Articles on Islamic Finance

IEP Forum on FSC Verdict on Riba – Experts View – Mufti Sharf Uddin Ashraf

Mufti Sharf Uddin Ashraf

Shari’ah Scholar, Council of Islamic Ideology

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 Sharf Uddin Ashraf. 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 Sharfuddin: The decision is satisfactory. The judgement is clear and leaves no loopholes on the issue of whether conventional banking interest falls within the scope of Riba or not. According to the judgement, conventional banking interest falls in the scope of definition of Riba, which is prohibited in Islamic sources of knowledge categorically, including Qur’an and Ahadith.  This current judgement reinforces the consensus based position also given in 1991 historic judgement on interest. Conventional banking interest indeed falls in the scope of riba prohibition. Therefore, it is necessary to avoid it in all matters of economy.  

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

Mufti Sharfuddin: The time frame of 5 years is sufficient to implement the reforms. In the financial system, already Islamic banking, Takaful, Modarba companies and Islamic mutual funds are operating. In public finance, the government has issued multiple Sukuk in past, both in local market as well as in international markets. Therefore, part of the work is already done on the products structuring side. In many situations, the issue is to convert and scale the Islamic financial segment. Hence, the time frame is sufficient.

Question: What are the measures which can be taken to ensure that the goals in transformation of the economy are achieved within the five-year timeframe?

Mufti Sharfuddin: There is need for collective thinking. The transformation has Shari’ah aspects, but also legal, economic and administrative aspects. Therefore, a team of noted Shari’ah scholars, economists, lawyers, and administrators must be formed to deliberate on action plans. Planned effort is necessary. Milestones need to be set and progress shall be monitored. The 5 years’ timeframe should not become an excuse for complacency and procrastination.  

It is also pertinent for Islamic banks to revisit their strategic positioning. Now, as their market share increases and competitive pressures from the interest-based conventional banking subside, they shall endeavour to transform their portfolio to increase the use of equitable and inclusive Islamic equity based modes of finance in true letter and spirit. The promised and distinctive benefits of Islamic financial system will appear more prominent and apparent if the use of Islamic equity based modes of finance will increase.

The Islamic debt based modes of finance which use legal stratagems (Hiyal) shall be used only in exceptional circumstances. This has been the suggestions from the Shari’ah scholars as well in past. Due to commercial displacement risk and competitive pressures, the nascent and small Islamic banking industry had less room and flexibility up until now. But, going forward, as the scenario changes and they start gaining more market share and control, Islamic banks should go back to the original ideals and vision.

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

Mufti Sharfuddin: On the monetary and external sector front, there might arise some challenges. Therefore, the stakeholders including the central bank, ministry of finance and Shari’ah scholars need to join efforts. A task force and committee of experts shall be setup in which there shall be broad based representation of policymakers from central bank and ministry of finance, Islamic financial industry and experts of Shari’ah, economics and financial law.

They can better assess the specific needs of public sector, external sector financing and how to manage the twin deficits of fiscal deficit and balance of payments deficit in such a way that financing should be sought only as a last resort. Rather than relying on debt based financing of twin deficits on permanent basis, economic policy and administration needs to be improved as well to minimize dependency.

Where needed, Islamic financial solutions can also be developed and provided to fill the financing gap. For this, a committee of experts shall be formed to do the economic analysis of needs and then Shari’ah experts can be engaged to provide Shari’ah compliant solutions to the external sector debt management. The lawyers and policymakers shall also be part of the committee to deliberate on the legal and administrative aspects to implement the solution. To be effective, the committee shall be given authority so that its recommendations shall be given due importance.  

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