“And making a whip of cords, he drove them all out of the temple. And he poured out the coins of the money-changers and overturned their tables.” This is the biblical account of Jesus Christ cleaning the Temple, of Herod in Jerusalem, of usurers. We wonder if the Zia-era State Bank of Pakistan was envisioning El Greco’s 16th century canvas depiction of that event when it declared interest to be illegal back in June 1984.
The Quran contains several injunctions prohibiting riba, which term generally translates as usury or more appropriately economic oppression. The prohibition appears to be upon the doubling and quadrupling of the takings of the lender, irrespective of the sufferings of the borrower. Two of several Quranic verses, in this regard, enunciate as follows: “O you who believe, you shall not take riba, compounded over and over. Observe God, that you may succeed. (Quran 3:130)” “And for practicing riba, which was forbidden and for consuming the people’s money illicitly. We have prepared for the disbelievers among them painful retribution. (Quran 4:161)”
The concepts of usury and oppression, economic or otherwise, are contrary to the precepts of every religion. However, of paramount importance is the determination of whether interest in itself, being simply the time value of money, amounts to usury and/or oppression.
The question whether interest can be equated with riba has been the subject of much discussion in Pakistan since 1969, when upon an enquiry made by the State Bank of Pakistan, the Advisory Council of Islamic Ideology, in its December 1969 session held in Dacca, declared interest on bank loans, savings certificates, prize bonds and postal life insurance schemes etc to be forms of “riba” and thus un-Islamic. The first judicial determination of this issue in Pakistan took place in 1991 before the Federal Shariat Court.
The eminent jurist Khalid M Ishaque, who was also an acclaimed religious scholar and a former member of the Council of Islamic Ideology, argued before the court that there is juristic opinion available to the fact that bank interest does not fall in the category of prohibited riba (interest). He argued that banks participate in the processes of the society/ community, make productive labour possible, increase social wealth, and take only a fraction of the profit that accrues, which is not riba.
The Federal Shariat Court did not concur with the proposition and thus on November 14, 1991 Pakistan became the first country in the world to have judicially declared bank interest as being equivalent to riba, which is prohibited by the Quran.
The judgement also contained a critical observation, which stated that “transactions in the garb of mark-up resulted in interest, as neither the commodity was in existence nor it had passed through the bank to the borrowers.” This was specifically targeted at loan agreements that were structured as mark-up agreements and hence fashioned as non-interest accruing transactions.
The judgement was assailed before the Supreme Court of Pakistan, where the matter continued to rest for the next seven years. On December 23, 1999 the Shariat Appellate Bench of the Supreme Court upheld the Shariat Court Judgment.
A review was filed against the judgment of the Supreme Court and in 2002 the Supreme Court of Pakistan, in a judgement authored by the then chief justice Shaikh Riaz Ahmed, set aside its earlier judgement and that of the Federal Shariat Court and remitted the entire matter for redetermination back to the Shariat Court in the following terms:
“We are of the considered view that the issues involved in these cases require to be re-determined after thorough and elaborate research and comparative study of the financial systems which are prevalent in the contemporary Muslim countries of the world. Since the Federal Shariat Court did not give a definite finding on all the issues involved the determination whereof was essential to the resolution of the controversy involved in these cases, it would be in the fitness of things if the matter is remanded to the Federal Shariat Court which under the Constitution is enjoined upon to give a definite finding on all the issues falling within its jurisdiction.”
This meant that the Supreme Court had nullified the judicial determination equating bank interest with riba and directed the Shariat Court to revisit this matter in the light of the guidance provided. The SC announced its verdict on June 24, 2002 and despite the passage of over twelve years since that day the redetermination of this most important critical issue has yet to taken place.
Why the Shariat Court has not taken up this matter, is a question one cannot answer. Conventional wisdom may suggest that since there is no judicial edict in existence anymore on the issue of riba then there is no requirement for the government or the State Bank to dwell further on the issue. That would certainly be the case if it were not for Article 38(f) of our constitution.
The constitution in the aforesaid article categorically articulates that “The State shall eliminate riba as early as possible”. So back in 1973, the constitution clearly recognised the presence of riba in the financial system and tasked the state to eliminate it. The term ‘state’ is defined in the constitution as meaning the federal government, parliament, provincial assemblies and authorities in Pakistan empowered by law to impose any tax or cess.
Now if interest is equated with riba, as the perennial State Bank circulars would have us believe, then it would appear that the state has failed to discharge its constitutional duty as each instrument in the banking sector, with the exception of current accounts, is prima facie interest based. The singular achievement of the SBP in this regard has been to remove the term ‘interest’ from all interest based instruments in the country.
The stock markets function on interest based financing, whether obtained from the banks or brokers. Interest-based financing is not restricted to consumer or corporate products in the financial sector, the entire borrowing of the government (from sources foreign and domestic) is interest based.
The icing on the cake is the interest free products advertised by financial institutions. Arabised tongue twisters such as murabaha, musharika, sukuk and ijarah are propagated to the pious so that they may be protected from loans, bonds and leases. What would the outcome be if the Competition Commission of Pakistan ever investigated these labels, under its jurisdiction to prevent deceptive market practices?
The confusion regarding interest in the financial sector is the biggest form of economic oppression. Interest upon loans, in the form of mark up, is recovered at the agreed rate by the lenders regardless of all economic or borrower related factors. However, mark-up payable on investments, in the form of expected return, can always be adjusted downwards by the lenders if the interest rates fall. Quite the travesty considering that the returns are supposed to be predetermined, fixed and not predicated upon any variable rate in Islamic modes of financing.
One of the premier modarabas, listed on the Karachi Stock Exchange, of Pakistan unilaterally slashed the contractually agreed rate of return on its certificates of investment (piously named as certificates of musharaka) in 2002 simply because interest rates were going down in the economy. Almost all the financial institutions in Pakistan subjected their customers to the same treatment, but the example of the modaraba is cited since the modaraba is supposed to be an Islamic finance institution. However, not all customers were treated equally by the banks. A leading Dutch international bank in Pakistan decided to stick to the agreed rate of return in instances where the customer demonstrated its ability to mount a cogent challenge to the unilateral reduction before the courts of law.
Khalid M Ishaque’s opinion that interest does not automatically fall in the category of prohibited riba still remains a convincing proposition. However, until this issue is judicially resolved the consumer will remain at the mercy of economic predators.
The courts must consider re-adjudicating this critical question as a priority. If the Federal Shariat Court is unable play its role in this regard then we see no impediment in the high courts exercising their jurisdiction to ensure that Article 38(f) of the constitution is effectively implemented.It is also time for the civil society and parliament to discuss the consequences that must accrue when constitutional bodies fail to discharge their duties.
Email: agha.faisal@gmail.com
Agha Faisal & Nazim F Haji, "Matter of interest," The News. 2014-09-01.Keywords: Economics , Islamic banking and finance , State Bank-Pakistan , Islamic laws , islamic banking , Sharia law , Bank loans , Civil society , Quranic verses , Supreme court , Mudariba , Musharika , Quran , Riba , CJ Shaikh Riaz Ahmed , Khalid M Ishaque , Pakistan , SBP