Articles on Islamic Finance

IEP Forum on FSC Verdict on Riba: Experts View – Mufti Dr. Irshad Ahmed Aijaz

Mufti Irshad Ahmed Aijaz
Mufti Irshad Ahmed Aijaz

Mufti Dr. Irshad Ahmed Aijaz

Chairman, Shari’ah Advisory Committee, State Bank of Pakistan

Chairman, Shari’ah Supervisory Board, Bank Islami Pakistan

Recently, Federal Shari’ah Court of Pakistan has given its judgement on the Riba case. The verdict reaffirmed the historic judgement on interest first given in 1991. But, the subsequent appeals process reopened the case. Concerns about jurisdiction further delayed the implementation of the historic judgement and delayed the case for several years. Now, finally, the verdict has come. The verdict has declared conventional banking interest to be Riba, which is prohibited in Islamic sources of knowledge categorically including Qur’an and Hadith. The judgement has also asked the government to transform the economic system on interest free basis within a period of 5 years to fulfil the constitutional requirement as well as completing the required implementation of the judgement.

Islamic Economics Project is making a humble effort to collect the views of Shari’ah scholars, regulators, practitioners, lawyers and academic experts to deliberate on the future course of action and generate ideas and debate on how to make this transformation possible.

In this regard, we got the chance to get reaction and response from Mufti Dr. Irshad Ahmed Aijaz. We hope that the views expressed and shared with relevant audience and stakeholders will generate practicable ideas and keep the momentum towards achieving the end goal of an economy that is in compliance with Shari’ah and is able to utilize the instruments and institutions in the Islamic economic teachings.

Question: What is your take on the decision by Federal Shari’ah Court of Pakistan on Riba?

Mufti Dr. Irshad Ahmed Aijaz: The decision is appropriate and need of the hour. It was constitutional requirement to transform the economy on interest free basis as soon as possible. Not only we could not implement this requirement of constitution, but could not take steps following the historic judgement on interest in 1991.

The delaying tactics by challenging the jurisdiction wasted a lot of time and did not exhibit seriousness and sincerity. We cannot change history. But, we must learn from it and now should not waste any more time.

The debate on what is Riba and whether conventional interest is Riba or not has now been settled by the judicial system. Since long, it has been settled academically. It should not be opened again as a delaying tactic. In addition to that, challenging the jurisdiction was also not appropriate in past. This often-used tactic should not be used as a way to delay the process of transformation.     

Question: Do you think that it is possible to implement the verdict on transformation of economy on interest free basis in 5 years?

Mufti Dr. Irshad Ahmed Aijaz: Yes, the deadline is reasonable. Important thing is to take first step towards transformation and start the journey rather than waiting or trying to confront the verdict through appeals and challenging jurisdiction.

If steps are taken and most of the different functions of institutions in the economy are transformed on interest free basis, then even if few functions are transformed later, the deadline could be extended. But, extension should not be given or sought as a way to delay the implementation. It has often been seen that matters of public welfare are given less emphasis and priority. Therefore, having a timeline is important as it will urge action.

If, in future, any further extension in deadline is given, it has to be only for the functions which could not be transformed due to certain obstacles in which the government finds itself having less room to expedite transformation and conversion. For instance, we rely on external financing for balance of payment troubles and the lending countries or international development finance institutions may or may not readily accept the Islamic financing options. However, it must not be automatically assumed that they will not welcome the use of Islamic modes of financing since several non-Muslim majority regions have also used Sukuk in past and several non-Muslim majority countries have also given tax neutrality to Islamic finance contracts.

Having said that, any extension in future if deemed necessary, has to be evidence-based, targeted and not given as a way to delay the process of transformation indefinitely.    

Question: What are the measures which can be taken to implement the verdict on transformation of economy on interest free basis in 5 years?

Mufti Dr. Irshad Ahmed Aijaz: There are various measures which are required to be taken. It is important that the momentum and debate should move towards that. There are certain steps which need to be taken to reform the legal system and laws. Laws regulating financial institutions including banks and non-banking finance companies need to be amended accordingly in compliance to the judgement of Federal Shari’ah Court.

There is also need to be a national level policy and strategic vision. State Bank of Pakistan has given a strategic vision for Islamic banking industry. But, now we need to be even more ambitious rather than targeting slower organic growth to reach 30% share in few years. Since the whole economy is to be transformed, the verdict has to be taken into account while making fiscal policy and making budgetary allocations as well from now onwards.

The conversion of institutions on interest free basis can be pursued in a systematic way. The process of transformation need not be linear. Several steps can be pursued simultaneously. But, hierarchy of priorities can be set. First, the state owned enterprises need to be transformed in a way so that their operations including financing, credit sales and credit purchases should not have element of interest. The articles of association need to be revised as well to ensure commitment towards the use of interest free modes of financing and to avoid the element of interest in credit purchases and sales.   

Conversion targets need to be given. There should also be periodic monitoring of milestones achieved. Unless that is done, it is feared that the momentum may not be maintained to achieve the transformation targets within 5 years.

As compared to 1990s, transformation of the financial system on interest free basis is easier. Conventional banks, Takaful companies and asset management companies all now have an experience and portfolio of Islamic banking and finance products and services. Conventional banks are operating Islamic banking windows. Insurance companies also have Takaful operations. Asset management companies also offer Islamic mutual funds. Thus, transformation towards interest free business segment is not that radical as it would be if conventional financial institutions had no presence and experience of Islamic finance.

Since the economy is targeted to be transformed on wholesome basis, the strategic direction of Islamic banking and finance can be revisited as well. For instance, movement towards more involved intermediary role for Islamic banks as trade intermediaries. Developing a distinct pricing benchmark for Islamic finance contracts and developing liquidity management instruments.

Coming to the economic transformation and economic policy, it is important to develop alternate fiscal policy tools for budgetary finance and to manage liquidity in the economy through monetary instruments. Likewise, the transformation of non-banking finance companies is also equally important to achieve wholesome economic transformation. Therefore, instead of having strategic vision confined to specific institutions, we need to have a national economic policy towards transformation of the economy and then specific policies and strategic vision shall be developed for each important stakeholder in the economy.

Question: What are the important obstacles that can be encountered along the way of transformation process?

Mufti Dr. Irshad Ahmed Aijaz: Lack of political will and complacency. Political instability should also not become a hindrance to fulfil the judgement of court. It must be ensured that even if government changes, the process of transformation shall continue. Along the lines of national security policy, which is a state-oriented policy, we shall develop a national policy which is unhindered by political changes and instability.

We also need to have planning to deal with what if scenarios. We should avoid a chaotic scenario where the transformation is not complete and people start reneging on their debt commitments after the deadline is over. After all, the conventional finance institutions are also working with funds which are people’s money contributed by shareholders and depositors. System should not be allowed to collapse abruptly because it may fuel the sentiment towards status quo, complacency and reversal. Therefore, prudent planning is necessary for seamless transition which should not result in any party benefiting from the situation unjustly.

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