Islamic Law On Interest: The 1999 Pakistan Supreme Court Rulings On Riba
| Author | Akhtar Hamid |
| Profession | Lead Counsel in the Middle East |
| Pages | 393-432 |
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Akhtar Hamid is lead counsel in the Middle East and North Africa/South Asia Practice
Group of the Legal Vice Presidency of the World Bank. The author gratefully acknowledges the research assistance provided by Ali Awais, consultant, in the preparation of this paper.
Page 393
On December 23, 1999, the Shariat Appellate Bench of the Supreme Court of Pakistan (the Court) delivered a landmark decision through two key rulings,1 Page 394 upholding a 1991 Federal Shariat Court (FSC) ruling2 that any increase, big or small, over the principal under a contract of loan or debt is riba3 prohibited by the Koran, regardless of whether the loan is for a consumptive or productive purpose. In the Court's view, bank interest is riba, and so also are certain other forms of increase under a loan contract, which though not called interest are nevertheless so, such as "indexation"4 and "mark-up."5 In the result, the Court declared a number of interest-related fiscal and other laws, or provisions thereof, to be repugnant to the injunctions of Islam and directed that these cease to have effect from March 31, 2000. In the process, overcoming objections from some of the appellants to its jurisdiction to do so, the Court laid down guidelines and a timetable for establishing an interest-free economy and directed the government to take the necessary steps in that direction.
The Court arrived at its decision by closely examining the relevant verses of the Koran and the sayings and traditions of the Prophet (the hadith and the sunna), as well as the ancient and traditional Islamic commentaries. The Court also relied heavily on the views of contemporary Islamic scholars, economists, bankers, lawyers, and other experts, who answered questionnaires addressed to them in writing, or who appeared in person before, or otherwise made submissions to, the Page 395 Court. Most of these hailed from within Pakistan, including a former finance minister; a former chief economist of the Ministry of Finance; representatives of the International Islamic University, Islamabad; the Faculty of Islamic and Oriental Learning, Punjab University, Lahore; the Islamic Research Council, Lahore; the Institute of Policy Studies, Islamabad; and several individuals in their capacity as prominent scholars of Islam (ulema), bankers, economists, chartered accountants, and senior lawyers with a special interest and expertise in Islamic financial matters. Many, however, came from overseas, including the president of the Islamic Development Bank, Jeddah, Saudi Arabia; the chief executive of the International Investment Company, Kuwait; the chief executive of Global Islamic Finance, Hong Kong & Shanghai Banking Corporation (HSBC), London; the economic advisor, Saudi Arabian Monetary Agency (SAMA), Jeddah; representatives of the King Abdul Aziz University, Jeddah; and the Al-Islamia Law Department, University of Khartoum, Sudan. The Court regarded these experts as providing it support particularly on the point that Islamic modes of financing are not only feasible, but also beneficial in helping to bring about a balanced and stable economy; and that it is no accident therefore that Islamic banks and financial institutions have been growing in the last three decades, and that, in turn Islamic banking is no longer a utopian dream.
The Court also endorsed and relied upon the reports of various committees and commissions appointed by the government from time to time to recommend ways and means of Islamicizing the economy. To name a few, these included the 1980 report of the Council of Islamic Ideology, the 1991 report of the Prime Minister's Committee on Self Reliance, and the 1997 report of the Commission for the Islamization of the Economy, all of which are discussed in later parts of this paper. The Court regarded these reports as ample proof of the substantial groundwork which has already been done to help design a strategy for the transformation of the existing financial system to an Islamic one.
This note will: - explore some of the background against which the Court's ruling was delivered, including the events of the past two decades which had made the Court's intervention in this area inevitable;
- extract the essence from the Court's ruling, paying particular attention to:
(a) the opinion of the Court as to what constitutes riba in Islam; (b) the views of the Court about the current financial system and how that system fails to measure up to what is in the Court's opinion the Islamic standard;
(c) the prescriptions set out by the Court for restructuring the financial system with a view to bringing it up to that standard, including changes in the Page 396 laws, in the judicial system, in the financial institutional arrangements and the financial instruments, in the regulatory framework and generally in the way of doing business; and (d) the practical steps identified by the Court to be taken to fulfill those prescriptions, including the time-frame set out for this purpose and the various milestones to be achieved along the way; and
- highlight the Court's views on how the country's existing domestic debt should be restructured, how the country's future financing needs should be satisfied through the domestic capital market, and what should be done about the country's foreign debt.
In 1980, in the discharge of one of its constitutional functions, the Council of Islamic Ideology (CII) submitted a report to the government entitled "The Elimination of Interest from the Economy" (CII Report). The CII Report contained a blueprint for the reorganization of banking practices and procedures on the basis of profit and loss sharing in accordance with the Islamic principles of joint ventures (musharika) and mutual investment funds (mudaraba). The CII Report recognized the difficulties of translating these principles into practice in their purest form, and therefore permitted the use of other, less stringent non-interest based modes of financing. The CII Report also recognized the difficulties of applying the Islamic principles to the substantial borrowings of the government from foreign governments and international financial institutions. The CII Report, therefore, provided that for the time being (i.e., until such time as foreign governments and international financial institutions are prepared to deal with the government on a basis compatible with Islamic principles or the sharia), foreign borrowings would have to continue on an interest basis. 6
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In 1980, the Federal Shariat Court (FSC) was established, through constitutional amendment.7 The FSC has jurisdiction, either of its own motion (suo moto) or on petition by a citizen or the government, to examine and decide whether any law or provision of law is repugnant to the injunctions of Islam. Subject to appeal to the Supreme Court (Shariat Appellate Bench (SAB)), any decision of the FSC holding any law or provision of law repugnant to the sharia takes effect on a date specified in the decision itself. And on that date, any law or provision which has been so held to be repugnant to the sharia ceases automatically to have effect to the extent of the declared repugnancy. Any court, including the Supreme Court and high courts, is prohibited from entertaining any proceedings or exercising any power or jurisdiction in respect of any...
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