Sayyid Tahir*

First published in "The Qur’anic Horizons"

ABSTRACT: This paper explains the process of elimination of riba followed in the first Islamic state in the light of the Qur’an and Sunnah. The thesis of gradualism is found to lack any Shari‘ah support. With the existing ribawi contracts viewed as Al-Uqood Al-Batilah, a Shari‘ah-consistent strategy for handling the existing debts is outlined. Among other things, penalties for all ribawi contracts among Pakistanis signed after June 30, 1992, are emphasized. The paper also reflects on the management of transition to a riba-free economy.

I. THE ISSUE

The Federal Shariat Court of Pakistan gave its landmark judgment on riba in November 1991. It also set June 30, 1992 as the date by which the task of elimination of riba from the Pakistani economy was to be completed. However, necessary action has been delayed because the matter is pending before the Supreme Court of Pakistan for a judicial review. None of the appellants is in favor of riba. Some issues have been raised about the definition of riba, the permissibility of indexation of loans for inflation, riba-free options for a modern economy, the status of existing loan contracts, and the strategy for transition to a riba-free economy. The Supreme Court issued a questionnaire on November 30, 1992, through its Registrar, seeking expert opinion on these matters. Strategy for the elimination of riba is the subject of Q. Nos. 8 and 9, reproduced for ready reference as follows.

If you are of the view that all the forms of interest are prohibited by Shari‘ah, then what procedure will you suggest to eliminate it from the economy? Will you go for total switch-over instantly, or will you propose a gradual process keeping in view the national economic requirements? If you prefer a gradual process, what strategy do you suggest for the purpose which may fulfill the requirements of the Qur'an and Sunnah?

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?

Both questions are interrelated, because one cannot talk of a strategy for the elimination of riba without addressing the status of the existing contracts. So we address them together. No attempt is made in this paper to go into the details of other related issues, such as the definition of riba, the blueprint of a riba-free economy, and so on. The argument in this paper runs as follows. General principles for elimination of riba are highlighted in section II with reference to Nusoos (singular: Nass: Shari‘ah precedence in the Qur'an and Sunnah). The Shari‘ah status of the existing contracts is discussed in section III, along with the action called for in this connection. The matter of allied measures for eliminating riba from the economy is taken up in section IV. The management of transition is considered in section V. This is followed by some concluding observations in section VI. A postscript is also appended to the paper to answer some of the issues raised during the seminar.

II. NUSOOS ON THE ELIMINATION OF RIBA

(1) The Evidence

Elimination of riba is not a new issue. The precedence was set by the Prophet (SAW) fourteen hundred years ago when the injunctions on riba were revealed for the first time, and it is binding on us. It is, therefore, important to delineate, first, the working of the strategy for the elimination of riba during the days of the Prophet (SAW).

The official declaration on the prohibition of riba came soon after Ghazwa of Ohad in late 3 A.H. as follows:

O Believers! Don’t eat riba on top of riba.¹ And, be afraid of Allah so that you may be successful. (Aal-e-Imran 3:130)

Not withstanding the linguistic style in this decree, the prohibition of riba was absolute — irrespective of whether the transactions were for personal or business needs and whether riba was simple or compound. This point is also confirmed by the later ayaat on riba given in Surah Al-Baqarah. The above decree left no doubt about the status of new ribawi contracts. However, it gave rise to two issues. First, the status of the then existing loan contracts and other outstanding debts. Second, a need for review of all existing exchange practices in order to rationalize them with the Qur’anic decree on riba.

The issue of the then existing contracts was tackled with a directive from Allah (SWT) in Surah Al-Baqarah 2:275, soon after the revelation of the above ayah:

Riba-eaters will get up on the Day of Judgment like someone driven to madness by the Satan with his evil touch. This will happen because of their claim that (profit on) Baiy‘ (or trading) is the same as riba, whereas Allah has permitted Baiy‘ but prohibited riba. As to riba charged in the past, whoever received the advice from his Lord (Aal-e-Imran 3:130), his matter is with Allah (that subject should be treated as closed in this world). However, all those who continue to charge riba in lieu of the outstanding debts, they belong to Hell where they will stay for good. (Al-Baqarah 2:275)

The second part of this ayah contains two instructions:

1. All ribawi contracts negotiated before the revelation of Aal-e-Imran 3:130 were to be honored after deleting the ribawi clauses in them.

2. The matter of riba given or charged in the past was to be treated as closed.

The unmistakable message was that the switch-over to a riba-free state, in respect of the then existing debts, had to be instantaneous. No gradualism was allowed.

As to the issue of rationalizing other exchange practices, there was the case of trading with, generally speaking, homogenous items at both ends of the exchange. This happened, for example, when a party had gold in the form of pieces, ornaments, or utensils, and the other had gold in the form of dinars. Another instance was the trading of dates of one variety for those of another. Technically speaking, these were special cases of loan transactions, but without a time lag in the give and take back process. Thus, while lenders were called upon to concede all costs associated with loan transactions, there was a question mark on the permissibility of unequal exchanges in the aforementioned and similar other cases. Therefore, in order to bring the trading exchanges in line with the Qur'anic injunctions, the Prophet (SAW) took immediate steps and prescribed rules for trading practices. The Ahadith of Hadrat Fudalah Ibn Obaid (RAA) confirm the existence of such injunctions in Muharram 7 A.H. In other cases, one cannot be definite because no event of a historic significance is mentioned in the Hadith text. However, the following two things leave no doubt that the Prophet (SAW) gave the necessary orders soon after the prohibition of riba in late 3 A.H.

First, given the seriousness with which Almighty Allah (SWT) views riba (Al-Baqarah 2:278 & 279), it is simply inconceivable that necessary legislation was delayed. Second, the texts of various injunctions on riba have internal evidence to support the above contention. Hadrat Obadah Ibn Samit (RAA) was the incharge and instructor of the first teaching institution of Islam established by the Prophet (SAW) for Ashab Al-Suffah. His narration on the subject is by far the most comprehensive, and its tone and tenor unmistakably authoritative. In the background of his narration, it is easy to see the "explanatory" character of the narration of Hadrat Fudalah (RAA). That is, while trading of gold for gold on unequal terms was forbidden, according to the then existing injunctions (given in the narration of Hadrat Obadah), the scope of the proviso "gold for gold" was not equally clear to all the Companions of the Prophet (SAW). Thus, a need for clarification arose on the eve of the Ghazwa of Khyber in 7 A.H., which the Prophet (SAW) made.²

The following main points about the elimination of riba stem from the Ahadith on riba.

1. The Companions were ordered to ignore differences of variety and quality in trading of like for like. They were instructed to do spot trading of gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, and salt for salt on a one-to-one and equal basis, in terms of the relevant units. The units of exchange were weight for gold and silver and mudy or saa‘ in the case of wheat, barley, dates, and salt.

2. New guidelines were also aimed at streamlining trading practices in order to rule out the possibility of riba even by chance. For example, whereas spot trading and loan transactions were separately allowed in gold and silver, their combination in one transaction involving trading of dinars (gold) for dirhams (silver) on credit was prohibited.

3. When trading of items of the same general kind became imperative, the Prophet (SAW) advised the interested party to replace a direct exchange by an indirect one based on the market value of the merchandise.

4. Whereas the guidelines were given quite early, whenever it came to the attention of the Prophet (SAW), the competent authority at the time, that some of the Companions — due to either a lack of knowledge or not understanding the nature of the injunctions — faltered in trading matters, he immediately corrected it. However, no ta‘azeer (Shari‘ah penalty) was introduced because the mistake was unintentional and the blameworthy party readily corrected its position.

5. According to the agreement signed by the Prophet (SAW) with the Christians of Najran in 9 A.H., there was to be no special treatment for non-Muslims in the application of the injunctions on riba in the jurisdiction of a Muslim state.

With the revelation of Al-Baqarah 2:275 and the enforcement of the adjunct guidelines by the Prophet (SAW), as above, the process of elimination of riba was officially completed. However, sometime in late 9 or 10 A.H., but before the departure of the Prophet (SAW) for Hajj Al-Wida‘, some new Muslims insisted on being an exception to the injunctions in lieu of their outstanding debt contracts. The matter was referred by Hadrat Attab Ibn Aseed (RAA), the then Governor of Makkah, to the Prophet (SAW) in Madinah. Thereupon Al-Baqarah 2:278-281 were revealed, threatening a retribution against those who hesitated to close the chapter on riba. The message in these ayaat is as follows.

O you who claim to be believers! Fear Allah, and give up whatever is left in lieu of riba if you are indeed believers. (Al-Baqarah 2:278)

Watch out! If you do not obey this order (and give up all outstanding riba), then there is a declaration of war against you from Allah and His Prophet. However, if you perform Taubah (repent with the resolve to make amends for past mistakes), you have right only to your principals. Neither you inflict zulm on others, nor the others should do zulm on you. (Al-Baqarah 2:279)

In the process of settling any outstanding accounts, if you find the debtor in a tight situation, give him some grace period so that he can manage to clear the dues against him. However, if you consider converting the outstanding debts into sadaqaat (charity), that would be better for you, if you understand. (Al-Baqarah 2:280)

And be afraid of the Day on which you will be returned to Allah. At that time everyone will be fully "rewarded" for his actions, without being subjected to any zulm. (Al-Baqarah 2:281)

This decree explicates some additional, not fresh, guidelines for the elimination of riba: When lenders were restricted to their principals in lieu of existing contracts in Al-Baqarah 2:279, in the very next ayah debtors were allowed grace periods to meet their payment obligations to the extent of principal amount. However, the written-off loans were to be treated as sadaqaat.

(2) Some Misgivings about the Process of the Elimination of Riba

The above ayaat of Surah Al-Baqarah raise a fundamental question: Was there not gradualism in the process of elimination of riba from the then Islamic economy? That is, was it not the case that the said process officially started toward the end of 3 A.H. and completed gradually sometime in 9 or 10 A.H.? In particular, was it not that formal completion of this process coincided with the abrogation of the riba claims of Hadrat Abbas (RAA), among others, by the Prophet (SAW) during Hajj Al-Wida‘ in Zul Hijjah 10 A.H.? The answer to these claims for gradualism is an emphatic "no," and that for the following reasons.

First, one must differentiate between the original enforcement of a decree and its violations. The latter may take place later on. The incident behind the revelation of the ayaat 278-281 of Surah Al-Baqarah falls in the category of violation of the existing laws. The thing unique about this case is that it was referred to the Prophet (SAW), the supreme legal authority at the time, and settled by a decree from Almighty Allah (SWT) Himself.

Second, indeed the Prophet (SAW) declared annulment of riba claims of Hadrat Abbas (RAA), among others, in Zul Hijjah 10 A.H. But it is wrong to conclude (see below) that Hadrat Abbas (RAA) or any other Companion of the Prophet (SAW) continued to charge riba as a Muslim despite its prohibition. This point can be confirmed by a direct reference to the address of the Prophet (SAW) reported by Hadrat Jabir Ibn Abdullah (RAA):

Verily your bloods and your wealth are haram upon all of you forever in the same way as you recognize them to be on this day (of Arafah) of this month (Zul Hijjah) in this city (Makkah). Be aware that all wrong acts of the age of Jahiliyyah (the Pre-Islamic era) are hereby buried under my feet. In particular, the blood claims pending since the period of Jahiliyyah stand cancelled. The first such claim which I declare void is that of our family (Banu Hashim), i.e., the blood claim of Ibn Rabi‘ah Ibn Al-Harith, an infant murdered by Huzail while the former was among the Banu Sa‘ad for breast feeding. Moreover, the riba claims of Jahiliyyah also stand nullified. The first such claim which I annul is our (family's) own, i.e., the riba claims of Abbas Ibn Muttalib, all of which are hereby revoked.... (Sahih Muslim, Kitab Al-Hajj)

Let us examine the three points specifically mentioned in this extract: (1) prohibition of unlawfully murdering someone or depriving him of his property; (2) revocation of blood claims dating back to the period of Jahiliyyah; and (3) annulment of old riba claims of Hadrat Abbas (RAA), among others. Can one claim that killing of innocent people was either allowed or condoned before this decree in late 10 A.H.? Similarly, did Banu Hashim ever claim retribution for the murder of Ibn Rabi‘ah after the Conquest of Makkah in 8 A.H., the time when none of them remained outside the fold of Islam? The answer to both questions is an unequivocal "no." The factual position in the third case is likewise. One cannot claim that Hadrat Abbas (RAA) or any other Companion continued to charge riba as a Muslim despite its prohibition. Technically speaking, all three declarations of the Prophet (SAW) were retrospective decrees. The significance of the third one — and, similarly, that of the other two — can be seen as follows.

The gathering on the eve of Hajj Al-Wida‘ symbolized the congregation of the entire Ummah at that time. A mention of the case of Hadrat Abbas (RAA) served the all-important purpose of clearing any doubts about the injunctions concerning riba in general and the status of riba on the then existing debts in particular. This clarification was necessary because more and more people were to enter the fold of Islam till the Last Day, and the status of riba on Pre-Islamisation ribawi contracts could become a contentious issue, as we find it today.

Third, the injunctions concerning riba are no different from those of Salah and Saum. The injunctions for none of these were prescribed with the dawn of Islam. However, once ordained, the relevant commands were enforced at once. As to those becoming Muslims later on, there was/is no choice but to initiate all "relevant" and "possible" steps at once. Willful refusal pushes one outside the fold of Islam.

In the final analysis, therefore, one must concede the fact that there was no gradualism in the process of elimination of riba. While drawing inferences for modern times, let it be clear that there is no fundamental difference between today's transactions and those directly covered by the original injunctions.³ Therefore, there cannot be any delay in the process of elimination of riba from today's Muslim countries, not to mention an "Islamic State." Indeed, every task involves a number of steps which ought to be taken in a particular order. For example, qayam, raku, sajood, etc., in the case of Salah. On this analogy, it may take a while before the eventual elimination of riba takes place. But all necessary action has to be initiated at once, and the process taken non-stop to its logical end.

III. EXISTING LOAN CONTRACTS IN PAKISTAN

Pakistan is the result of the demand by Muslims of the Indian subcontinent for a separate homeland. The raison d’être for this demand was the "Islamic" identity of Muslims. The entire struggle for Pakistan was waged for several decades by Muslims alone. Hindus and Sikhs were openly against the idea of Pakistan, while Christians and other minorities sided with their colonial patrons. Migration by millions of Muslims to Pakistan and non-Muslims from Pakistan in 1947 and thereafter is an undeniable proof of the Islamic character of Pakistan. This point has been re-affirmed by the Objectives Resolution passed by the first Pakistani legislature in 1949 and subsequently enshrined in the country’s various Constitutions. The very name "Islamic Republic of Pakistan" speaks volumes for the Islamic ethos of Pakistan. This background implies that at the state level, the Government of Pakistan is obliged to implement the injunctions of Shari‘ah w.e.f. the birth of the state on August 14, 1947.

(1) The Shari‘ah Status of the Existing Loan Contracts

In order to form any opinion about the status of the existing contracts, one must distinguish between three periods: The Pre-August 14, 1947 period⁴, the period from August 14, 1947 to June 30, 1992 (the target date set by the Federal Shariat Court of Pakistan for the elimination of riba), and the post-June 30, 1992 period. The Shari‘ah status of the existing ribawi contracts signed during these three periods is as follows.

1. All ribawi contracts signed between two Pakistani parties since August 14, 1947 are Al-Uqood Al-Batilah (not recognized in Shari‘ah and hence void contracts) and, therefore, null and void. Like theft, for example, ownership cannot be established through a ribawi contract. Therefore, the said contracts cannot be a legal basis for claims of either creditors or debtors to the extent of riba.

2. Pre-August 14, 1947 contracts signed by Muslims in their capacity as lenders (with other Muslims or non-Muslims) too are null and void. The reason is that every Muslim was, and is, obliged to act according to the injuctions relating to riba irrespective of time and place. However, the Pre-Pakistan contracts signed by non-Muslims in their capacities as lenders (with Muslims or other non-Muslims) hold apart from the ribawi clauses. The status of such contracts is similar to that of the ribawi contracts negotiated before the revelation of Al-Baqarah 2:275. The reason is that till August 14, 1947, non-Muslims were not subjects of a Muslim state, and, hence, not within the purview of the injunctions concerning riba in Surah Aal-e-Imran and thereafter.⁵

3. One may dispute with the analysis of the Federal Shariat Court (FSC), but not with the conclusions drawn by it. With reference to the case before it, the FSC symbolized the Hakam (the arbitrator) in Shari‘ah matters, recognized as such by the people of Pakistan and their executive authority ,the Government of Pakistan. In view of this, the Shari‘ah status of FSC’s November 1991 Judgment is similar to that of Al-Baqarah 2:278-281. That is, if an offending party violated the injunctions without formally coming into the notice of the competent authority, no binding decree was offered; but the matter became altogether different once the issue was taken up by the competent authority. In this perspective, if someone has willfully offered or signed a ribawi contract after June 30, 1992  the date set by the FSC, his status is like that of a person consciously taking a stand against Allah (SWT) and His Prophet (SAW).⁶ The gravity of the matter has increased manifold with the financial institutions still in 1994 boldly competing for fresh ribawi contracts while the process of elimination of riba is stalled with the creation of a legal impasse. In this unfortunate situation, simple regrets plus taking of the necessary corrective steps, as at the foregoing point 1, is not sufficient: Besides corrective measures in lieu of the Al-Uqood Al-Batilah, such persons and bodies are also liable to Shar‘ee ta‘azeer for signing ribawi contracts after June 30, 1992.

While bringing about necessary changes in lieu of existing contracts, the following three principles are also relevant.

1. In general, all individuals and parties (such as companies, autonomous bodies, local bodies, and Provincial and Federal Governments) that come under the legal jurisdiction of the Islamic Republic of Pakistan, are bound to act according to Shari‘ah. Therefore, express consent of either Pakistani creditors or debtors is not required to revoke the existing Shari‘ah-proscribed contracts.

2. Since the revocation of any contract, in principle, requires consent of all contracting parties, and since foreign creditors (including international organizations and foreign governments) do not come under the legal jurisdiction of the Islamic Republic of Pakistan, nothing can be done unilaterally in respect of ribawi contracts signed with foreign lenders in the past.

3. In rationalizing the existing domestic transactions with the injunctions of Shari‘ah, the decision-making role has to be transferred from the creditors and debtors to an independent competent authority a third party in order to neutralize any conflict of interest in defining new contracts.⁷

(2) Necessary Action in lieu of the Existing Loan Contracts

There is a big credibility gap between what we profess and what we do. This is true at all levels of the Pakistani society from individuals to the Government. Unfortunately, people’s representatives in the Parliament too are no exception. Therefore, in order to confirm our resolve to go for a riba-free economy, all new signings of ribawi contracts have to be banned immediately, irrespective of whether the creditor is a Pakistani or a foreigner. With this, the following process may be initiated.

A. Domestic Loan Contracts Signed after August 14, 1947 (including the Pre-Pakistan Contracts Negotiated by Muslim Creditors)

All ribawi contracts signed by Pakistanis since August 14, 1947, with other Pakistani individuals or institutions ought to be replaced by appropriate riba-free contracts w.e.f. 30th June, 1992. The term "Pakistani" covers Muslims, non-Muslims, individuals, companies, organizations, and governments at various levels,  local, provincial, and federal — in the Islamic Republic of Pakistan. The following possibilities exist in this regard.

i) In most of the cases such as loans for purchases of consumer goods, business equipment, and homes a credit sale contract valued at amortized value of the loan may be enforced from the time of beginning of the loan. The installments already paid may then be deducted in order to determine the amount outstanding against the borrower. Indebted parties may also be given reasonable repayment schedules.

ii) Where option (i) is not feasible such as multi-purpose business loans, the creditors may be given equity stakes in the ventures in which their funds have been used. For this purpose, the capital base of the involved enterprises may be increased through an administrative fiat. The claims of debtors in this regard may be overruled.

iii) Where neither option (i) nor option (ii) is workable — such as old Government bonds or Government borrowing to finance administrative expenses — the loans may be retired without any additional compensation. If necessary, the Government may claim suitable grace period to clear its outstanding debt obligations on a one-for-one basis. Though it is not Islamically admissible, the Government may pacify the lenders by not reclaiming the interest paid in the past.

B. Domestic Loan Contracts Signed after June 30, 1992

Both Pakistani parties to such a contract have to be financially penalized in addition to the corrective measures mentioned under A. As discussed in section III.1 (point 1), such a penalty would be in lieu of the claim of Allah and His Prophet (SAW) enshrined in ayah 279 of Surah Al-Baqarah. Since this claim is of a "personal" nature, the State cannot condone it, and, therefore, the Government is duty-bound to take punitive action. However, there can be Ijtehad (Shari‘ah-consistent deductive reasoning) about the nature of the penalty. For instance, necessary action may proceed along one of the following lines.

i) All ribawi contracts signed after June 30, 1992, may be liquidated with penalties on creditors equal to riba already claimed by them.

ii) If liquidation of contracts is considered undesirable, the lenders may be restricted to their principals and riba payments (including those made to them after June 30, 1992) diverted as fines to the State exchequer. Apart from this, the existing contracts may be allowed to run until their maturity.

iii) All contracts negotiated after June 30, 1992, may be handled as Al-Uqood Al-Batilah in the manner explained under the foregoing heading A, i.e., replaced by suitable riba-free contracts. However, the riba-equivalent in redefined contracts may be diverted to the Treasury as fine for both parties to the existing contracts.

The fines generated in the above manner may be used to retire public debt.

iv) For all persons claiming to be people’s representatives, whether in the past or at present, lifetime ban on holding public office may also be imposed. This is warranted because, from a Shari‘ah point of view, after effectively supporting the ribawi system, such persons have become unfit to be a witness or a judge (decision-maker) in the matters of other people. Furthermore, a ban on their doing business in Pakistan may also be considered to set an example for others.

C. Existing Foreign Loans at the State Level

In the case of foreign loans acquired by the Government of Pakistan, the situation would be as follows. Though these are Al-Uuqood Al-Batilah, they cannot be unilaterally terminated. The Government may, however, request the foreign lenders to change the forms of contracts by replacing existing ribawi contracts with equivalent riba-free contracts. If they refuse, old ribawi contracts may be honored but without creating any further delay in meeting the necessary payment obligations.

In the case of ribawi loans made to other foreign governments, the matter is slightly complex. The Government of Pakistan personifies the Islamic Republic of Pakistan which is viewed as an Islamic state by the foreigners. The Muslim versus non-Muslim distinction would be ill-advised. As such, the Government of Pakistan could not have entered into negative da‘wah to foreigners. Consequently, all riba charged should be returned, while all existing or future riba claims cancelled. Only principal should be claimed from the borrowing foreign governments.

D. Pre-August 14, 1947, Loans by non-Muslim lenders

In the case of existing contracts signed by non-Muslims in their capacity as lenders (with Muslims or other non-Muslims) before the creation of Pakistan, the contracts have to be honored without the riba claims. Suitable time may be fixed for the debtors to meet their payment obligations to the extent of the principal on August 14, 1947.

E. Writing off Existing Loans

In this regard, necessary inferences may be drawn from Al-Baqarah 2:280 wherein Allah (SWT) encouraged the conversion of unpaid loans into sadaqaat (charity). Since one can do sadaqah only with his "own" things, the following conclusions are applicable to writing off the existing loans.

i) All nationalized banks and similar other financial institutions represent the joint ownership of all citizens of the country.⁸ Thus, their outstanding loans represent the claims of all citizens — not the management of these institutions or other executive bodies, such as the Pakistan Banking Council — against the debtors. Since any loan can be written off only with the unanimous consent of all creditors, the outstanding loans cannot be written off by the management of these banks or any other executive body. The only conceivable Shari‘ah remedy — short of a "unanimous" vote in a national referendum — is a "unanimous" vote to this effect at a joint sitting of the Parliament with "all" members present.

ii) In the case of privatized financial institutions, the respective boards of directors need a new mandate from their shareholders on forgiving any outstanding loan. This mandate may be in the form of general principles and a formula for forgiving loans. It would also need to accommodate the interests of dissenting shareholders in the treatment of losses and distribution of profits.

iii) In the case of outstanding loans in favor of the Government and other organizations, the treatment would be similar to that explained in (i).

iv) Since sadaqah means conceding one’s own right(s), therefore, written off loans cannot be treated as costs to the forgiving party in financial and cost accounting of commercial banks and
other institutions.

IV. ALLIED STEPS

As explained in section II, besides the cleansing of loan transactions, elimination of riba also calls for rationalizing all exchange practices with the Qur’anic injunctions on riba. The decrees of the Prophet (SAW) in the injunctions on riba have this significance for trading matters. Whereas the points listed in section II have to be faithfully observed in trading affairs, it is possible to expand on the details by taking into account the modern advances in the efficiency of markets, payment modes, communications, record-keeping and, of course, new organizational norms. Some such measures which ought to be enacted in the contemporary Pakistani scene, without any further delay, are as follows.

a) All financial institutions must be obliged to acquire funds from depositors on either pure loan or modarabah basis. In the first case, the exercise should not be linked to special privileges for the depositors as incentives. In the second case, the overall profit-sharing ratio in favor of depositors must be announced at the time of receiving deposits. If administrative considerations warrant, such a ratio may be announced for a given accounting period at a time.

b) There is a need to formalize the idea of documentation costs, and to restrict the lenders in all (pure) loan transactions to only documentation costs, not "service charges" as commonly understood.

c) New principles for revision of the capital base of banks and companies in view of reinvested profits (retained earnings) be set.

d) The existing provision for pure loan financing in the establishment of new companies must be withdrawn.

e) Provision of legal framework for establishment of new Islamic financial institutions must be made. Whereas correct operational procedures may be prescribed through the State Bank, artificial barriers to entry — such as a large paid-up capital base — should be avoided.

f) The role of financial institutions should not be restricted to that of financiers in the context of traditional lender-borrower relations. They should be freed to act directly as traders, equity-holders — permanent or temporary —and providers of services for collection and transfer of funds. In order to promote participatory financing, banks may even be allowed to use accounting, auditing and tax services as pretexts for musharakah.

g) The Banking Ordinance and/or the State Bank’s relevant regulations must be revised in order to allow for unlimited financial innovation — within the general framework of Islamically permissible forms of transactions — by the existing commercial banks and newly established Islamic financial institutions.

Freedom from selective credit ceilings may also be a price that we have to pay for some time in order to facilitate transition to a riba-free economy.

h) The existing idea of limited liability and bankruptcy laws may be replaced by an effective system for recovery of loans from the ultimate borrowing individuals.

i) The existing Companies Ordinance ought to be revised to rationalize the status of banks' and companies' sponsors and directors vis-à-vis other shareholders — in matters of cost and profit accounting — according to the Islamic injunctions on profit and loss sharing.

j) Immediate steps are needed to rationalize the transactions between insurance companies and their clients in the light of the injunctions of riba and other Shari‘ah edicts.

k) The Ministry of Finance, the State Bank of Pakistan and Pakistan Banking Council need to be re-organized and their operational roles re-defined to suit the working of a riba-free economy.

Apart from taking the above steps, serious effort is needed to identify all reforms necessary for transition to a riba-free economy. Of course, the importance of trained manpower to meet practical needs of a riba-free economy cannot be underestimated. But measures for elimination of riba cannot wait for the completion of this job.

V. THE MANAGEMENT OF TRANSITION

The Federal Shariat Court acted as the constitutionally recognized arbitrator in matters related to riba. The position of the case before it was similar to that of the dispute before the Governor of Makkah, which led to the revelation of Al-Baqarah 2:278-281. Therefore, with effect from June 30, 1992, if not November 14, 1991, the verdict of FSC may be viewed as Ittmam Al-Hujjah (the final warning from Allah) on us from the Shari‘ah point of view.

The current position is that, for all practical purposes, every Pakistani individual as well as institution is a party to Al-Baqarah 2:278-281. Like the original addressees of the injunctions on riba, one cannot seek relief from the enforcement of the commands of Allah (SWT) on the pretext of misunderstandings or technicalities. Unfortunately, the appeals of Federation and other parties against the said judgment are akin to taking positions against Almighty Allah (SWT) in front of the Supreme Court of Pakistan.⁹ Of course, under the Constitution, the Supreme Court can review any judgment of the Federal Shariat Court. But, like the injunctions of Salah, there is no room for these technicalities in the injunctions relating to riba. Even the Parliament can only endorse the injunctions, not "pass" them, for enactment.

In the management of transition to a riba-free economy, the following points need to be accommodated.

1. The Constitution has an article declaring this state to be the Islamic Republic of Pakistan. This article falls under the operative part of the Constitution. Therefore, anything that makes Pakistan fundamentally un-Islamic is barred from taking effect by default. In other words, a fresh act of Parliament is not a necessary condition for Pakistani citizens and courts of law in order to derive sanction for actions mitigating riba.

2. One may respectfully mention that the history of the Pakistani legislatures since 1947 is witness that for all practical purposes, in the matters related to riba, the Shari‘ah position of the Parliament is like that of a minor or majnoon who needs a guardian to look after his rights and responsibilities. Incidentally, the role of the Parliament vis-a-vis protecting the Constitution, for example, in the case of making Urdu as the official language of the Federation, speaks for itself. This is an important reason why there is no option but to depend on the legal system in the transition to a riba-free economy.

3. By virtue of the appeal, the Federal Government has become a party holding grievance against the judgment of the Federal Shariat Court. An aggrieved party cannot be entrusted with the task of doing justice to the orders of the Supreme Court. Therefore, the transition to elimination of riba has to be overlooked by the Supreme Court of Pakistan, which is incidentally already recognized as Hakam (the arbitrator) by the Federation.

Against this background, the following steps would expedite the process of elimination of riba.

A legally-protected Standing Commission may be established with the power to oversee the transition of all laws and accounting principles in conformity with the Islamic dictates. In view of the gravity of the matter and the nature of problem, the membership of the Commission may be as follows.

Chief Justices of the Supreme Court, the Federal Shariat Court and the four High Courts;

A representative of the Speaker National Assembly;

A representative of the Chairman Senate;

Representatives of Ministry of Law, Ministry of Finance, State Bank of Pakistan, Pakistan Banking Council, Federation of Pakistan Chambers of Commerce and Industry;

Chairman, Corporate Law Authority;

Registrars of Stock Exchanges; and

Experts (scholars of Shari‘ah, economics, and business administration and chartered and public accountants)

The Commission may also be authorized to establish necessary tribunals and committees at regional levels.

If it is not possible for the Supreme Court to involve itself deeply — through its representative individual or body — in the process of elimination of riba, then at least the following action may be taken.

1. All appeals against the judgment of the Federal Shariat Court may be rejected in very clear terms.

2. All existing ribawi contracts be declared null and void pending further action as per the following point.

3. The Federation may be ordered to establish tribunals or institutions to replace the void ribawi contracts with suitable other contracts.

4. The Federation may be directed to initiate immediate action in lieu of steps mentioned under Section IV (ALLIED STEPS).

5. All citizens of Pakistan be given a right (i) to contest all ribawi claims in courts of law and (ii) to seek legal remedies against any laws, procedures or conventions which stand in the way of riba-free transactions.

 

 

VI. CONCLUDING OBSERVATIONS

The elimination of riba is not a new issue. Almighty Allah (SWT) has set the guidelines for us through the example set by the Prophet (SAW) fourteen centuries ago. Of course, times have changed, and a modern economy has transformed in ways unimaginable even a few decades ago. But let us not forget that, despite all complexities, all modern transactions are combinations of the basic acts of trading, lending, and sharing resources. Modern institutions may be said to have no precedence. But they are man-made. Therefore, their grandeur and sophistication do not exempt them from operating according to the Islamic injunctions concerning riba.

The problem of elimination of riba is economic in nature. And the solutions have to be looked for on the economic plane. Elimination of riba does not mean elimination of profitable opportunities. Instead, it offers a different way of pursuing the right goals. A proper moral and spiritual environment will indeed yield the best results. But this is not indispensable. On the contrary, elimination of riba will create an environment more conducive to the uplift of moral standards in the society. This may be due to, for example, restraints on unwarranted and unethical economic pursuits.

The unmistakable message from the Qur’an and Sunnah is that there can be no gradualism in moves towards a riba-free economy. The process of elimination of riba has to start with an immediate ban on new ribawi contracts, and taken non-stop to its logical end according to the dictates of Shari‘ah.

Last but not least, unforeseen challenges lie in the area of outstanding loans among people. It is quite likely that the need to handle these claims may lead to a restoration of the proper role of the institution of Masjid in an Islamic milieu. The process of Islamisation of society and economy may pick up from thereon. Thus, elimination of riba may prove to be the most important factor towards the Islamisation of society.

POSTSCRIPT

This postscript addresses some critical points that came to fore during the discussion on the paper. These points can be best appreciated by noting that the discussion took place in April 1994 in the background of the Federal Shariat Court's judgment of November 1991 and the appeals filed against it in June 1992.

The seminar participants raised the following issues.

1. The judicial process is far from complete. The very Constitution which has empowered the Federal Shariat Court to take up the petition on riba, has empowered the Supreme Court of Pakistan to review the judgment of the Federal Shariat Court. Every citizen has a right to go to the Supreme Court and seek his clarification or challenge the Federal Shariat Court’s judgment. This is also desirable because the controversy is not that the Government or those who appealed before the Supreme Court want to defy the injunctions against riba, but they want to settle some fundamental matters. For example, what is riba? Is the interest on productive and other non-consumption loans riba? And, so on.

2. In drawing the various inferences in the paper, it is wrong to equate the judgment of the Federal Shariat Court with the ayaat of the Qur’an which are final and absolute.

3. There is a message in the Treaty of Hudaibiyah: when Muslims are in a weak position, they may even accept unfavorable conditions and terms toward achieving their ultimate objective. Can we not invoke the same logic today for the elimination of riba?

4. When the delegation of Banu Thaqeef came to Madinah and negotiated the terms for embracing Islam, it sought exemptions from some Shari‘ah obligations. And the Prophet (SAW) did not object to the demand for nonpayment of Zakat, knowing that Banu Thaqeef would themselves pay it after becoming Muslims. Does this not justify taking a lenient view on riba and approaching its elimination gradually?

5. Riba is a psychological complex rather than an economic phenomenon. These psychological complexes can be cured only if people come up to a minimum standard of morals in Islam. Unless efforts are directed to this effect and people are upgraded ideologically and morally, the mere cancellation of riba contracts will not solve the problem. Therefore, it is desirable to first emphasize the moral uplift of the society, and then press for the elimination of riba.

Point-wise replies are as follows.

First, on technical grounds, the point that a person can go to the Supreme Court has merit. But one important thing is being overlooked here. According to Al-Baqarah 2:279, Allah (SWT) has threatened retribution against all Muslims who continue to deal in riba. Thus, de facto, Allah (SWT) and His Prophet (SAW) are party to the matter. As humans, we are free to take "legal" steps. But as Muslims, one has to concede that the principle of equality before law and questions of legal norms do not apply here.

If none of the appellants wanted to derail the action on the Federal Shariat Court judgment, it was only logical that they pressed for an early settlement of the issues, rather than be content with the filing of the appeals. Moreover, if filing of the appeals meant just clarification of some matters, at least the appellants should have waited for the verdict of the Supreme Court before venturing into contentious areas. Again, the flood of advertisements for new financial products raises doubts about the clarification thesis.

Second, there is no question of equating the Federal Shariat Court’s judgment with the ayaat of the Qur’an, in particular Al-Baqarah 2:278-281. But legal parallels are there. At that time, the matter reached the then legal authority, and the verdict called for a redress along with punishment in case of resistance by the guilty parties. The same would hold today.

It is pertinent to note that the Federal Shariat Court judgment did not legitimize riba till June 30, 1992. What the judgment implies is that all ribawi laws were to stand repealed by June 30, 1992, with the intervening period serving as the time given to people to make necessary adjustments. In other words, after the said date, legal relief was not to be available any more to the creditors in ribawi matters.

Third, the Treaty of Hudaibiyah was between Muslims and non-Muslims. At present, both parties to the issue of riba are Muslims. Therefore, the parallels with Treaty of Hudaibiyah do not apply. It is significant that in Pakistan many target dates for elimination of riba have come and gone during the last four decades. Thus, "gradualism" has already lost its meaning, and it cannot be on the agenda any more.

Fourth, comparison with the case of Banu Thaqeef is unwarranted, and the conclusion based thereupon inapplicable for two reasons. One, Banu Thaqeef were not given exemption from the payment of Zakat as Muslims. In fact, the entire tribe did not become Muslim when their delegation presented the said demands to the Prophet (SAW). The Thaqeefs embraced Islam over a period of two years after their delegation’s visit to Madinah. Two, while the delegation made the above demand about Zakat, it also sought exemption from the injunctions of riba. But this demand was categorically rejected by the Prophet (SAW). Hence, a gradual approach to the elimination of riba cannot be justified with reference to the story of Banu Thaqeef.

Fifth, elimination of riba is a question of right versus wrong. Riba is basically an institution. It represents a way of achieving certain goals. For example, meeting an investment target when someone is short of funds. As Muslims, we are duty bound to replace the institution of riba with another one to do the needful. The importance of good morals can never be denied; indeed they can expedite the transition to a riba-free economy. But high moral standards themselves are not a pre-requisite for the elimination of riba.

Endnotes

1. Literal translation of the ayah would be: "Don't feast on riba doubled and quadrupled." In either case, the order is to stay away from riba.

2. The Ahadith of Hadrat Abu Bakrah (RAA) also fall in the category of "explanations" of the original injunctions for new Muslims in 9 or 10 A.H.

3. All contemporary transactions may be viewed as combinations of the primary transactions covered by the said injunctions.

4. One does not expect any Pre-1947 contracts to be continuing in 1994. To this extent, therefore, the points raised in this paper may not have any practical relevance. However, they are retained for their theoretical significance.

5. Note that the status of any such contract did not change with the concerned lender becoming a Muslim after the creation of Pakistan.

6. In order to be on the safe side, one may wish to take November 14, 1991, the date of the decision, as the reference date.

7. The Pakistan Banking Council, being a representative body of the financial institutions, may not be a neutral arbitrator in cases involving its members.

8. The following points also apply to those financial institutions in which the Government has an equity stake. For example, the Allied Bank.

9. Academic issues are not to be settled in legal forums.