THE Federal Shariat Court’s decision that the ‘simple interest’ charged on all kinds of financial transactions — domestic or international — was riba, and thus against the injunctions of Islam, is likely to have far-reaching implications for the nation’s financial system and its dealings with the outside world. The court has given the government until the end of 2027 to convert the country’s economy into one that is “equitable, asset-based, and risk-sharing” by prohibiting and eliminating interest in all its manifestations, in accordance with religious edicts. Deciding a long-pending case remanded to it by the Shariat Appellate Bench of the Supreme Court in 2002 for reconsideration of its earlier 1992 judgement, in which the FSC held interest as repugnant to Islam, the court said that charging any sum, in any manner, over the principal amount of a loan or debt is riba, which is prohibited. The bench declared in its 298-page judgement that the prohibition was absolute and, therefore, riba should be eliminated. The court also held that any interest stipulated in government borrowings acquired from domestic or foreign sources was also riba and thus forbidden.
Finance Minister Miftah Ismail has welcomed the decision, stating that the government and State Bank will “carefully study this important decision and then seek guidance and clarification from the FSC about the process, steps and time frame to implement this decision”. However, it is likely that the decision will be challenged by the banks — and quite possibly by the government itself — because of its potential impact on the national financial system and the country’s financial integration with the rest of the world.
There is no doubt that the prohibition of riba is a crucial aspect of Islamic teachings. But some Muslim scholars believe that riba should not be equated with simple interest charged on modern financial transactions. Many think that the concept has not been properly understood, which has led to difficulties in the implementation of Islamic banking and finance in the country. Moreover, there are also questions regarding how far the FSC has complied with the Supreme Court directions to carry out, and make use of, thorough research at home and abroad, in reaching its decision. The FSC was required to undertake a comparative study of contemporary financial systems in Muslim countries around the world. It is important to review the system in other Muslim states as many among the latter that are governed by Islamic law have found it difficult to completely do away with an interest-based financial system. That is because the ‘shift’ to an interest-free economy in a complex, modern financial system can be challenging, even if it is possible. Before we embark on this path, we must try to define riba correctly and carry out original research on the challenges we may face as we move towards what the FSC calls an interest- or riba-free economy.
Published in Dawn, April 30th, 2022