‘Seismic shift’ to take interest out of banking sector

After challenging the Federal Shariat Court’s (FSC) decision on the interest-free banking system some four months ago, the government had a major change of heart on Wednesday, saying that it now wants to rid the country of Riba as soon as possible.

In a pre-recorded video message, Finance Minister Ishaq Dar announced that the State Bank of Pakistan (SBP) and the National Bank of Pakistan (NBP) would be immediately withdrawing appeals against an April decision of the FSC in which it gave the government five years to eliminate Riba (interest-based) banking from the country.

“With the permission of Prime Minister Shehbaz Sharif and consultations with the SBP governor, I am announcing a decision of the PDM [Pakistan Democratic Movement] government that both the SBP and NBP would withdraw their appeals filed in the Supreme Court of Pakistan against the FSC order within the next few days,” Mr Dar said.

He said the FSC had in the recent past given a judgement to transform the country’s banking system and end the interest-based financial system within five years as required by the Holy Quran and Sunnah.

Interestingly, Mr Dar’s pre­decessor, Miftah Ismail, ann­ounced in June that the NBP had been directed to withdraw its appeal in the apex court filed against the FSC judgement, but no progress took place on the ground.

In December 1991, the Federal Shariat Court declared interest-based banking in all forms and manifestations against the teachings of Islam and set a deadline for its elimination in the country by June 1992.

The order, however, could not be implemented as the then government went into appeal against the decision in the Supreme Court on several grounds, including the tight schedule to transform the whole financial system and risks to the banking system.

The matter lingered on one pretext or the other as the Supreme Court initially upheld the FSC judgement of 1991 and then suspended its implementation and then referred it back for review to the FSC, where it remained for more than two decades.

On April 28 this year, the FSC noted that enough time had lapsed since 1991 to dev­elop the country’s banking system and the national eco­n­omy into an equitable, asset-based, risk-sharing and interest-free system. It decla­red the prohibition of Riba in all forms and manifestations and directed the government in a conclusive judgment to eliminate interest from Pakistan by Dec 31, 2027.

The SBP, NBP and three other leading private commercial banks — MCB Bank, United Bank Limited and Allied Bank Limited — then challenged the FSC’s decision in the Supreme Court.

Mr Dar said a lot of progress towards the Islamic financial system had been made between 2013 and 2018 and the then government had also constituted a high-level committee comprising prominent Islamic scholars, but the speed of transformation towards Shariah compliance could not be sustained over the last few years. He said it was the government’s priority to make decisions as per the teachings of the Quran and Sunnah.

He conceded there would be multiple challenges as the country’s banking and financial system had been based on a different system and could not be shifted overnight to a Shariah-compliant mechanism, but the government would try its best to implement the FSC decision as quickly as possible to rid the country of interest.

In April, the FSC also noted as constructive, encouraging and positive approach of international financial institutions like the International Monetary Fund, Asian Development Bank and the World Bank to utilise Shariah-compliant, Riba-free financing modes for being more productive and economically feasible.

According to the FSC’s final order, charging any amount in any manner over the principal amount of a loan or debt was Riba and was completely prohibited according to the Quran and Sunnah.

Similarly, the interest from banks in all forms is Riba whether the loan is taken for commercial, productive or industrial purposes or even for personal or any change in the percentage at which the interest is charged on loan, whether it is low or high and with any change in the method of calculating the amount of interest upon a loan whether it is calculated as simple interest or doubled or multiplied interest upon a loan is Riba.

The SBP, in its appeal before the Supreme Court, welcomed the spirit and the intent that led to the substantive provisions of the judgement delivered by the Shariat Court, but it sought various clarifications in line with its responsibility to protect the stability and security of the financial sector that functioned as part of a larger global financial system.

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