Articles on Islamic Finance

IEP Forum on FSC Verdict on Riba – Experts View – Prof. Tariqullah Khan

Prof. Tariqullah Khan

Professor, Faculty of Business and Management Sciences

Istanbul Sabahattin Zaim University

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 Prof. Tariqullah Khan, who is also the recipient of Islamic Development Bank Laureate Award for his work in Islamic economics and circular economy in 2022. 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?

Prof. Tariqullah Khan: Though, the judgment has come late, but it is the right judgement. Interest in any form whether it is banking interest or interest in loan based contracts in other financial products is Riba for almost 99.99% scholars of Shari’ah. The issue was never in doubt in academia and mainstream scholarship.

Due to the unwarranted fear that how the economy would function without interest, the earlier verdict on prohibition of interest which came in 1991 was delayed. But, now, the Islamic alternatives have been developed and are being used globally. Islamic alternatives have shown resilience even when they had limited market share and were competing against conventional financial institutions with greater market share, experience and economies of scale. Islamic alternatives also have numerous social, economic and environmental benefits.

Islamic financial services are now being practiced worldwide as credible businesses. In Turkey, Islamic banking is positioned as participation banking. In Europe, Islamic banking is positioned as ethical banking. Islamic financial services are not only useful in corporate finance, but they are also useful to be used in public finance, development finance and green finance.

Pakistan will definitely benefit from the total abolition of the interest based system and it is the right time to introduce the Shari’ah compliant alternatives in the broader segments and functions of the economy.

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

Prof. Tariqullah Khan: The timeframe of 5 years is more than sufficient. The reform of the banking, insurance and financial markets does not need that much time as there are practical models in applied side being employed in many countries like Malaysia. Those can be replicated to start with. Improvements should be undertaken as a continuous process through learning by doing.

Therefore, it is important to avoid status quo and complacency. There are Islamic financial institutions in Pakistan which are providing exclusive Shari’ah compliant and Riba-free financial services in banking, insurance, asset management and venture capital, to name a few prominent sectors. The issue in these sectors is not of starting something from scratch, but rather scaling up the already available set of financial services provided by Islamic financial institutions through an enabling environment. Now, as the interest based financial services are prohibited after this judgement, it can be expected that the transformation and conversion of the economy towards interest free foundation would accelerate and gain momentum.

Question: What are the measures which can be taken to showcase the full potential of Islamic finance?

Prof. Tariqullah Khan: There is need for co-ordinated and consistent efforts to achieve the goals which requires will and prudent policy to steer the transformation of economy. Islamic financial institutions shall aim to achieve zero-waste, zero-emissions and zero-financialization. In our long term strategic plans, we urge the government and Islamic finance to adopt the Circular Economy paradigm as it is consistent with Mizan (universal balance), prohibition of Israf (waste), Tabzir (extravagances and indulgences), Riba (commercialization of lending and financialization) and echo Maqasid of legislation and men’s responsibilities in the role of stewardship.

We shall aim for not only Riba-free economy, but an economy that is in full sync with the ethos of Islamic teachings. If we are able to achieve that, we can show the true potential of Islamic finance and our value system. 

We can also learn from international best practices, such as value-based intermediation system introduced by Malaysia. Out capital market instruments, such as Sukuk can be used to make genuine attempts to support green projects, initiatives, and businesses. On the other hand, regulators also need to set criteria for green businesses, whether SMEs or publicly listed companies for sustainability disclosures and how the businesses are contributing to restoring the ecosystem.

Using Islamic commercial and social finance, such as Waqf, we can contribute in supporting green SMEs, low-cost green energy housing, educational, sanitation and other critical services needed for green transition. Providing microfinance, low-cost housing and educational infrastructure in public private partnership between Government and Akhuwat is already showcasing a good example to scale.

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

Prof. Tariqullah Khan: The external debt and funding debt servicing in future is an economic, political and governance challenge. This challenge will continue and the government has to find hard and innovative solutions. It requires much deeper reforms as well as time to replace interest from the external sector of the economy.

There is no solution except earning more foreign exchange and contain outflow of foreign exchange with improvement in competitiveness of local industry. Islamic finance can facilitate to serve financial needs, but the government has to manage its monetary, fiscal and balance of payment situation prudently.

Increase in exports and foreign direct investment together with robust remittances can help in increasing the inflow of foreign exchange. Substituting imports requires making domestic industries competitive, innovative and quality-conscious. Since the environmental concerns have also been given weight in ratings and economic exchanges nowadays, it is also important for our domestic firms to comply with quality and environmental standards in order to retain and gain more market access.  

Therefore, the only challenge is for the government to get its house and macro economy in order. If it manages to control its fiscal deficit and endeavours to access market based public finance, then Islamic financial institutions have the liquidity and variety of product structures to support public finance and development finance. However, the government has to manage its twin deficits prudently. 

Questions, Feedback or Comments

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.