.Waqar Masood, Director-General (Planning), International Islamic University an Economic Expert of the Government contended that the new system has to conform with the change through tremendous re-documentation of the present arrangements in the private sector, but in the public sector it would require many changes in the fiscal system; referring to the banking sector, it was contended that the profit and loss savings were closest to the Islamic banking system and there was a consensus that the bankers need not inform the depositors where their funds were being invested that Mudarbas and Musharkas (finance and partnership) fell into the Islamic concept of investment. Talking about three kinds of coins at the time of revelation of Islam, he said the existing system of coinage was accepted by the Holy Prophet (peace be upon him) and besides gold and silver coins, copper coins were also in use at that time which was later named as “fulus”, and the ultimate survivor was the “fulus”. He narrated the brief history of different coins and its origins and usages between different people. He said that there were four aspects which affected the currency and this includes inadequacy in backing up commodity (gold. silver); Trust (credibility of the issuing institution); Social, political and economic circumstances; and risk of forgery. He referred to the situation during British-French War, to state that the people had started withdrawing the gold they had deposited against the currency issued to them and that was the first time when conversion was denied by the Government. According to him indexation is basically motivated to combat the adverse effects of inflation and it (indexation) is no answer to inflation, rather it amplifies inflation. He pointed out that besides the laws noticed in the impugned judgment there are other laws containing provisions as to charging of “interest” and examination of the same is necessary for eliminating Riba and for seeking compliance of Shariah in all facets of economy. Dr. Waqar Masood also referred to the provisions of Constitution e.g. Article 78, 79 and 166, to point out the necessity to enact law with a view to regulate the borrowing by the Government. The written submissions later filed elaborating various aspects of the issues involved will be dealt with while discussing these matters.

 

 

 

Mr.Abu Bakar Chundrigar, Advocate, learned counsel for the Habib Bank Limited; while assisting the’ Court on the question of Riba argued that the research carried out by the Muslim Scholars showed that interest does not fall within the connotation of `Riba’. According to him, there is prohibition of Riba in Qur’an but the detailed view on the issue has not been expressed there. He requested the Court to keep in mind all the complexities of the system which affected the economic system and the banks should be compensated against rise in inflation.

 

 

 

Mr.Abdul Jabbar Khan, a Banking Expert (former President of the National Bank of Pakistan), addressing the Court contended that interest was illegal and forbidden in all forms and the Holy Prophet (peace be upon him) had waged a Jihad against interest or Riba and proposed a 16-Point Action Plan for dealing with the issue of Riba. He informed the Bench that Commission of Islamization of Economy in its report on banks and financial institutions had even drafted circular instructions to be issued by the State Bank to the banks and financial institutions, alongwith formats of legal documents to be executed by the clients financed under non-interest Banking system. He added that the report of the Commission had also identified how financial steeds could be better met within Sharia parameters. Mr.Khalid M Ishaque, Senior Advocate, contended that all the forms of interest were riot prohibited in Islam and only “Ribs al Nasie” or form of interest which was made compulsory/mandatory or taken by force was prohibited. He contended that the present banking system as a whole could not be termed un-Islamic and learned Federal Shariat Court has erred in declaring all forms of interest un-Islamic and it would be in the interest of justice if the case is remanded to the Federal Shariat Court so that the Court can review its decision in view of Injunctions of Qur’an and Sunnah and current banking system. It was contended that ‘current Banking System is not above Constitution and its adoption is a compulsion; that a mid way will have to be found as Qur’an’s teachings can control the economy of the world; that if a compromise way is not found then our economy would be destroyed like those of Korea, Indonesia, Malaysia and Thailand.

 

 

 

Dr. Muhammad Omer Chhapra, an Economist and Expert on Islamic Banking System, and Senior Economic Advisor at Saudi Arabian Monitoring Agency, dealt at length with the Islamic modes of financing and whether or not the existing Banking System fulfilled the requirements of Shariah. He further submitted that Qur’an has used the word “Ribs” for “interest” whereas there are about 70 different shapes of Riba; that the laws given by the Allah Almighty in Qur’an are final and explicit and there is no other way for Muslims but to subscribe to such injunctions without any hesitation; that it is possible that human mind does not comprehend the benefits hidden in following Islamic system of finance which totally prohibit “Riba” (interest in its all forms) but as the humanity develops these benefits will be felt and surface as bounties of Allah Almighty; that the biggest handicap of the Banking System in vogue is that only the people having valued assets or lands which can be mortgaged avail facility of loan and these individuals in general do not pay interest and mostly usurp the principal amount and in such a scenario the -possibility of national development diminishes; that Pakistan should try to attain self-sufficiency to end crucial dependence on loans from World Bank or IMF as these loans are giving rise to financial instability; that declaring interest as un-Islamic is not  he real issue instead question of doing away with the interest system is a big ,question which warrants solution; that transactions and profit where risk is not involved come under the definition of interest; that a country can get loans on interest from non-Muslims in acute emergency, but such loans are devastating for economy of that country; that Islam allows use of Haram for existence. He pointed out that Turkey got loans of about 6.5 billion dollars on interest to improve its economy but the economy did not improve; Pakistan has taken credit of over 30 billion dollars, which would be harmful for economy; that instead of investing reasonable amount in social sector and development projects, the Pakistan Government is allocating only 15 per cent. of its total annual budget; that for elimination of interest-based system, the Government should implement a judicious economic system, in which the people should be provided equal opportunities in employment, education and health; that charging of interest was prohibited mainly because of the injustice it inflicted upon the poor. Emphasising that in a Muslim society all measures were needed to reduce luxury expenditure both by the people as well as the Government, he dealt with various connotations of investment which, according to him, could be productive, unproductive and speculative. Turning to the interest-based banking system, he contended that the element of speculation in international market caused diversion of resources from essential investment which was against the principles of Islam, and when consumption rose the rate of savings decreased which in turn limited the Government’s ability to provide full employment. He, referring to the United States, where according to him, were negative savings, contended that this was because the dollar was an international currency and a sizable amount was brought back into the United States and in Pakistan’s case it was not possible so the rate of savings has to be increased. Giving comparative statistics of the rate of savings, he stated that Pakistan’s savings at 13 per cent. were very low as compared to 35 per cent. in Malaysia and Taiwan, and 42 per cent. in China. He added that for the past 100 years the rate of return on equity in the United States was 7 per cent. whereas on treasury it was 1 per cent. and in case of Germany and Japan it was 5.9 and 4 per cent. respectively on equity whereas in the case of T-Bills the return was wiped out during the world war. According to him it was possible to get a hither rate of return on equities. He dealt with the equitable distribution of resources and contended that despite progressive taxation in the Western countries it was no longer possible to continue with welfare spending such as health, education etc,, and maintained that the modern banking system has failed to finance smaller companies because they could not furnish collaterals; that 56 per cent, of the resources provided by over 28 million depositors went to borrowers who did not pay back. In respect of problems being faced by Japan and the Asian Tigers, he contended that too much money was doled out by the banks to the stock market and when the banks stopped lending, it had a domino effect. The Asian Tigers collapsed because over 50 per cent. of the money had been got from the outside on short term and the banks were lending it on medium ,or long terms, which created problems especially in view of hedge financing and, therefore, $30.3 billion out of a total of $1,490 billion in April, 1998 were transacted for speculate trading.

 

 

 

Dealing with prohibition of interest, Mr. Chhapra referred to the alternatives suggested by Shariah i.e. the primary and more risky modes of Modaraba (passive partnership between the financier and the entrepreneur), Musharakah (active partnership) and shares of joint stock companies, wherein the rate of return is based on the ultimate outcome of a business and not determined in advance and the depositor participates in the risk; and the secondary and less risky modes of Murabaha (cost plus service charge). Ijarah (Leasing), Ijra wa Iqtina (hire-purchase), Salam (forward delivery contract), and Istisna (contractual production) wherein rate of return is stipulated in advance and the depositor is free from the risks of the business. According to Mr.Chhapra, the bank is a Modaraba and it could lend to a sub-Modaraba and there is no permission required from the depositor for further lending, and the bank has the right to lend because it is providing the service of keeping the depositors’ money in safe custody. Narrating the major problems to be faced by an Islamic Bank he stated that Islamic Bank has to compete with other agencies as it would be very difficult to operate if harsh measures are taken. According to him a person might be imprisoned but no financial burden should be imposed, and the liberal view supported imprisonment and financial penalties as a deterrent by a Court of law to recover the actual damages which include compensatory cost. It was suggested that the law should be changed enabling the publication/circulation of names of defaulters by the bank. On rescheduling of loans Mr.Chhapra urged that it was possible in an interest based economy but in Islamic banking it could be done only for genuine reasons. He asserted that lease contracts must be different from the contracts for the purchase of residual assets.

 

 

 

As regards establishment of banks, Mr.Chhapra urged that 1400 years ago banks did not exist and people knew each other personally and performed trade and transactions among themselves during the period of Holy Prophet; that banks were formed in 15th and 16th centuries and first Islamic Bank was established in 1975 in Dubai and in 1996 there were 166 Islamic Banks in 34 Muslim and non-Muslim countries of the world.

 

 

 

Summing up arguments, he contended that a Central Shariat Board should be established; that the current Constitutional system of transactions is against teachings of Qur’an and Sunnah of the Holy Prophet (peace be upon him) and it is the Court’s responsibility to fix date for gradual Islamisation of system. He contended that new banking system should be started along with old system and later the non-Islamic Banking System should be eliminated.

 

 

 

Mr. Ebrahim Sidat, a Chartered Accountant by profession, appeared to make his submissions against the continuation of interest-based banking system and urged that the banking system of the country could be switched over to the Islamic mode within three to six months. According to him, there are no technical difficulties in introducing Islamic modes, it is just the lack of will and determination on the part of the Government. He contended that in order to bring the banking system strictly in accordance with the Islamic framework, Riba-based investments should be a cognizable offence as unless the Riba-based investments are made cognizable offences, many people will continue to circumvent it. He, however, added that the existing contracts must be honoured and after a cut off date option must be given for switching over to either of the Islamic modes. It was further contended that certain provisions of the Partnership Act should be amended to get rid of interest, in accordance with the judgment of the Federal Shariat Court; that revaluation of assets should not be done on the basis of book value but on the basis of its real value; that there could be no doubt about the need of doing away with Riba after what had been clearly spelt out in the Qur’an; that Riba is a matter which does not need to be dilated and fears and apprehensions that it cannot be replaced are misplaced; that Riba in all its manifestations was deplorable and the Federal Shariat Court’s judgment in this regard was a valid document and it is a matter of regret that after the initial steps in the early 80’s the process was reversed and ultimately put on the back-burner. He referred to State Bank of Pakistan’s report in which there is no mention of interest-free economy. He contended that one of the difficulties being faced in the Islamization of the banking system is that instead of treating Murabaha as a trading device people consider it as a financing instrument; that Modarabas and Musharikas are compatible with venture certificates and the venture certificates are influenced by the Islamic modes and its propriety under Shariah has to be looked into; that private Musharikas are operating successfully and no one is talking about its credibility. According to him Modarabas have become popular because some tax evaders use it as a shelter; and whole export funds are not subjected to tax on profits which provide strong motivation for playing with the figures e.g. presumptive tax. In reply to a question about the format of the accounting procedure under Islamic mode of financing he stated that it would not be different but requires expanding the scope of corporate law for carrying out Shariah audit and since every audit firm would not be having the Shariah experts, it could fall back upon others who possessed the expertise.

 

 

 

Mr.Ebrahim Sidat, like Mr. Chhapra, also recommended that the State Bank of Pakistan should have Central Shariat Supervisory Board to monitor the Islamic modes. He also suggested that not only corporate but private Modarabas should also be allowed to harness the funds available with individuals who lack the expertise but could make profit with the help of some experts citing the case of funds available with the employees relieved of the jobs through golden handshake.

 

 

 

Syed Muhammad Hussain, Chartered Accountant, contended that an authoritative pronouncement in respect of all types of interest, and with whatever name it is called, is required which could legally be implemented without scope for loopholes or misinterpretation; that interest be made a cognizable offence and investment companies should not accept interest based funding; that the economic order based on the Holy Qur’an and Sunnah of the Holy Prophet (peace be upon him) is for all times to come and the elimination of interest occupied a key position in the establishment of that order and centuries of colonisation have created doubts among the Muslims about the matter; that all loans taken by the Government from the public by issuing domestic debt instruments with a fixed rate of return/profit as well as the loans taken by the public from the Government-controlled banks should either be retired or be converted into an interest-free liability, such as equity; that the Government could request the foreign lenders to change the forms of contracts by replacing the existing interest-based contracts with those equivalent to Riba-free contracts as foreign loans contracted with foreign Governments or international financial institutions could not be terminated unilaterally, and if the foreign lenders refuse to do so, the contracts should.be honoured but without creating any further delay in meeting the payment obligations giving the quantum of uncertainty involved in settling the matter with foreign lenders; that the Federal Government should be directed to form a working group with a specific time-frame to chalk out an action plan for settling the matter with foreign creditors; that mark-up and interest in the present form levied by the financial institutions on accommodation, bill discounting charges, profit and interest payable on majority of leasing contracts, profit and interest payable on majority of PLS and interest-bearing deposits and profit and interest payable on majority of Term Finance Certificates (TFC) and National Savings, fell within the ambit of Riba prohibited by Islam; that interest payable on all present treasury bills and bonds, the interest levied on money due to Government on various accounts and the interest and penalties levied by the utilities and other business concerns on amount overdue also fell under the same category. He suggested structural and legal reforms and in this context mentioned Shariat audit, auditing and accounting standards, risk mitigation, trade finance and mark-up and Murabaha transactions.

 

 

 

Mr.Maqbool Hussain, Chairman Small Group of Companies, in his submissions stated that only paper work was done in Pakistan with regard to Islamization whereas the situation warrants a non-political autonomous body which not only makes laws in conformity with basic principles of Islam but also supervise the implementation of legislation regarding Islamization. He proposed creation of an Islamic Banking (Planning and Implementation) Board with a mandate to reform the whole, system- and suggested that this Board or Commission should comprise jurists, Ulerna, bankers and chartered accountants with a time span of two to five years. He contended Modarba is the only. system through which the economy of Pakistan could be transformed into a viable and credible economic order.

 

 

 

Dr.Shahid Hasan Siddiqui, an Economic Expert and Chairman of the Karachi-based Research Institute of Islamic Banking and Finance, appeared to state that present banking system is at the verge of collapse while the nationalized banks arc facing bankruptcy. Relying on various circulars and reports issued by, the State Bank of Pakistan which is regulatory body for all banking institutions including Development Finance Institutions, he urged that the successive Presidents of nationalized Banks had issued false and fictitious balance sheets showing increase in profits while in fact the banks have sustained record loss during the last ten years which even exceed the losses sustained during 41 years after independence, and these losses also exceed total profits by the banks in our whole life as a new nation; that interest-based banking system has failed due to corruption by the bankers and the interest-free banking system may also face the same fate at their (bankers’) hand and in the circumstances the Islamic Banking System may not prove successful; that the auditors who had been certifying false balance sheets of banks/DFIs including those who had certified higher value of assets for rescheduling of advances to sick units should be blacklisted and revaluation of assets should not be used for allowing new finances against the revalued assets. According to him in view of the documentation and declaration of correct profits by entrepreneurs the tax collection would be enhanced while the cost of production would go down as profits would be shared with the banks after the profits were declared. Referring to the Banking Companies Amendment Act, 1997 it was stated  that incentives given under this amendment are “un-Islamic, unjust and harsh for investors”. A high powered commission was also recommended by him to be established for looking into the cases of written off loans involving billions of rupees. He proposed that all modes of deposits, mobilization and utilization thereof must be based, as far as possible on profit and loss sharing system and the Government must restore its credibility by resolving the issue of imposing curbs on withdrawals from foreign currency accounts; that Kissan Bank and a Model Islamic Bank which should operate on 100 per cent. profit and loss sharing basis have to be established which would be able to offer much higher rates of return to the depositors even in the first year of their operation; that all major banks and DFIs should have an Islamic banking division and the same should be upgraded in the State Bank. Dealing with bank advances with up to date mark-up the economic expert said that no new loan on mark-up or interest should be allowed with immediate effect and at least 75 per cent. of new financing should be on Musharika, while for old advances he proposed that by January 1, 2000 all mark up or interest-based advances should be converted preferably into Masharika, if feasible; that in case of old debts there should be gradual reduction, optional conversion to second line techniques of financing and debt-equity swap, no renewal of existing products and optional transfer to new products on PLS basis as and when these products are developed, while in the context of external debts there should be no interest-based loans for new financing; and for old debts negotiations for conversion to second line technique of financing and for debt equity swap should be followed; that no interest-deposits should be accepted, including where, on the instrument, expected rate of profit was mentioned or announced in advance whether formally or informally; that existing deposits should be brought under the new system irrespective of the maturity and for foreign currency deposits the depositor should be given the option to convert it at the average of prevailing open market rates on the date of encashment and the maximum rate in the open market after 1998. He called for establishment of a high powered commission headed by a Judge of the superior Court to examine all cases of rescheduling/restructuring/written off/remissions etc. in the advances portfolio after January 1, 1985 and losses under these heads, according to him, could be as high as over Rs.100 billion; that the commission should be empowered to examine the State Bank’s Incentive Scheme to loan defaulters and decide whether it was un-Islamic, unjust and detrimental to the depositors’ interest; the commission should also fix the responsibility of bankers/directors and of the State Bank in respect of 869 cases of loan defaulters, where a sum of Rs.111 billion was involved and examine higher assignments given during the last five years in the Government departments and autonomous corporations to those who had been or were still a defaulter or had committed a fraud. ‘

 

 

 

Abdul Wadood Khan, Economic Expert reappeared to contend that inflation would reduce by 42 per cent. if interest system is abolished and TMCL based interest-free banking system is introduced, and there will be more amount available in money market which might be used to repay the loans. He claimed that level of bank deposit would rise with the elimination of interest and referred to Keynes’s philosophy of lowering the rate of interest, the higher the level of investment. According to him the elimination of interest would also increase Government’s earnings. He also dealt with encashment of premature commercial and treasury bills, liquidity agreement and profit earning by banks. He argued that both Islamic and non-Islamic Banking Systems should be run parallel so that people can choose the system of their liking. According to him counter-loan scheme is not against Shariah and it is according to the Hanafi school of thought, and under the Counter Loan Scheme replacement of interest with Time Multiple Counter Loan (TMCL) would convert existing banking system into interest free banking system without any disruption, and upon banning of interest, the existing banks would stop giving loans on interest or mark-up and would commence providing loans on TMCL basis and would start negotiations for converting existing interest-based or mark-up based loans into TMCL-based interest-free loans. In the context of conversion of depositors accounts he argued that the depositors would be given the option to keep their money in demand-deposit or investment deposit. Demand deposit, according to him, would not get any profit or incur any loss but in investment deposit the bank would share the profit and loss with the account holders.

 

 

 

Maulana Hafiz Abdur Rahman Madani, a religious scholar argued on prohibition of Riba in Islam by the Holy Prophet (peace be upon him) narrating the background and time of prohibition of Riba. According to him Riba was evolutioned in four stages as four different verses of’ the Holy Qur’an were revealed at different times and one of the last verses of Qur’an revealed oil Holy Prophet (p.b.u.h.) includes the prohibition of Riba strictly. It was contended that all the verses related to prohibition of interest (Riba) are incumbent upon Muslims; that it would be wrong to say that the Holy Prophet (p.b.u.h.) had left anything unexplained while teaching the people about prohibition of all kinds of Riba. Talking about the definition of Riba, Maulana Hafiz Abdul Rahman Madani referred to Imam Sarakhsi’s definition of Riba to the effect that Riba is a conditional increase in sale agreement which has no counter value and proposed certain amendments in the same. According to him Riba is the agreement where conditional increase is without matter of right. He argued that time and currency have wrongly been defined as means of productivity as currency will become asset when it will be changed into, commodity and that it only represents value. He insisted on promoting “Ijtehad” in Islam which is an essential part of Shariah but it needs a big effort and brain storming. According tar him there are few aspects which were not properly addressed by the Federal Shariat Court and it is now the duty of the Supreme Court to take care of them while resolving the issue. Hr was of the view that existence of Western laws besides Islamic laws is creating problems.

 

 

 

Prof. Khurshid Ahmed of Jamate Islami who is heading Institute of Policy Studies and Islamic Foundation in UK appeared to state that Europe was considering the interest-free banking system, given by Islam as an alternative for a number of credit-related problems. He referred to a Drench Nobel Laureate who had given a new concept of banking system specializing only in three sectors, including banks accepting deposits, investment banks and banks for business purpose, whereby the credit problem created throughout the world could be overcome. He argued that it is the foremost duty of the Parliament to Islamize the existing financial system of the country; that the Governments in Pakistan lacked political will and neglected the work already done for the transformation of the existing banking transactions into interest-free system; that the plea of the Government against the Federal Shariat Court judgment to suggest alternative banking and financial system without usury was unconstitutional and by filing an application in the Federal Shariat Court for suggesting measures to implement its judgment, the Government did try to unload its burden: that the Council of Islamic Ideology and different institutions had done; a lot of work in this regard and the efforts by these institutions were appreciated abroad and many awards were given by the Islamic Banks to them but the Government was paying no heed to it; that Islam approved profit or kiss sharing on any investment for the purpose of production as it ensured growth, distribution of justice and stability, but the present interest-based economic system had only encouraged exploitation; that the IPS Chief insisted that the authority to create credits should be with the central bank and the Government only, and not with other banks and interest system had created a havoc in the world specially in the third world. He cited the example of Brazil and Pakistan. In 1985, according to him, Brazil’s total debt was $80 billion out of which it had already payed back $21 billion but still indebted to $221 billion and Pakistan, which owed a total foreign debt of $6 billion in 1978 and had paid $22 billion but still indebted to $35 billion. According to him 40 per cent. of the total loans in the world was non-performing and in Europe 97 per cent. money in circulation was the bank created money because of which rich had become richer while poor dipped to new lows. He also cited the example of 200 banks practising interest-free banking to 40 countries having assets of $600 billion with $80 billion of deposits and asset transaction of $200 billion. It was urged that 15 per cent. of Kuwait and 5 per cent. of Malaysia’s economy was based on interest-free banking; and that it was wrong to suggest that our economy would collapse if we adopt the interest-free system instead it would collapse if we fail to adopt the transition phase. As Pakistan is normally bound to honour the international commitments, he was, therefore, not in favour of cancelling the same. He was of the view that it would take a year to completely transform the domestic debt into the new system while two to three years in respect of international agreements. He suggested that we should endeavour for debt restructuring with the World Bank with open minds as the World Bank has already been dealing with 31 countries on debt restructuring because the loan giving agencies benefited 70 per cent. by the loans they advanced, while the countries which received loans benefited only to 30 per cent. Besides, these loans were also used for corruption purpose.

 

 

 

Prof, Nawab Haider Naqvi, an Economist, argued that we do need an Islamic economic system if only to end the current schizophrenic confusion between what we believe in and what we practise; that it is possible to construct an Islamic system, complete with its own ethical values, policy objectives and policy instruments, which alone can satisfactorily explain the economic and social behaviour of Muslims but it has to be kept in view that the Islamic system to be constructed will be as man-made as any other system and as such the task of translating the timeless, institution-free Divine ethical and economic principles into a workable economic system will have reference to specific time and applicable within the matrix of specific institutions and will have infirmities as it will be made by men/women themselves and naturally the end-product of these efforts will bear the mark of human imperfection. This necessitates the gradual approach ac Islamic economic system will emerge gradually out of a prolonged interaction between the Islamic ideal and the reality in the Muslim countries. Professor Naqvi argued that the two issues which arise before this Court are (i) equivalence of Riba and the bank interest in modern times and (ii) the optimal replacement of interest-based banking by profit based banking i.e. by a banking system raised on the principle of universal Profit and Loss Sharing (PLS), unsupported by any guaranteed return on bank deposits or bank advances. He added that both these questions are very difficult to answer as interest-free banking is a property of a fullfledged Islamic economic system but not of capitalism, where interest and profits are inter-linked like the Siamese twins and economic studies show that changes in the profit rates have been caused by changes in the interest rates, speculative trading, and in productivity. Separating the two would require nothing less than an intricate surgical operation upon the economic structure, of which the consequences are not known with certainty. He explained that once fixed rate of return instruments are altogether abolished in a capitalist economy, we do not know the outcome of such a step; so that the new profit-based system may as well take us nearer to, or farther from the Islamic ideal of Adl-o-Ihsan. He posed himself the question: “Does the PLS system offer a ready-made workable Islamic alternative to the modern-day banking interest?” His answer was that contrary to the widely held opinion which is also reflected in the impugned judgment, the PLS alternative alone does not necessarily guarantee an Islamically acceptable outcome in terms of its efficiency and equity. The theoretical reason in support of the answer that a negative outcome is more likely when profits are substituted for interest is the empirical evidence on the working of the Islamic Banks in the last 15 years or so. According to him a shift from the present interest-and-profit financial system to an all-profit financial system will, in general, lead to a worse equity outcome. It may increase, rather than decrease, the size of the perverse flow from the poor to the rich, even more than the present capitalist system does. He maintained that in the new system the risk averse savers/investors will be crowded out of the market unless, of course, they can anticipate with complete confidence that they will always get a higher reward in such a system which has a contradiction. So the reform of the banking system in the name of Islam may take us from one capitalist hell to an even hotter hell, and that too without interest. Professor Naqvi was also of the view that a system based on profits i.e. variable rate of return is not likely to be more efficient than the one based on interestcum-profits in view of the following prevailing circumstances:--

 

 

 

(i) In monopolistic/oligopolistic market structures, which also characterise Pakistan, profits impose an “excess burden” on the society in the form of lower production and higher product prices than would be the case in the textbook capitalist world of free and perfect competition.

 

 

 

(ii) The Islamic Banks will tend to under-invest in a large number of projects where social profitability is higher than private profitability i.e. public infrastructure. education and public health etc  for the reason that investment in them does not yield immediate and large profits. So, more investment will be made in high profit-yielding projects whose social profitability is very low or negative e.g. investment in wasteful luxuries. Such high-profit investments may not be sanctioned by Islam because they come in the category of Tabzeer.

 

 

 

(iii) The moral hazard problem i.e. when due to information asymmetry, the Mudharib cheats the Raul-mal is large in a banking system based on the PLS principle.

 

 

 

Professor Naqvi’ pointed out that without finding a reasonable solution of the fore-noted problems, the PLS-based system will neither be efficient nor equitable. Moreover. PLS system will not be preferred by the public unless perfect honesty prevails a condition which is observed more in the breach than in the observance in the real world and the situation where the investors almost never share true information about their profits with the banks, as is the case of Pakistan, a universal PLS banking would almost certainly face a complete break-down. Mr. Naqvi further stated that in the Survey conducted by Islamic Research and Training Institute of Islamic Development Bank, 29 major problems which are being faced by the Islamic Banks have been listed. The essence of these findings/problems are:----

 

 

 

(a) The rate of return offered by the Islamic Banks has been generally lower than the interest-based banks where they coexist with the interest-based banks; as well as in Pakistan, Iran and Sudan, where they have completely replaced the interest-based Banks.

 

 

 

(b) The loan defaults have increased dramatically since the introduction of the Islamic Banks which appears to be powerless in dealing with such cases as effectively as the interest-based Banks used to do and the size of the involuntary resource transfer from the poor to the rich is much bigger in a PL.S system than in an interest-based system.

 

 

 

(c) The incidence of the moral-hazard problem is pervasive. Indeed, it threatens the very fabric of Islamic Banking„ especially in Pakistan. In Iran, the banks have not been able to invest more than 3Rr% of their total assets after the introduction of Islamic Banking.

 

 

 

(d) Due to moral hazard phenomenon, the Islamic Banks have generally lavoured fixed rate of return type financial instruments like Murabaha and leasing. According to the i996 issue of “the Directory of Islamic Banks (Jeddah)”. the sale of lease based financing account for more than 80% of total financing of the Islamic Banks, and the PLS type financing represents only 20% . His conclusion was that notwithstanding the optimality of these modes from Shariah point of view, the PLS financing has not been preferred by the public and the banks so far.

 

 

 

(e) Heavy concentration of the Islamic Banks’ portfolios has made their asset structure highly unstable, as they cannot minimize their risks.

 

 

 

(f) The investment portfolios held by the Islamic Banks are typically loaded by trade-related activities. As of 1996, agriculture and manufacturing together accounted for only 26% of their lending activities. while 74 % was accounted for by Trading (31 % ). Services (13.12 % ), Real Estate (11.67 % ), and others (17.62 % ). Also, the investments made by the Islamic: Banks are of even shorter duration than is the case with the interest-based banks. The longer-term investments have generally suffered.

 

 

 

Professor Naqvi submitted that despite the fore-noted empirical evidence about the working of the Islamic Banks he is not claiming that the Islamic Banking should be scuttled as his point of view is that we should do everything feasible to improve its efficiency and equity, but it is important that undue haste is avoided in making it perfectly acceptable from an Islamic point of view. So, no precipitate steps should be taken to further Islamize the Islamic Banks until the relevant information on their actual working has been fully analysed and that it should be accepted that the PLS-based financial instruments, like Mudhariba and Musharika are totally inadequate to meet all the financial needs of a modern society and minimum element of fixity is essential for modern financial institutions, including the Islamic ones; and that the present mark-up and other sale-related instruments should be treated as essential aspects of Islamic Banks, at least for now. According to him these are presumably second-best options for the Islamic Banks to safeguard the depositor’s money in view of the widespread moral hazard problem, and to meet the borrower’s preferences. He argued that if as decreed in the impugned judgment, the mark-up system is abolished forthwith and replaced by the PLS principle, then it will seriously destabilise the banking system. Mr. Naqvi was of the opinion that the guiding principles of Islamic Banking should be---

 

 

 

(a) to safeguard the interests of the depositors as opposed to those of the borrowers of the loan able funds;

 

 

 

(b) to minimize the information cost of its operations by not relying excessively on the borrower’s honesty, which is a scarce resource in any society, but especially so in Pakistan;

 

 

 

(c) to do risk minimization and perform such essential functions as financial intermediation, increasing private saving etc.

 

 

 

On the question of indexation of public borrowing Professor Naqvi criticized the observation made in paragraph 42 of the impugned judgment that inflation did exist in the early Islamic period as prices rose by 15% during the period of Khulafa-e-Rashideen and Imam Yusuf. He pointed out that such an observation could not have been recorded had any Economist pointed out that 15% increase in the price level over a period of more than 100 years comes to less than 0.145 per cent. per annum, which is really a zero inflation rate. He referred to page 136 of his book titled “Islam, Economics, and Society” wherein the Scheme proposed to meet the problem is that the rate of indexation should be equal to the current or expected rate of inflation plus an amount equal to the increase in the Gross Domestic Product due to the contribution of capital. The results of the calculation on the basis of this formula are given in the following Table:------

 

 

 

“Table I

 

Calculation of Rate of Indexation (Return)

 

 

 

 

 

Year                 Inflation            GDP Growth                K Share in                    Rate of

 

                        Rate                 Rate                             GDP**                        Indexation

 

1990-91           12.66               5.57                             0.69                             16.50

 

1991-92           10.58               7.71.                            0.69                             15.90

 

1992-93           9.83                 2.27                             0.69                             11.40

 

1993-94           11.27               4.54                             0.69                             14.40

 

1994-95           13.02               5.24                             0.69                             16.63

 

1995-96           10.79               5.19                             0.69                             14.37

 

1996-97           11.8                 1.30                             0.69                             12.7

 

1997-98           7.81                 5.44                             0.69                             11.57

 

Averages          10.97               4.66                             0.69                 `           14.18

 

 

 

@Estimated by the World Bank

 

 

 

** Rate of Indexation = Inflation Rate + (GDP * K share in GDP)”

 

 

 

This Table shows:

 

 

 

(i) The rate of indexation does not necessarily increase with time alone so it is not true that the longer the period the higher the rate of indexation. It was pointed out that the rate of indexation would have been 16.50% in 1990/91 when the GDP and the inflation rate were higher, but only 11.57% in 1997-98 when both were lower.

 

 

 

(ii) The rate of return due to indexation is not pre-determined in any way nor can it be predicted with complete certainty.

 

 

 

(iii) The rate of indexation is related to the increase in the flow of goods and services in the economy.

 

 

 

So, the proposed indexation formula does not satisfy any of the features of Riba identified by the Fuqaha.

 

 

 

On the question of equivalence of interest and Riba, Mr. Naqvi maintained that in view of the clear Qur’anic injunction there is not much room left for intellection or debate if we accept that interest, including bank interest, is Riba but it can still be asserted, as it is his case, that Riba is not just interest, muchless only bank interest; but that it signifies all exploitative relationships which have the effect of transferring resources from the poor to the rich. He added that there may be an identification problem here because bank interest does not satisfy at least some of the basic criteria of Riba. Professor Naqvi though seemed reluctant to enter this controversy as to the meaning and scope of the term Riba but after dealing with the characteristics of Riba noted in paragraphs 94 and 113 of the impugned judgment which are-----

 

 

 

(i) the amount to be repaid in excess of the principal amount at the end of the contract period is fixed in advance in relation to time by the lender as an essential condition of the loan;

 

 

 

(ii) the amount so stipulated is risk-free;

 

 

 

(iii) it involves no uncertainty; and

 

 

 

(iv) it causes a net transfer of resources from the poor to the rich, which is considered as the raison de etre for the prohibition of Riba in Islam, made the following comments:----

 

 

 

(i) Contrary to popular conception, the interest rate need not always be fixed in advance and be risk-free. Such is the case only if the investor makes decisions under conditions of perfect certainty, which is seldom the case; but will not be so if uncertainty prevails, which is almost always the case. In the latter case, the interest rate will consist of a risk-free rate plus a risk premium, which will be variable depending on the degree of uncertainty at a given time and on the changes in it over a period of time. Indeed, Euro-dollar syndicated borrowing, which includes a tisk premium over the London Inter-Bank Offer Rate (LIBOR), is both variable and risky; which makes it worse than the borrowing done at a fixed rate, on a Government-to-Government basis.

 

 

 

(ii) Risk and uncertainty do not necessarily constitute an Islamically legitimate characteristic of interest in the meaning of Riba. Indeed, if these were desirable characteristics of an Islamic instrument then these would have to be maximized. But this is not the case, because Islam has declared gambling, betting, speculation as Haram (Just think of the State of Monaco and the city of Las Vegas shining examples of an Islamic economy).

 

 

 

(iii) While fixing of the rate of return in advance may attract Shariah’s prohibition, it is not generally true that bank interest causes a perverse transfer of resources from the poor to the rich. This is difficult to establish one way or the other; but whatever evidence exists shows that, because of an initial unequal distribution of income and wealth, both the profit and interest incomes accrue, more to the rich than to the middle and lower middle-income groups. More shall be given to those who have more! However, Table 2 makes clear that, relatively speaking, interest income is more important for the low income group than profit income; the reverse is the case for the high income group.

 

 

 

Table 2

 

 

 

Distribution of Income from Interest and Profit

 

among Households in Pakistan (1996-97)

 

 

 

%o of Total @                         Income Group                          Interest Income Profit

 

Income     Household                                        

 

26.57   54.65                           Lowest                                                 7.53                 6.91

 

24.33   24.26                           Low                                                     18.55               16.85

 

49.10   21.09                           Middle + High                                      73.91               76.28

 

 

 

Source: Computed from the Income and Household Survey 199697.

 

 

 

@ Column based on the 1990-91 Survey

 

 

 

It was contended that the point is that Islamic reform does not aim at abolishing interest income but to convert it into profit income; which reform, if implemented, would then leave the distribution of income between income classes unchanged. To reverse the perverse flow of income the remedy is a more equitable distribution of wealth holdings`, ‘through an effective tax-cum-subsidy scheme in which the interest and profit incomes are taxed, the former at a higher rate than the latter; and the tax proceeds used to compensate the losers in the market place.

 

 

 

Mr. Naqvi concluded that Musharika and Mudharaba instruments should be sparingly used on rational grounds, both by the consumers and the banks and that it would do incalculable harm, if modern banking were made to fit in the Procrustean bed of anachronistic ideas and practices. He pleaded that nothing should be done to do away with the present mark-up system, which is Islamically legitimate. The small saving schemes must be left as they are till a more satisfactory solution is found, and Government borrowing from the banking system on a fixed return basis may be declared as not interest, as in Iran, alternatively, the indexation system as is proposed by him may be tried. He added that this Court may focus attention on building fences around the present Islamic banking system by punishing dishonesty, by making loan default a social crime, by making honouring of voluntarily agreed contracts mandatory, by promoting respect for private property rights where their exercise does not conflict with similar rights of others only, then Islamic values are effectively internalized that Islamic Banking, based on the PLS principle, will have any chance of becoming operational, even on a restricted basis.

 

.

 

Mr. Iqbal Ahmed Khan, Managing Director, Global Islamic Finance HSBC Investment Bank Plc, London, a foreign expert, appeared to express his views. He provided a global perspective on the ethical, indigenous and equitable form of finance, which stands around US $90 billion and is growing at the rate of 15 per cent. per annum. According to him Islamic Finance Industry is spread across 65 countries with the total population with around 1.3 billion; that it is a trend, which is broadening the ownership base, creating more stakeholders and therefore bringing the hope of stability in the Muslim countries; that in a broad sense Islamic finance today provides a moral version of modern capitalism. In order` to create a macro economic context he provided the Bench with World Bank statistic which measured the world economy in terms of the goods and services for the year 1997 to be around $7 trillion while the financial flows were well in excess of $500 trillion. He clarified that the Islamic finance industry was embedded in the commercial value producing real economy; that the rise of financial, capitalism is pinning Wall Street against main street; that today 80 % of the wealth is concentrated in the hands of 20 % of the world’ people. Commenting on this disparity of wealth distribution, he said that the invisible had has not worked very well and quoting a reverend Bishop he urged that the rich seem to be getting richer, the poor poorer and we are not getting any holier. Looking at the world with a detached, view from another world one can find majority of economic and social activity to be creating pockets of affluence in the sea of ever-increasing poverty: On the increasing polarization in the world economy he quoted Larry Summers the US Assistant Treasury Secretary who said that the world economy is linked with the US economy; that the health of the US economy is dependent on the consumer spending in the USA; that consumer spending is reliant upon the performance of the US stock market; the stock market;  fate is linked to the performance of around 50 blue chip companies listed in New York Stock Exchange, which according to him is an evidence of the polarization in the world economy. On philosophical foundation and core concept of Islamic finance he pointed out that the foundation of the Islamic finance is firmly rooted in the principles derived from the Holy Qur’an and the Sunnah of the Holy Prophet (p.b.u.h.), the two original sources, which have been kept intact for more than 14 centuries; and when taken together the Qur’an and Sunnah of the Holy Prophet (p.b.u.h.) or the basis of Shariah law, which govern the Islamic finance, the Shariah law wants to ensure that Muslims invest their funds in a socially responsible manner; and at the centre of Shariah law are concepts of man’s vicegerency and trusteeship, concept of Amanah (fiduciary trust) and Adl (fairness). Addressing the Bench he said that this indigenous and equitable form of finance has gained increasing relevance in the last two decades in its home market - the OIC world; that Islamic finance is an emerging product in emerging market, which is gradually evolving along with the market in which it operates. He deliberated on the value creation potential of Islamic finance, the value paradigm of Islamic finance was outlined in the Shariah code which talks about the moral transparency, individual responsibility corporate governance, reliance on market mechanism, a commitment to economic and social justice, a partnership of capital and enterprise, a care for environment as some of the core values. He gave the Bench a brief historical overview of the evolution of Islamic finance, stating that the first modern experiment with Islamic banking was undertaken in Egypt in early 1960s, the pioneering in Egypt took the form of savings banks based on the principle of profit sharing in the town of Mit Ghamar; and it was not until the mid 1970s that the industry gained its initial momentum which fact was evidenced by the launching/establishment of Islamic Development Bank in 1975 by the Organization of the Islamic Countries and Pakistan has played an important role in the creation thereof as a founder member. In fact, according to him, Pakistan’s finance Minister chairs the Board of Governors of the Islamic Development Bank and the Bank is primarily inter-Governmental bank which primarily provides fund and infrastructure and developmental project., in member countries. The launching of Islamic Development Bank led to the creation of Islamic financial institutions in the Gulf cooperation council countries which include Dubai Islamic Bank, 1976, Kuwait Finance House. 1977, Faysal Islamic Bank in Egypt and Bahrain Islamic Bank in 1979. h was pointed out that in Far East. Malaysia, the Muslims Pilgrims Saving Cooperation was set up m 1963 which later became the well known Tabong Haji 1969 which in turn led to the creation of Bank Islam Malaysia Bhd in 1982. Since then a number of Islamic financial institutions have emerged in Muslim countries such as Saudi Arabia, UAE, Qatar, Turkey, Pakistan, Indonesia, and Brunei which institutions have taken the form of commercial banks, investment banks, investment companies, Takaful companies (Insurance). Amongst the major Islamic financial institutions there are Al-Rajehi, Kuwait Finance House, DMI Group, AI Barakah, Abu Dhabi Islamic Bank, Dubai Islamic Bank etc. Summing up the history and evolution of Islamic Finance, he informed the Bench that the industry today stands at 90 billion dollars and is growing at 15 per cent. per annum; that the biggest growths are taking place in countries where there are large vibrant middle classes. Taking Kuwait and Saudi Arabia as a case in point, he stated that Kuwait today has an estimated share of around 40 to 45 per cent. while in Saudi Arabia, admittedly a larger market, the share of Islamic finance was around 20 per cent. According to him most of new institutions being created today are predominantly focused on investment banking; that during the 1990s Islamic financial institutions have become increasingly innovative as more complex instruments and structures have been developed to meet the demand of modern day business; that the use of instruments such as Istesnaa’, Ijarah, Bai Salam, are becoming more widespread and we are witnessing tenure, starching as Islamic financial institutions moved towards cash flow based project finance with average life extending seven years and Islamic trenches being created in big ticket deal such as the Equate project in Kuwait and a number of infrastructure project in Turkey. These activities have already landed the Islamic financial institutions in the league tables of Euro money as arrangers and providers of finance. He added that, there has been a tremendous improvement in the documentation capabilities of Islamic project finance issues being addressed much more clearly; that equity has also opened up as an asset class and they are ‘fortifying the portfolios of Islamic financial institutions while we are seeing the promise of private equity being fulfilled through international Musharakas. He emphasized that the trend of Islamic finance is broadening owner base, creating more stake holders and therefore bringing the hope of stability to Muslim countries He went on to talk about the manner in which the Islamic finance as an industry was evolving alongwith the framework in the countries in which it operate He also emphasized the importance of the supporting Macro economic and legal framework. In order to take Islamic finance forward it was important that comprehensive reforms are brought about in the monetary, fiscal  and judicial framework of Muslim countries and that the importance of establishing of `missing links’ such Islamic common market and Islamic Dinar. He referred to the Islamic Drnar to state that today it exists only as a translation currency linked to the SDRs.

 

 

 

Mr. Siddiqul Farooq, Chairman House Building Finance Corporation (HBFC) appeared to state that the society is not well settled to adopt the Islamic Banking system at this juncture, the implementation of which would only create negative impression about Islam than bringing positive results; that all segments of the society and institutions, including the Courts, politicians, religious scholars and bureaucracy have to play their role to establish a true Islamic society in Pakistan; that till now we could not even create a proper ,lunar calendar due to which we celebrate three Eids every year. According to him loan under the Modaraba could trot be effective at this stage where society has lost most of the Islamic moral values and every person who would get loan under Modaraba would never admit about the profit and would always come with a loss. He suggested to adopt the Islamic values in letter and spirit but for the time being also keep in view the exceptions which Islam had allowed in certain circumstances. He referred to the famine during Hazrat Umar Farooq (r.a.)’s time where the punishment for theft had been suspended. He argued that Pakistan was facing an exceptional situation in the shape of inflation and the HBFC has reduced the interest rate almost by two per cent. on the loans it extended as the inflation rate fell and would keep doing the same gradually if inflation rate further declines. He submitted the documents before the Court relating to amendments effected in the laws of the corporation in the light of the HBFC cases in Courts and profits earned by it before 1979 and from 1979 to 1987, 1988-89 and thereafter. The documents produced also included details of the credit liras payable to State Bank, profit paid to State Bank and balance sheet of the Corporation besides relevant record from 1979 to December 31, 1997. He implored that harvesting was not possible without proper cultivation of land as seeds sown in water cannot yield, legislation without a solid base would bear no fruit rather it would be counterproductive. He pleaded that Holy Prophet (p.b.u.h.) first raised a team of his companions and enforced Islamic laws after spade work for acceptability of Islamic system in the society. The other submissions made by him with, respect to the specific provisions of the House Building Finance Act, 1952, will be dealt with while dealing with Shariat Appeals No.24 of 1992 to 35 of 1992 under the aforesaid Act of 1952.

 

 

 

Syed Riazul Hassan Gilani, representing the Government argued that Riba-al-Fazal was covered by the Muslim Personal Law and therefore, Article 203 of the Constitution has excluded the jurisdiction of the Shariat Court. He stated that the term “Islamic Banking” was misnomer as bank had no religion; that in spite of all sympathies with the sentiment behind Islamic Banking, the term Islamic Banking was a misnomer; that Bank is an instrument which can neither be Muslim nor non-Muslim. Neither all the transactions or modern banking are un-Islamic nor all the transactions of Islamic banks were purely Islamic. He categorised the Riba into categories as: Riba al Jahilia (pre-Islamic system of usury) which he said was extremely oppressive; Riba al Qur’an, the compound interest-based system which was prohibited by the Holy Qur’an; Riba Al Nasiya (profit motivated lending) and Riba al-Fadl (soft-interest loans). He argued that the system of Riba al Jahilia and Riba al Nasiya are not relevant in the present case and he would confine himself to Riba al Qur’an and Riba al-Fadl in his arguments. It was asserted that definition of Riba al Qur’an was definite and undisputed among the Muslim jurists and Muslim sects and it should not remain part of our banking and legal system even for a moment as the. prohibition of Riba al Qur’an is applicable to the Muslims and non-Muslims of an Islamic State. He stated that Riba al-Fadl was Makrooh (reprehensible) but not Haram (prohibited) and that some other kinds of Riba like “Najsh” are also Makrooh. It was introduced by Shariah so that the doors of Riba al Qur’an be closed. It is applicable to Muslim citizens of an Islamic State and not to non-Muslim citizens. He was of the view that if Riba al-Fadl was prohibited at the State level, it would allow the non-Muslims to monopolise the banking system of the country. Riba al-Fadl, according to him, did not strike down the established practice of the society and required the Government to regulate it in public interest. It was argued that Islamic jurisprudence provided for punishment of defaulters and if he could be jailed for breaking his promises why he could not be fined; that a defaulter with bona fide reasons could expect a lenient treatment under Injunctions of Riba al Qur’an; that Indekation in public interest did not fall under the mischief of Riba and he had precedents to show that it was not repugnant to Islamic Injunctions; that overall rationale and objective of prohibition of Riba was to eliminate practice of loans and money-lending from the Islamic society as far as possible; that money lending with or without pre-determined profits fell under the category of Riba al-Fadl. It was contended that Riba was not only applicable on loans but also purchases; that there was similarity in the prohibition of alcohol and Riba as use of alcohol in the society was prohibited gradually and same was the case of Riba. He produced a chart of Qur’anic verses showing a comparison of prohibition of Riba and ban on alcohol. It was stated that it was wrongly attributed to Hazrat Umer Farooq (r.a.) that he had said that verses banning Riba were the last and the Holy Prophet (p.b.u.h.) could not explain it due to early death. It was urged that at least two years before the death of Holy Prophet (p.b.u.h.) the verses banning Riba had been revealed and Riba had been enforced in 8 Hijra and the Holy Prophet (p.b.u.h.) died in 10 Hijra. It was further urged that Holy Prophet (p.b.u.h.) had declared “Muzarbat” as one kind of Riba, and recommending some body for some post with the intent to get something for the recommendation was another kind of Riba. Syed Riazul Hassan Gilani further contended that Holy Prophet (p.b.u.h.) had established loan free society with the idea that debt leads to servitude; that the fate of those countries which took loans for development is before us; that Riba al Qur’an (compound interest-based system) was Haram and should not be kept for a moment in Islamic State; that the definition of both forms of Riba al Qur’an and Riba al-Fadl have separate mechanism of enforcement; that any transaction which had an element of “Zulm” was contrary to the injunctions of Islam; that saying of the Holy Prophet (p.b.u.h.) was no less than Qur’an as the matters of Shariat were equally binding on us as of Qur’an; that Riba al Jahilia (pre-Islamic system of usury) was started at the time of default of the loan and if lender and the lendee agreed on a time frame for the payment of loan and if the deadline for the repayment was not met, the lender would fix Riba. According to him when the Riba al Qur’an was enforced, the Riba al Jahilia would automatically be eliminated and the same remained enforced in all the Muslim States. Riba al Qur’an remains abolished by the State decree of the Holy Prophet (p.b.u.h.) and it remained abolished throughout the Muslim history till the time of Aurangzeb Alamgir, the last powerful Mughal Emperor and when the sub-continent was subjugated by the Britain, it allowed advancement of loans on the basis of interest. The permission led to perpetuation of Zulm and people were under virtual slavery of the Hindu Banyias. According to him loan of Banyia fell both in the category of Riba al Qur’an and Riba al-Fadl. He asserted that the propositions of law derived from the text relating to Riba al-Fadl are from the cry beginning disputed amongst the Muslim jurists and the Muslim sects because the Hole Prophet (p.b.u.h.), to save the Ummah from hardship, did not enforce Riba al-Fadl in the form of a definite ruling and only the mode of exchange of six commodities was illustrated; that the enforcement of prohibition of Riba al-Fadl is not the obligation of the State as its implementation is responsibility of individual Muslim and this was not enforced in the form of a State decree/a proposition of law by the Holy Prophet, Khulfai Rashedeen and the Muslim Rulers in the Muslim History; that Riba al-Fadl does not strike down “Mash-al-Tarajeeh” i.e. the established practice of the society; that only Hajat (facility/need) rather than Zaroorat (necessity) is entitled to exception in the domain of Riba al-Fadl; that the State may in the public interest regulate Riba al-Fadl; that the saying “Qule Qarze jer manfaatu fahowa Riba” is not a Hadith but a principle derived from the provision of Riba al-Fadl; that the predetermined profit on loan was considered Makrooh by Imam Abu Hanifah and other great jurists as it falls under Riba al-Fadl; that the penalty or fine imposed on wilful defaulter is not Riba and a defaulter can also be put behind the bar till he pays the debt while only a bona fide defaulter is/should be entitled to lenient treatment contemplated in Riba al Qur’an; that the over all rationale and objective of prohibition of Riba is to eliminate loan in the Muslim society as far as possible and a loan with or without predetermined profit falls under Riba al-Fadl while bona fide need (Hajat) is exception to the Rule; that Riba al-Fadl is covered by the term Muslim Personal Law used in Article 203 of the Constitution - thus subject of Riba al-Fadl is not within the jurisdiction of Federal Shariat Court; that in spite of all the sympathies with the sentiments behind Islamic Banking, the term. Islamic Banking is a misnomer, Bank is an instrument which can neither be Muslim nor non-Muslim, neither all transactions of modern Banking are un-Islamic nor all the transactions of Islamic Banking are Islamic and all the attention of Islamic Banking is diverted towards Riba al-Fadl, whereas due attention is not paid to Riba al Qur’an. Arguing his case, it was asserted by Syed Riazul Hassan Gilani that in Islam the real meaning of “Qarz” was lending money to someone without any interest. He also quoted a Hadith of the Holy Prophet (p.h.u.h.) in which the Holy Prophet (p.b.u.h.) had stated that he saw in the heavens written that who lends Qarz receives 18 times more “Sawab” as compared to the Sawab blessed on one who pay “Sadqa” and gets 10 times of it only. He also told the Court the views of Ulema of the sub-continent about the banking institutions established by the British. One requirement for getting correct “Fatwa” from the Ulema should be to ask questions by the persons seeking Fatwa, in clear terms since Ulema were not experts of sciences. He added that there were three kinds of Ijtehad including Tehrir-e-Munaja, Tanqia-e-Munaqa and Tehrik-e-Munaja. He referred to the Fatwa of Hazrat Ahmad Raza Barelvi about the banking system which he had given to a specific question by a man about the profit being offered to him by the bank on his deposits. The Maulana in response said though interest was Haram but he could receive the enhanced money believing that he was not getting interest. This Fatwa was given in the background, Gillani explained, when banks were not national institutions rather British institutions and the Maulana had no sympathy with the banks. He said except Sir- Syed Ahmed Khan, no scholar of the sub-continent gave any importance to the British institutions. Sir Syed was of the view that if the Muslims distanced themselves from the banking system, it would only benefit the Hindus.

 

 

 

At this stage Syed Riaz ul Hassan Gilani, learned counsel for the federal Government sought adjournment of the case after summer vacation since he could not close his arguments and he had only covered one-fourth of it, besides he had to go to Lahore to look after his ailing father and was also planning to proceed on Umra. The Court rejected his plea reminding the assurance he gave to the Court to conclude the arguments as well as the professional duty that he owes to the Court to appear and assist the Court irrespective of amount of fee that he claims from the Government. The hearing was, however, adjourned to the following week. Syed Riazul Hassan Gillani did not appear to conclude his arguments despite specific order of the Court. The Court after waiting for an hour adjourned the matter to the ensuing day in order to give him another chance to appear and complete his submissions. The Federation’s counsel, however, did not turn up on such day as well. Attorney-General, Chaudhry Muhammad Farooq who was also asked to appear on the next day did not appear. Chaudhry Akhtar Ali, Federation’s Advocate-on-Record, however, made a statement before the Court that the Attorney-General had nothing to say in the case. The Advocate-on-Record for the Federation said that Mr.Gillani was not available and the Attorney-General had no submission to make in the case. The Court, in the circumstances, was constrained to conclude the hearing. It was observed that the Federation’s counsel is at liberty to file his submissions in writing within fifteen days. Learned Additional Advocate-General Punjab, Rana Muhammad Arif, who was present in the. Court room stated that he intended to argue the matter after the completion of arguments by the counsel of the Federation and when the Court asked him to start his arguments, he showed his inability to start his arguments immediately stating that he was of the view that the counsel for the Federation would get some time for the completion of his arguments. In the circumstances, the learned Additional Advocates-General of the N.-W.F.P. and Punjab were directed to submit their arguments, if they wanted to, in writing. The representative of the Government of N.-W.F.P. later submitted a brief note reiterating the pleas noted above.

 

 

 

Before proceeding to examine the aforenoted submission on crucial issues of definition of Riba, the concepts, connotation and scope thereof, it is appropriate to deal with the question of scope of jurisdiction of the Federal Shariat Court and the Shariat Appellate Bench.

 

 

 

The question of scope of jurisdiction of the Federal Shariat Court and the Shariat Appellate Bench of this Court, was raised by some jurisconsults and the scholars who appeared before us. This question was raised mainly in view of the representation of the Government made in the application for withdrawal of the appeal from this Court and to seek parameters and guidelines from the Federal Shariat Court as to the modalities of enforcing and implementing its judgment on Riba. The Government needed such guidelines within which the Government wanted to move the necessary legislation for the compliance of ifs constitutional duty and obligation to enforce a truly Islamic economic system. The Federal Government in. the said application had also contended that some serious issues of utmost importance have come up which have a close and intimate bearing on Pakistan’s obligations both to foreign lenders as well as in relation to the functioning of the banking system within the country including lending for the payment of foreign debts, inflation, indexation etc. are involved and that the Government seeks guidelines of the Court (Federal Shariat Court) in the shape of laying down guidelines on the basis of which the Government can comply with its solemn commitments within the framework of Islamic Injunctions. These specific parameters and guidelines,, it was urged, were to be sought so as to enable banking and other related laws to be recast in such a manner that they conform strictly to the stipulations of Islam.

 

 

 

Prof. Khurshid Ahmad, Maulana Abdul Sattar Niazi and Maulana Gauhar Rehman, the religious scholars as well as Mr. Muhammad Ismail Qureshi, Advocate, argued that neither the Federal Shariat Court nor the Shariat Appellate Bench of the Supreme Court has jurisdiction or power to provide guidelines or the parameters in compliance of which the Government is to provide the legal framework of Islamic Injunctions by enacting appropriate laws, nor economic financial or banking policies or the system is to be charted out by the Court. According to them the Federal Shariat Court and the Shariat Appellate Bench of the Supreme Court, in view of the provisions contained in Chapter 3-A of the Constitution and more particularly under Article 203-D of the Constitution are empowered only to examine and decide one question i.e. whether or not any law or provision of law is repugnant to the Injunctions of Islam as laid down in the Holy Qur’an and Sunnah of the Holy Prophet (peace be upon him). According to them it is only vires of any law or the provisions of law on the touchstone of Injunctions of Islam as to their repugnancy or otherwise which is to be examined and decided by the Court i.e. the Federal Shariat Court and the Shariat Appellate Bench of the Supreme Court. Neither the framing of any law nor the economic or financial policies or the banking system itself can be examined by the Federal Shariat Court as these are concerns of the other organs of the State under the relevant provisions of the Constitution and the law. It is unfortunate that these contentions so emphatically urged by the religious scholars were not at all adverted to by the learned counsel for the Federation. Learned Attorney-General also, despite being conscious of the questions raised in the application moved by the Federation and the view-point of the religious scholars on this question, did not enter appearance to render assistance to the Bench on the important Constitutional and legal questions in his capacity of highest law, officer of the country, what to say of presenting and elaborating the point of view of the Federal Government. We have, therefore, surveyed the provisions of the Constitution and the relevant legal provisions on our own. Article 203D of the Constitution which provides for the powers, jurisdiction and functions of the Federal Shariat Court constituted in pursuance of Article 203-C of the Constitution reads as under:-----

 

 

 

“203D. Powers, jurisdiction and functions of the Court-- (1) The Court may, [either of its own motion or] on the petition of a citizen of Pakistan or the Federal Government or a Provincial Government, examine and decide the question whether or not any law or provision of law is repugnant to the Injunctions of Islam, as laid down in the Holy Qur’an and the Sunnah of the Holy Prophet, hereinafter referred to as the Injunctions of Islam.

 

 

 

(IA) Where the Court takes up the examination of any law or provision of law under clause (1) and such law or provision of law appears to it to he repugnant to the Injunctions of Islam, the Court shall cause to be given to the Federal Government in the case of a law, with respect to a matter in the Federal Legislative List or the Concurrent Legislative List, or to the Provincial Government in the case of a law with respect to a matter not enumerated in the either of those Lists, a notice specifying the particular provisions that appear to it to be so repugnant, and afford to such Government adequate opportunity to have it point of view placed before the Court.

 

 

 

(2) If the Court decides that any law or provision of law is repugnant to the Injunctions of Islam, it shall set out in its decision--

 

 

 

(a) the reasons for its holding that opinion; and

 

 

 

(b) the extent to which such law or provision .is so repugnant: and specify the day on which the decision shall take effect:

 

 

 

Provided that no such decision shall be deemed to take effect before the expiration of the period within which an appeal therefrom may be preferred to the Supreme Court or, where an appeal has been so preferred, before the disposal of such appeal.

 

 

 

(3) If any law or provision of law is held by the Court to be repugnant to the Injunctions of Islam,--

 

 

 

(a) the President in the case of a law with respect to a matter in the Federal Legislative List or the Concurrent Legislative List, or the’ Governor in the case of a law with respect to a matter not enumerated in either of those Lists, shall take steps to amend the law so as to bring such law or provision into conformity with the Injunctions of Islam; and ‘

 

                       

 

(b) such law or provision shall, to the extent to which it is held to he so repugnant, cease to have effect on the day on which the decision of the Court takes effect.”

 

 

 

The revisional and other jurisdiction of the Federal Shariat Court is contained in Article 203-DD while Article 203-E details the powers and the procedure of the Court. The next Article i.e. Article 203-F provides for appeal to the Shariat Appellate Bench of the Supreme Court against the final decision of the Court rendered in the proceedings under Article 203-D of the Constitution. At this juncture it will be appropriate to reproduce the definition of the term “law” given in clause (c) of Article 203-B in Chapter 3 of the Constitution which reads:--

 

 

 

“law” includes any custom or usage having the force of law but does not include the Constitution, Muslim Personal Law, any law relating to the procedure of any Court or Tribunal or, until the expiration of ten years from the commencement of this Chapter, any fiscal law or any law relating to the levy and collection of taxes and fees or banking or insurance practice and procedure.

 

 

 

It is pertinent to note that the period of ten years of moratorium has expired and as such the vires of any fiscal law or any law relating to the levy and collection of taxes or fees and banking or insurance practice and procedure can now be tested on the touchstone of Islamic Injunctions. It is also pertinent to note that the provisions of the Constitution, Muslim Personal Law and any law relating to the procedure of any Court or Tribunal are still outside the purview or jurisdiction of the Court i.e. the Federal Shariat Court and the Shariat Appellate Bench of the Supreme Court. The jurisdiction is thus limited to the examination of the question whether any law or provision of law is or is not repugnant to the Injunctions of Islam as laid down in the Holy Qur’an and Sunnah of the Holy Prophet and the term “law” also includes any custom or usage having the force of law or any law relating to banking or insurance practice and procedure. The authors of Chapter 3-A consciously included within the definition of term  “law” for the purposes of Chapter 3-A, “any custom or usage having the force of law” as the Supreme Court in its judgment in Federation of Pakistan through the Secretary, Ministry of Finance, Government of Pakistan. Islamabad etc. v. United Sugar Mills Limited, Karachi (PLD 1977 SC 397) had held that “the term “law” as used in Article 4 has also been used in Article 8 of the Constitution, in contradistinction with any “custom or usage having the force of law” and must therefore, be given the same limited connotation in Article 4 as well.” The Shariat Appellate Bench of the Supreme Court in the case of Wasi Ahmed Rizvi v. Federation of Pakistan (PLD 1982 SC 20) commenting on the term “law” appearing in Article 203-B observed:--

 

 

 

“13. Coming back to Article 203-B which confers jurisdiction, which defines the limits thereof and which prescribed exclusions thereto, we find that it provides an inclusive definition of law. On the force of that definition itself any usage having the force of law shall qualify as law. Such a usage may relate to the nation or group as a whole or may relate to practise and procedure of the Court. The former has been included in the definition of law but the latter has been expressly excluded by providing that law includes any custom or usage having the force of law but does not include ‘any law relating to the procedure of any Court or tribunal’. Law here does not mean only the enacted law but includes usage having the force of law. Such usage or law may relate to procedure of Court or to matters not expressly excluded from the jurisdiction of the Court. If usage or law does not relate to matters excluded from jurisdiction, a petition attacking it would be competent. On the other hand, if it concerns any of the matters excluded then it would be incompetent.”

 

 

 

But the question is whether the Federal Shariat Court or the Shariat Appellate Bench of the Supreme Court can be called upon to lay down parameters and guidelines of financial policies or the banking system-and the legal framework needed for complying with the requirements of Shariah. The mandate of the Constitution as is apparent from the Objectives Resolution under Article 2-A it that the Muslims shall be enabled to order their lives in the individual and collective spheres in accordance with the teachings and requirements of Islam as set out in the Holy Qur’an and Sunnah; and that adequate provision shall be made for the minorities to profess and practise their religions and develop their cultures; and also that fundamental rights including equality of status of opportunity and before law, social economic and political justice, and freedom of thought, expression, belief, faith, worship and association, subject to law and public ‘ morality, shall be guaranteed.

 

 

 

The framing of laws is the prerogative of the Parliament or the Provincial Assemblies according to their respective spheres allotted to them under the Constitution. A reference to Article 227 of the Constitution is relevant as it prop-ides that all existing laws shall be brought in conformity with the injunctions of Islam as laid down in the Holy Qur’an and Sunnah, and that no law shall be enacted which is repugnant to such Injunctions. Clause (2) of this very Article provides that effect shall be given to the provisions of clause (1) only in the manner provided in Part IX of the Constitution. This has a reference to the next Article 228 which provides for composition of Council of Islamic Ideology to which a reference may be made by the Parliament, the President or the Governor of a Province on a question whether a proposed law is or is not repugnant to the injunctions of Islam. On receipt of such a question so referred under Article 229 the Council has to inform within 15 days of the receipt of reference, the period within which the Council expects to be able to furnish the reply/advice. Article 230 further provides that if the Council advises that the law is repugnant to the Injunctions of Islam, the Parliament, the Provincial Assembly, the President or the Governor, as the case may be, shall reconsider the law so made. This is how the law which is to be framed or enacted can he made to conform to the In junctions of Islam and the mandate of Article 227 that no law shall be enacted which is repugnant to such injunctions is to be complied with. If any enacted law is considered by anyone to be repugnant to the Injunctions of Islam, the course to be adopted, as provided by the Constitution, is to challenge the said law before the Federal Shariat Court under Article 203-D of the Constitution. This power can also be exercised suo moat by the Federal Shariat Court.

 

 

 

The manner of framing of laws by the Parliament or the Provincial Assembly as to who is to introduce a law in the shape of the bill in the Parliament or the Provincial Assembly is contained in the Constitution and need not be dilated upon here. The framing of the economic and financial policies including banking is prerogative of the Government which is composed of the majority party in the Parliament or in the Provincial Assemblies. The parameters, the limits and the scope of these policies have been provided in the Constitution itself and the laws framed under the Constitution. Some of the Constitutional provisions having important bearing on the fiscal policies may now be noticed.

 

 

 

Article 73 of the Constitution provides that a Bill or amendment shall be deemed to he a Money Bill if it contains provisions dealing with all or any of the following matters:-----

 

 

 

(a) the imposition, abolition, remission; alteration or regulation of any tax;

 

 

 

(b) the borrowing of money, or the giving of any guarantee, by the federal Government, or the amendment of the law relating to the financial obligations of that Government;

 

 

 

(c) the custody of the Federal Consolidated Fund, the payment of moneys into, or the issue of moneys from, that Fund;

 

 

 

(d) the imposition of a charge upon the Federal Consolidated Fund, or the abolition or alteration of any such charge;

 

 

 

(e) the receipt of moneys on account of the Public Account of the Federation, the custody or issue of such moneys;

 

 

 

(f) the audit of the accounts of the Federal Government for a Provincial Government; and

 

 

 

(g) any matter incidental to any of the matters specified in the preceding paragraphs.

 

 

 

A Money Bill is to originate in the National Assembly and if passed is to be presented, without being transmitted to the Senate, to the President for assent. Article 74 then provides as under:-----

 

 

 

“A Money Bill, or a Bill or amendment which if enacted and brought into operation would involve expenditure from the Federal Consolidated Fund or withdrawal from the Public Account of the Federation or affect the coinage or currency of Pakistan or the constitution or functions of the State Bank of Pakistan shall not be introduced or moved in Majlis-e-Shobra (Parliament) except by or with the consent of the Federal Government. --

 

 

 

The other provisions which provide for financial procedure and also borrowing powers of the Government may now he noticed. These are reproduced hereunder:---

 

 

 

“78. Federal Consolidated Fund and Public Account.---(1) All revenues received by- the Federal Government. all loans raised by that Government, and all moneys received by it in repayment of any loan, shall form part of a consolidated fund. to be known as the Federal Consolidated Fund.

 

 

 

(2) All other moneys--

 

 

 

(a) received by or on behalf of the Federal Government; or

 

 

 

(b) received by or deposited with the Supreme Court or any other Court established under the authority of the Federation, shall be credited to the Public Account of the Federation.

 

 

 

79. Custody etc. of Federal Consolidated Fund and Public Account.---The custody of the Federal Consolidated Fund, the payment of moneys into that Fund, the withdrawal of moneys therefrom, the custody of other moneys received by or on behalf of the Federal Government their payment into, and withdrawal from, the Public Account of the Federation, and all matters connected with or ancillary to the matters aforesaid shall be regulated by Act of Majlis-e-Shoora (Parliament) or, until provision in that behalf is so made, by rules made by the President.

 

 

 

80. Annual Budget----(1) The Federal Government shall, in respect of every, financial year, cause to be laid before the National Assembly a statement of the estimated receipts and expenditure of the Federal Government for that year, in this Part referred to as the Annual Budget Statement.

 

 

 

(2) The Annual Budget Statement shall show separately --

 

 

 

(a) the sums required to meet expenditure described by the Constitution as expenditure charged upon the Federal Consolidated Fund; and

 

 

 

(b) the sums required to meet other expenditure proposed to be made from the Federal Consolidated Fund; and shall distinguish expenditure on revenue account from other expenditures.

 

 

 

81. Expenditure charged upon Federal Consolidated Fund ---The following expenditure shall be expenditure charged upon the Federal Consolidated Fund---

 

 

 

(a) the remuneration payable to the President and other expenditure relating to his office and the remuneration payable to--

 

 

 

(i) the Judges of the Supreme Court;

 

 

 

(ii) the Chief Election Commissioner;

 

 

 

(iii) the Chairman and the Deputy Chairman;

 

 

 

(iv) the Speaker and the Deputy Speaker of the National Assembly;

 

 

 

(v) the Auditor-General;

 

 

 

(b) the administrative expenses, including the remuneration payable to officers and servants, of the Supreme Court, the department of the Auditor-General and the Office of the Chief Election Commissioner and the Secretariats of the Senate and the National Assembly;

 

 

 

(c) all debt charges for which the Federal Government is liable, including interest, sinking fund charges, the repayment or amortisation of capital, and other expenditure in connection with the raising of loans, and the service and- redemption of debt on the security of the Federal Consolidated Fund;

 

 

 

(d) any sums required to satisfy any judgment, decree or award against Pakistan by any Court or Tribunal; and

 

 

 

(e) any other sums declared by the Constitution or by Act of Majlis-e-Shoora (Parliament) to be so charged.

 

 

 

82. Procedure relating to Annual Budget Statement,--- (1) So much of the Annual Budget Statement as relates to expenditure charged upon the Federal Consolidated Fund may be discussed in, but shall not be submitted to the vote of, the National Assembly.

 

 

 

(2) So much of the Annual Budget Statement as relates to other expenditure shall be submitted to the National Assembly in the form of demand for grants, and the Assembly shall have power to assent to, or to refuse to assent to, any demand, or to assent to any demand subject to a reduction of the amount specified therein:

 

 

 

Provided that, for a period of ten years from the commencing day or the holding of the second general election to the National Assembly, whichever occurs later, a demand shall be deemed to have been assented to without any reduction of the amount specified therein, unless, by the votes of a majority of the total membership of the Assembly, it is refused or assented to subject to a reduction of the amount specified therein.

 

 

 

(3) No demand for a grant shall be made except on the recommendation of the Federal Government.”

 

 

 

A study of these Articles shows that the Federal Government has the power to frame the financial, economic and fiscal policies of the State and also to provide necessary legal framework to execute such policies. It is the Federal Government which has the authority under the Constitution to operate and issue guarantees on the security of the Federal Consolidated Fund under such limits as may be fixed by an Act of the Parliament. However, no such law framed by the Parliament was referred to us. In the absence of such a law, the Government exercises unrestricted powers to borrow against the security of the Federal Consolidated Fund as no law has yet been framed to regulate the custody of Federal Consolidated Fund or the Public Account of the Federation. Though variety of rules such as Treasury Rules exist but in the absence of specific laws and rules pertaining to borrowing, it is practically and ultimately the Rules of Business which are resorted to regulate the business of the Federal Government. Rules of Business [Schedule II, specified in Rule 3(3)] indicate at Entry No.13 `Finance Division’ and the functions assigned to the said Division. In subentries 6 and 7 thereof, following items have been mentioned:-----

 

 

 

Public debt of the Federation both internal and external; borrowing money on the security of the Federal Consolidated Fund;

 

 

 

Loans and advances by the Federal Government.

 

 

 

It follows from these provisions of the Rules of Business that the lending and borrowing operations of the Federation are performed by the Ministry of Finance within the framework provided in the Rules of Business.

 

No specific guidelines appear to have been provided to regulate and streamline such functions. It may, therefore, be inferred that the Secretary Finance or at best the Minister for Finance are free to make decisions on these subjects though they may consult the Prime Minister if the matter is considered, in the discretion of the Secretary Finance or the Minister for Finance, to be an important policy matter. Rule 16 which specifies the cases required to be brought before the Cabinet does not contain borrowing proposals and as such even the Cabinet is not required to be taken into confidence. It will, therefore, be seen that neither the borrowings are restricted for specific uses nor the expediency of the situation necessitating borrowings has been spelled out. This situation of wide flexibility confers on the Finance Division unique and unlimited powers to borrow without at all being bothered about the productivity of the uses to which borrowed resources are applied or even without there being any limitation to the extent to which the nation is to be burdened with borrowings.

 

 

 

As regards the revenues and loans credited to Federal Consolidated Fund and to Public Account, expenditures are incurred without regard to the sources of funds. It appears that no accounting is done for identifying the liabilities created by certain expenditures as revenues are mixed up with proceeds of loans and both are treated at par. This situation prevails as regards the borrowings both from foreign lenders as well as domestic lenders, as no distinction is made whether the borrowing in rupee or in foreign exchange or from local and foreign markets. It is only the Government in power which is to decide freely the mix between the foreign and local borrowings or in rupee or in foreign exchange. Under the Federal Legislative List, Entries No. 9 and 10, make the subjects of foreign loans and foreign aid Federal subjects.

 

 

 

At this stage the views of Dr. Waqar Masood Khan, Vice-President, International Islamic. University with regard to the implications emerging from the legal provisions on the subject may be dealt with. He contended that:----

 

 

 

“(1) The Federal Government enjoys borrowing powers which are Constitutionally sanctioned and no limits have been placed by any Act of the Parliament on these powers.

 

 

 

(2) The borrowing transactions, are protected by their inclusion within the list of expenditure charged to the Federal Consolidated Fund; according to the interpretation of Dr. Waqar Masood Khan, these transactions include both the principal money as well as the interest.

 

 

 

(3) Charged expenditure enjoys the protection of complete insulation from Parliamentary control or scrutiny. Although such expenditure can be debated but cannot be put to vote, and hence no cut motions can be moved in respect of such expenditure. More importantly, since these are charged expenditure, they take precedence over all other expenditures. Apparently, such obligations will have to be discharged prior to incurring any other expenditure.

 

 

 

(4) Together with the absence of any Act to regulate the custody of the FCF and PA, the Federal Government has complete freedom to manage the finances of the Federation.” .

 

 

 

The other important aspects to be noticed, considering overall effect of the judgments rendered by the Federal Shariat Court, it was contended, are:--

 

 

 

(a) That the Federal Shariat Court has examined only the laws enlisted above and not the other laws having bearing on the common finances or containing provisions pertaining to levy or charging of interest. An illustrative list of these laws provided by Dr.Waqar Masood details the enactments as follows:--

 

 

 

(1) Contract Act, 1872 (Act IX of 1872), section 73, illustration (n).

 

 

 

(2) Trusts Act, 1882 (Act II of 1882), sections 20 and 20A.

 

 

 

(3)  Transfer of Property Act, 1882 (Act IV of 1882), sections 58 to 104.

 

 

 

(4) The Land Improvement Loans Act, 1883 (Act XIX of 1883), sections 6, 7 and 10.

 

 

 

(5) The Agricultural Loan Act, 1884 (Act XII of 1884), section 5.

 

 

 

(6) The Local Authorities Loan Act, 1914 (Act IX of 1914), sections 3 and 4.

 

 

 

(7) The Usurious Loans Act, 1918 (Act X of 1918), sections 2 and 3.

 

 

 

(8) The Securities Act, 1920 (Act X of 1920), section 13(2) [many other parts implying that securities bear interest].

 

 

 

(9) The Provident Funds Act, 1925 (Act XIX of 1925), section 2 [many other parts implying that interest is payable].

 

 

 

(10) The Public Debt Act, 1944 (Act XVIII of 1944), section 18 [many other parts implying that interest is payable].

 

 

 

(11) The Foreign Exchange Regulation Act, 1947 (Act VII of 1947), section 13 [many other parts implying that interest is payable].

 

 

 

(12) The National Bank of Pakistan Ordinance, 1949 (Ordinance XIX of 1949), section 25 [many other parts which imply interest-based business]. ,

 

 

 

(13) The House Building Finance Corporation Act, 1952 (Act XVIII of 1952), sections 21 and 24 [many other parts implying dealings in interest].

 

 

 

(14) The. Industrial Development Bank of Pakistan Ordinance, 1961 (Ordinance XXXI of 1961), sections 5 and 27 [many other parts implying dealings in interest].

 

 

 

(15) The Investment Corporation of Pakistan Act, 1966 (Ordinance IV of 1966), section 23 [many other parts implying dealings in interest].

 

 

 

(16) The People’s Finance Corporation Act, 1972 (Act XXIX of 1972), section 20 [and many other parts implying dealings in interest].

 

 

 

(17) The National Development Finance Corporation Act, 1973 (Act VIII of 1973), section 18 [and many other  parts implying dealings in interest].

 

 

 

(18) The Establishment of the Federal Bank for Cooperatives and Regulation of Cooperative Banking Act, 1977 (Act IX of 1977), section 17 [many other parts implying dealings in interest].

 

 

 

(19) The Income Tax Ordinance, 1979 (Ordinance XXXI of 1979), section 17 and numerous other provisions dealing with interest income.

 

 

 

(20) The Companies Ordinance, 1984 (Ordinance XLVII of 1984). Numerous provisions dealing with debentures and other fixed income securities.

 

 

 

(b) That the treasury rules and other rules regulating Government finances have also not been examined by the Federal Shariat Court. Thus at present Government finances may not be directly and fully hit by the decision of the Federal Shariat Court. These finances may be hit only partially.

 

 

 

(c) That the borrowing powers of the Government emanate directly from the Constitution and the provisions of the Constitution are beyond the scrutiny or examination of the Federal Shariat Court and hence it is to be seen and decided whether the laws authorizing the Government to borrow can be struck down disabling the Government from borrowing on the basis of interest.

 

 

 

It was for these reasons that it was contended that, in view of the above Constitutional provisions, the Government finances seem to be outside the purview of the Federal Shariat Court because it is not competent to examine the provisions of the Constitution, and since borrowing powers are protected under the Constitution together with the transactions carried out in pursuance of such powers the process of prohibition apparently cannot be extended to the Government finances under the existing scheme of judicial review of laws with regard to their consistency with the Injunctions of Islam. Following the above noted line of argument, Dr.Waqar Masood expressed the view that within the existing Constitutional framework the prohibition can effectively be applied to private transactions and not to the Government finances unless of course the Constitution is amended.

 

 

 

We have given serious considerations to the abovenoted aspects and are of the view that as regards the laws which have not yet been scrutinized by the Federal Shariat Court, it will be appropriate to have the said laws/enactments/provisions scrutinized by moving appropriate petitions by the Government itself or by taking suo motu notice by the Federal Shariat Court. As regards implications emerging from the legal provisions on the subject, the Federal Government enjoys borrowing powers under Article 78 of the Constitution. The mandate of Article 79 of the Constitution, however, is that an Act of the Parliament has to regulate--

 

 

 

(a) the custody of the Federal Consolidated Fund;

 

 

 

(b) the payment of moneys into that Fund;

 

 

 

(c) the withdrawal of moneys therefrom;

 

 

 

(d) the custody of other moneys received by or on behalf of the Federal Government;

 

 

 

(e) their payment into, and withdrawal from, the Public Account of the Federation; and

 

 

 

(f) all matters connected with or ancillary to the matters aforesaid.

 

 

 

This mandate has not yet been obeyed and complied with as no enactment has been till date framed and enacted by the Parliament. All the above matters are being dealt with under the Rules made by the President which Rules, as commented in one of the paragraphs above are deficient in many respects and, in any case, cannot be a valid substitute of law framed by the Parliament itself. The Rules existing on the subject were probably made pursuant to section 151 of the Government of India Act, 1935, which section provided that the Rules may be made by the Governor-General and by the Governor of Province for the purpose of securing all moneys received on account of revenues of the Federation or of the Province and also with regard to the moneys to be paid into the Public Account of the Federation or the Province. After the establishment of Pakistan, the Constitutions of 1956 in Article 62, the Constitution of 1962 in Article 38 and the Constitution of 1973 in Article 79 mandated for the enactment of an Act by the Parliament to regulate the custody of the Federal Consolidated Fund, the payment of and withdrawal of moneys into or therefrom as well as custody of other moneys received by or on behalf of the Federal Government, their payment or withdrawal from the Public Account of the Federation and all matters connected with or ancillary thereto. Reference may also be made to Article 81 of the Constitution of which clause (c) provides that the expenditure charged upon the Federal Consolidated Fund includes all debt charges for which the Federal Government is liable, including interest sinking fund charges, the repayment or amortisation of capital, and other expenditure in connection with the raising of loans, and the service and redemption of debt on the security of the Federal Consolidated Fund. Reference may also be made to Article 166 of the Constitution which provides that the executive authority of the Federation extends to borrowing upon the security of the Federal Consolidated Fund within such limits, if any, as may from time to time be fixed by Act of Majlis-e-Shoora (Parliament), and to the giving of guarantees within such limits, if any, as may be so fixed. Similar provisions were contained in the Constitutions of 1962 and 1956 in Articles 139 and 115 respectively. The economists appearing before us showed ignorance as to the existence of any such law as contemplated by these Articles on the statute book. In the absence of any such enactment providing guidelines and fixing the limits up to which the borrowing power can be exercised by the Federation, Dr.Waqar Masood, argued that the charged expenditure enjoys the protection of complete insulation from parliamentary oversight as, on the one hand, no guidelines exist and, on the other, such expenditure can be debated but is not to be put to vote. Moreover, the Federal Government has complete freedom to manage the finances of the Federation and this unrestricted power has plunged the Nation into huge indebtedness and has ruined the economy. It would be seen that for almost fifty years we have not been able to obey the mandate of the Constitution by not enacting appropriate law defining the borrowing powers, the purposes, the use and limit of the exercise of such power. The contracts of billions of dollars burdening the nation through execution of sovereign guarantees are being entered into without information of even the members of the cabinet what to say of obtaining approval of the National Assembly by a member of bureaucracy or advisor appointed by Prime Minister in his sole discretion injudiciously. The contract executed with IPPs provide sufficient basis for providing prudential laws and making approval of such contracts by the National Assembly mandatory. Such a law should be enacted without further loss of time so that prudential measures could be adopted so as to regulate management of Federal Consolidated Fund as well as Provincial Consolidated Funds and Public Accounts and the borrowing powers of the Federation particularly.

 

 

 

The contention that the process of prohibition cannot be extended to Government Finances under the existing scheme of Judicial Review of laws with regard to their consistency with the Injunctions of Islam on account of the fact that the Constitutional provisions cannot be scrutinized on the touchstone of Injunctions of Islam under Article 203-D of the Constitution merits some consideration. It is on account of exclusion of the Constitution from the definition of the term “law” given in clause (c) of Article 203-B that this view has been expressed. No doubt, the question of repugnancy or otherwise of the Constitutional provisions on the touchstone of Injunctions of Islam cannot be examined by the Federal Shariat Court and also by the Shariat Appellate Bench of the Supreme Court but the enactment which as and when framed regulating the Federal Consolidated Fund or the Public Accounts as well as defining, prescribing and limiting the borrowing powers are enacted, the said statute, enactment or even the rules shall have to conform to the Injunctions of Islam as contained in the Holy Qur’an and G Sunnah of the Holy Prophet not in view of the provisions contained in Article 203-B(c) but also of the provision of Article 2-A and Article 227 of the Constitution. This Constitutional position is well established and in support reference may be made to Hakim Khan and 3 others v. Government of Pakistan through Secretary Interior and others PLD 1992 SC 595) wherein five learned Judges of this Court, inter alia, held that the Court has no power to apply the test of repugnancy by invoking Article 2-A of the Constitution for striking down Article 45 of the Constitution of the Islamic Republic of Pakistan for the reason that if any Article of the Constitution is in conflict with Article 2A, the appropriate procedure is to have it amended in accordance with the prescribed provision for the purpose. However, it does not absolve the Courts of their duty to give effect to the provisions of Article 2A as it has been made substantive part of the Constitution. A Constitution is an organic whole. All its Articles have to be interpreted in a manner that its soul or spirit is given effect to by harmonising various provisions. Again in The State v. Syed Qaim Ali Shah (1992 SCMR 2192) it was observed that the Courts while construing the provisions of statute should make efforts that the interpretation of the relevant provision of the statute should be in consonance with Article 2A of the Constitution and the grund norms of human rights.

 

 

 

This Court in the case of Zaheeruddin and others v. The State and others (1993 SCMR 1718) declared that effect of adoption of Objectives Resolution as Article 2A in the Constitution by the chosen representatives of the people as the operative part of the Constitution, is the acceptance of sovereignty of Allah to be binding on them who vowed. that they will exercise only the delegated powers within the limits fixed by Allah. Such adoption also enhanced the power of judicial review of the superior Courts. It was further observed that “the Constitution has adopted the Injunctions of Islam as contained in Qur’an and Sunnah of the Holy Prophet (p.b.u.h.) as the real and the effective law. In that view of the matter, the Injunctions of Islam as contained in Qur’an and Sunnah of the Holy Prophet (p.b.u.h.) are now the positive law. Article 2A, made effective and operative the sovereignty of Almighty Allah and it is because of that Article that the legal provisions and principles of law, as embodied in the Objectives Resolution: have become effective and operative. Therefore, every man-made law must now conform to the Injunctions of Islam as contained in Qur’an and Sunnah of the Holy Prophet (p.b.u.h.). Therefore, even the Fundamental Rights as given in the Constitution must not violate the norms of Islam”. Again this Court in the case of Mushtaq Ahmad Mohal and others v. The Honourable Lahore High Court, Lahore and others (1997 SCMR 1043) held the appointments to various posts by the Federal Government, Provincial Governments, statutory bodies and other Authorities, either initial, ad hoc or regular, without inviting applications from the public through the press to be violative of Article 18 read with Article 2A of the Constitution of Pakistan. Not only the actions but also the laws to be framed as such are to conform to the grund norm established by the incorporation of the I Objectives Resolution as substantive part of the Constitution with the addition of Article 2A in the Constitution of the Islamic Republic of Pakistan, 1973.

 

 

 

Reference may be made to the case of Dr.Mahmood-ur-Rahman Faisal v. Government of Pakistan through Secretary, Ministry of Justice, Law and Parliamentary Affairs, Islamabad .(PLD 1994 SC 607) wherein Shariat Appellate Bench of the Supreme Court observed that the provisions of the Constitution conferring jurisdiction on the Federal Shariat Court to examine whether or not any law or provision of the law is opposed to the Injunctions of Islam, are to be interpreted in a manner which would give full effect to the process of Islamization of laws and such interpretation will be more harmonious with the spirit and letter of the Constitution.

 

 

 

The net result of the above discussion is that every law to be framed by the Parliament has to conform to the Injunctions of Islam as contained in Holy Qur’an and Sunnah of the Holy Prophet (peace be upon him) and if any such law is found to be repugnant to the Injunctions of Islam, the Federal Shariat Court as well as the Shariat Appellate Bench of the Supreme Court has the power to scrutinize the said law on the touchstone of Islamic injunctions and make the necessary declaration as is contemplated in Article 203-D of the Constitution and the Federal Government or the Provincial Governments, as the case may be, shall have to amend the law suitably as required in the judgment.

 

 

 

The definition of ‘Riba’ as finally determined by this Court will provide touchstone for evaluating as to whether a provision of law conforms to the Injunctions of Islam or not and any such provision of law as finally declared to be not conforming to the injunctions of Islam shall have to be amended suitably. The position of the past and closed transactions and the liabilities already incurred under the existing provisions of law is, however, different and shall be dealt with at appropriate stage while dealing with the said question in this judgment.

 

 

 

The stage is now set to examine the question of definition of Riba, the concept of Riba, as found in Qur’an and expounded by the Prophet of Islam, practised by the Righteous Caliphs and understood and explained by the Fuqaha. The criticism of the opponents of Islam, the pleas urged and the apprehension expressed by certain quarters will also be examined hereunder.

 

 

 

The question of redefining Riba in the context of modern international economic and monetary system has been raised time and again, during the past few decades. It was raised before the learned Federal Shariat Court and has also been raised before us not only in the appeal submitted on behalf of the Federation but also on behalf of some other appellants. It has been asserted that since the present monetary system has become much more advanced, complex and developed as compared to what is termed by some as the rudimentary system prevalent during the early centuries of Islam, a fresh definition of Riba is needed and the earlier, or traditional definition, if any, developed by the early doctors of Islamic Fiqh suited only their time when the economy was based mostly on barter rather than complex paper currency system. According to this opinion, Riba has to be redefined afresh in every age keeping in view the existing economic realities, monetary system and financial institutions of the time. The new definition, it is contended, should be liberal, accommodative and contributive to economic progress and well-being of the people; it should be free from the limited approach of the medieval jurists who, according to this view, were not exposed to such complex and difficult problems as are faced by the modern jurists and the contemporary economists. The upholders of this view differentiate between interest and usury and take pains to show that Riba is synonymous with usury and is basically different from the present day interest. Basing their argument on the Qur’anic verse (4: 160-161) which refers to the prohibition of Riba in the Jewish law, they argue that the Jews were known for charging interest at exorbitant rates employing all sorts of harsh, coercive and treacherous methods. In their society, Riba was extracted from the poor along with a pound of flesh. However, those who propound this view do not themselves come out with any definite, clear and viable definition of Riba which should exclude bank interest and cover only usury charged at exorbitant rates. Any worthwhile logically phrased and technically defensible definition is bound to be such that either it would exclude everything, even what is conceded to be usury at exorbitant rates or it would include everything traditionally considered Riba by Muslim jurists including the bank interest regardless of its rate.

 

 

 

Despite this difficulty, some scholars have tried to develop a theory of Riba in such terms as may be helpful to exclude bank interest from the ambit of Riba. We wish to thoroughly examine their views and weigh the arguments marshalled in support of this interpretation of Riba. But we have noted that either the upholders of this view do not give any definition of Riba, or, if they do, it is either all-inclusive or all-exclusive. Therefore, one is left with no other option but to accept the definition of Riba agreed upon by almost all the commentators of the Qur’an, the Hadith, the jurists the classical and traditional writers on Riba. This definition has been phrased differently by different scholars but, in fact and in effect, there is no material or substantial difference among them. However, we shall come back to the definition of Riba later. Before discussing the definition of Riba as agreed upon by the overwhelming majority of the Ummah, it is advisable that the minority view of those who do not consider bank interest as Riba is discussed in detail. Among those who advocate this view, the names of Sayyid Rashid Rida, Maulana Jaafar Shah Phulwarwi, Syed Yaqub Shah, Dr. Fazlur Rahman, Mr. Justice Qadeeruddin Ahmed and Shaikh Muhammad Sayyid Tantawi are prominent and deserve mention. The views of earlier four scholars were summarized and condensed in a scholarly article by late Mr. Justice Qadeeruddin Ahmed. Out of these, the views of Sayyid Rashid Rida, Shaikh Muhammad Sayyid Tantawi,. Dr. Fazlur Rahman and late Justice Qadeeruddin Ahmed deserve deeper examination because their views and findings were placed before us by the counsel of some of the parties as well as by Mr. Khalid M. Ishaque and Mr. H. U. Beg a former Secretary Finance to the Government of Pakistan who appeared before us on his own initiative. Although the views of other scholars, namely Maulana Jafar Shah Phulwarwi and Syed Yaqub Shah were not formally quoted before us, yet we have taken notice of their views because of the prominent stature these scholars possess. These views have a tendency to influence such people who may not have profound or systematic knowledge of Islam- and may be carried away by the apparent force of their arguments. This is evident by some letters written to us by some people as well as some newspaper articles.

 

 

 

We have gone through all this material. It is evident from perusing this bulky literature that a lot of time, resources and energy has been exhausted by these scholars in exploring and determining the meaning and interpretation of Riba as used in the Holy Qur’an to determine whether interest and profit in vogue in our present day economic and financial system fall under the purview of Riba. It is contended that Islam being a progressive religion and a way of life for the `Muslims’, the question of Riba should be resolved with a progressive approach so that the progress brought about by the modern economic system does not halt and the journey to progress is not disturbed. In such-like arguments reference is always made to the Jews. It is said that since ages Jews have been particularly reputed to be experts in usurious business i.e. charging exorbitant rates of interest by employing all sorts of harsh, coercive and treacherous methods for extracting interest with a pound of flesh. After narrating the details of the harsh attitude of Jewish money-lenders, it is claimed that the position about interest (as used in our day-to-day transactions) is entirely different from usury or Riba. In the case of interest it is claimed that there is no compulsion or coercion but it is a simple agreement for levy of a small sum to be paid by the borrower for the use of money. It is contended that the payment of interest is justified because the principal money is used for financing public welfare projects and enterprises in public and private sectors. On the basis of this difference between usury and interest, it is asserted that the bank interest is not Riba and that the misconception has been created by those who do not differentiate between usury and interest.

 

 

 

Following are main grounds on which bank interest is claimed to be different from Riba:-----

 

 

 

(i) The prohibition of Riba as laid down in the Holy Qur’an should not be interpreted in isolation without considering the context or background in which these verses were revealed as well as the situation in which this prohibition was applied. This neglect or disregard of the context is bound to result in misconception.            

 

 

 

(ii) That Riba has a relationship with economic and financial  system of Islam and unless there is an ideal Islamic society,   free from want, corruption and avarice in the true sense of the  terms it is not proper to enforce any of the Qur’anic Injunction in isolation.      

 

 

 

(iii) Some people also contend that the traditional sources of Government income in an Islamic system are restricted to only four sources, i.e. Zakat, Ushr, Jizyah and Ghanimah. In view of the pitiable condition of Zakat and Ushr collection, the Government cannot rely on these sources alone and has to resort to borrowings which, according to this view, cannot be ensured without the payment of interest. Reference is made to the deplorable situation of the distribution of Zakat in which mismanagement and embezzlement is known to all and sundry, There being no question of the levy of Jizvah and Ghanimah in the present days, no alternative is left except borrowing on interest. It is asserted that under the Islamic system no taxes, duties, cesses can be levied as they are all un-Islamic. But the Government has to undertake development work for the welfare of people for which resources are needed which can only be obtained through taxation and borrowings from local as well as foreign lenders.

 

 

 

(iv) Government also borrows and inculcates the habit of savings among people. The money thus collected is used for welfare projects whereas some profit or interest is given to the persons who contribute to these savings schemes.

 

 

 

(v) In the absence of any dependable system of welfare for the old and the needy, people want to keep something for the rainy day. If investment is made in a savings scheme both the Government and the people enjoy its benefit. Such people can neither work or toil nor can they incur the risk and face the ordeals caused to them by the so-called finance companies in the early eighties. For such people, it is argued, there is no other viable option except to deposit their savings in banks and receive the interest accruing from such investment. The interest accruing on such savings, therefore, should not be equated with Riba.

 

 

 

(vi) There are various methods of deceiving oneself through change of nomenclature. One may call it PLS account or mark-up, yet, this is that very old system which is prevalent since last century. This experience shows that the present system based on interest cannot be changed.

 

 

 

(vii) The spirit of Islam is the welfare of the people and should remain a predominant factor.’ The present interest has provided welfare to the people. There is no exploitation in this system; exploitation has been committed by the vested interest and not by the present day banking system.

 

 

 

These are some of the grounds or arguments advanced by the advocates of bank interest at the popular level in support of their plea. During the hearing of this case quite a good number of newspaper articles have appeared in some of which the views summarized above were expressed. A number of letters, notes and memoranda were sent to us reflecting the wishes and sentiments of the writers concerned. Of these, some supported the view that batik interest was not Riba. They based their opinion by and large on these very grounds summarised above. These arguments will be dealt with in the course of this judgment at a proper place. Let us first examine the views of the scholars whose writings have been referred to by some experts as well as learned counsel of some of the parties:

 

 

 

First of all we take up the views of Sayyid Rashid Rida, being the oldest and the most widely respected among the advocates of this view, and also for the fact that Mr. Khalid M. Ishaque who had relied mostly on these views, complained that the learned Federal Sharait Court neither allowed him to elaborate these views nor dealt with those aspects, nor considered them in the impugned judgment.

 

 

 

The views of Rashid Rida are found in a booklet presented to us along with an English translation by Mr. Khalid M. Ishaque. The English translation being extremely poor, if not altogether faulty, we have discarded it and confined our examination to the original Arabic text entitled “Riba and Commercial Dealings in Islam” (published in Cairo, 1960 along with a Foreword by Shaikh Muhammad Bahjah-al-Baitar). This booklet is, in fact, the writer’s response to a set of questions put to him by some people from Hyderabad Deccan, India, in early thirties or late twenties of this century. The booklet includes a lengthy Istifta (a request seeking legal ruling by a Mufti) covering 39 pages (pages 10--48) of the booklet followed by the detailed answers given by Rashid Rida and reproduced at pages 49--103. The long Introduction to the Istifta gives the four questions sent to him from Hyderabad Deccan. It also summarizes the discussion prevailing on the question of Riba in the sub-continent. The Introduction is well-researched and contains a fund of references to the wide range of books of Tafsir, Iladith and Fiqh. References to Fiqh books are overwhelmingly from Hanafi books with the exception of very few. This Introduction is followed by the following four questions--

 

 

 

(1) Whether the term Riba as used in the Qur’anic verse: “Allah has permitted trading and prohibited Riba” requires any explanation or not, particularly according to the Hanafi Jurists? What is briefly the explanation of this term given by the Law-Giver in the Qur’an and the sound (or Sahih) Ahadith?

 

 

 

(2) Kindly explain the meaning of Riba as used in the Qur’an and the sound Ahadith.

 

 

 

(3) Whether the stipulated and definite amount of profit to be paid on the loan is Riba according to the Nass or not?

 

 

 

(4) If it is held that the stipulated profit on the loan is Riba then what is the argument in support of this view from the sources recognized among the Jurists.

 

 

 

These questions were answered by some Indian scholar(s) whose name(s) have not been mentioned in the booklet. However, the answers given may be summarized as follows:--

 

 

 

(1) The Riba as mentioned -in the Qur’anic verse (2:275) needs explanation and elaboration according to the Hanafis as well as according to other Jurists. It may well be said that the Ummah has unanimously held this view and the Ahadith reported by Ubadah ibn Samit furnish the required explanation and elaboration to this term according to the majority of the Jurists. (Elaborate discussion on the Ahadith reported by Ubadah and other companions will come later in this judgment.)

 

 

 

(2) Riba is the increase which has no corresponding consideration in an exchange of property for property. Thus, there is no discrepancy or difference between the meaning of term Riba as used in the Qur’an and the meaning of the term as used in the Hadith because the Riba mentioned in the Hadith is only an elaboration and explanation of the Riba mentioned in the Qur’an.

 

 

 

(3) The stipulated profit on a loan is not Riba according to the Nass because it has no proof from the Qur’an or from a sound Hadith.

 

 

 

(4) The view that the stipulated profit on a loan is Riba is not supported by the Qur’an or the Hadith. Sometimes it is substantiated by Qiyas (analogical reasoning) and sometime by the Hadith which says: “every loan which entails any benefit or profit is Riba”. Both these arguments require reconsideration. The argument based on analogical reasoning is not sound because there is no common ground or illah between the original case and the present case. As to the second argument it is also inadmissible because it is based on a weak Hadith which cannot be accepted as a basis of argument. Even if we accept the argument that analogical reasoning is sound it is subject to change with the passage of time; because rulings and views based on analogical reasoning are subject to change with the change of environment and circumstances.

 

 

 

The istifta containing the long introductory Note along with the above brief answers to the four questions was referred to Sayyid Rashid Rida for an authoritative ruling and/or confirmation of the above answers. Rashid Rida praised the Note along with the answers and spoke highly about the author of the Note. He pointed out at the very outset that the Indian author, despite of the depth of his knowledge and the mastery over the subject, had confined himself to the views of the Hanafi jurists while the subject required that it should have been studied in the larger perspective of Fiqh in general without adopting a certain ruling or abiding by the rules of Ijtihad followed in any particular legal school. However, Rashid Rida did not confine himself to subscribing to the views of the Indian scholar but also gave his own opinion. However, he did not agree with the definition of Riba as given by the Indian author in his response to the second question and insisted that Riba was always in a debt and was not confined to a loan or to a deferred price. According to him, the original Qur’anic Riba was different from the Riba of the Hadith. The latter, namely the Riba of the Hadith had been prohibited because it might have led to the perpetration of the Qur’anic Riba. Otherwise, he maintains, the Riba of the Hadith does not directly fall under the Qur’anic prohibition and condemnation of Riba since it does not involve that enormous evil which is represented by the Qur’anic Riba. Rashid Rida had spoken at length on the answer to the fourth question as, according to him, this constituted the basis of the whole discussion.

 

 

 

The nutshell of the views of Rashid Rida is that it is only the Riba al-Nasi’ah (also called Riba al-Qur’an and Riba al-Jahiliyyah) which is prohibited in the Qur’an. All other kinds of Riba prohibited by the Prophet (p.b.u.h.) are only by way of preventive measures. He expresses his disagreement with those who consider both kinds of Riba to fall under one and the same category, He contends that most of the opinions and rulings given by the jurists in respect of Riba have no support from the Shariah directly or indirectly. According to him, this extended meaning of Riba is neither in consonance with the fundamentals of Islam nor any principle of legislation nor is based on any ratio decidandi drawn from the divine revelation dealing with the prohibition of Riba. He disagrees with the views of Imam Abu Hanifah who says that the exchange of two fungibfe (i.e. countable, measurable or weighable) commodities with an excess is Riba.

 

 

 

The large body of legal rulings developed by the jurists on the basis of this understanding of Riba, according to Rashid Rida, is irrational and unsubstantiated by the scriptural authorities. In this context, Rashid Rida comes out with vehement criticism against the Jurists and considers it to be an intervention in the divine prerogative to determine what is lawful and what is unlawful. He goes on citing examples where a Hanafi jurist considered something to be unlawful and which should not have been held unlawful in the opinion of Rashid Rida or any other jurist.

 

 

 

Although Rashid Rida claims to take up the question of defining the contours of Riba al-Jahiliyyah prohibited by the Qur’an, yet his treatment of this subject is self-contradictory. On the one hand, he establishes that the term Riba as used in the Qur’an was clear and express and was fully understood by the addressees of the Qur’an, namely, the Companions. On the other hand, he tries to develop a definition on the basis of some illustrative reports found in the Hadith literature about the nature of Riba and Riba-based transactions prevalent in pre-Islamic Arabia. He picks up one such report recorded by several authorities and concludes that Riba is only that increase which is agreed upon by the parties at the stage of maturity of the initial loan if the borrower is not in a position to pay. Any increase, irrespective of its weight, measure or quantity agreed upon between the two parties at