[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:---
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.
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