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Strategy for the Elimination of Riba with Special Reference to
Existing Debts
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.
Written By: Sayyid
Tahir (Tanzeemi Islami)
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