Articles on Islamic Finance

IEP Forum on FSC Verdict on Riba – Experts View – Dr. Rizwan Malik

Dr. Rizwan Malik

Head – Standards Implementation and Strategic Developments at AAOIFI

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 Dr. Rizwan Malik. 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?

Dr. Rizwan Malik: Indeed, it is a decision that is welcomed wholeheartedly. Not only this reaffirms the historic judgment on Riba i.e. the interest that is paid and received by conventional banks falls within the definition of Riba, but it also clarifies the doubts in the mind of some people.

Indeed, in a country like Pakistan, kids grow with this teaching and understanding that Riba is Haram (prohibited) and there is no bigger sin than consuming interest. Hence, this decision will reinforce this understanding that taking Riba is a sin and a prohibited crime in law. This standpoint is consistent with Islamic sources of knowledge. This ruling will be fit with the cultural norms and values and it can help in steering the economy towards the right path of Riba-free economy.

The decision is also consistent with the constitutional requirement which clearly stipulates that Riba shall be eliminated from the whole economy as soon as possible. Of course, the delay caused by the political leadership and allowing conventional financial system to operate in parallel slowed the growth of Islamic banking and finance in the country. Additionally, Islamic banking and finance industry has grown many folds and according to IMF, it has become systematically important in 14 countries. Hence, it is now the right time to press the accelerator on the transformation to a fully Shari’ah-compliant financial system and economy. I have no doubt that a country like Pakistan where individual Islamic banks are already competing with the conventional banks. They have the capabilities to compete with some of the international conventional banks and financial institutions.

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

Dr. Rizwan Malik: In short, this is definitely possible. It totally depends on the political will and the mind-set of the leaders. Lately, we have seen successful transition and transformation in a number of emerging countries in different aspects. Hence, if our policymakers committedly decide to transform the economy to a fully Shari’ah compliant one, then such a transformation is possible.

Iran and Sudan have run their economies on Riba-free basis. If these countries have decided to do this, then the potential success of Pakistan in attaining this goal is promising, especially since Pakistan has a larger Muslim population and more developed, open and diverse economy. As an example, in 2011 a country like Qatar decided not to allow Islamic finance window model in the country – again it was the decision of the political leadership.

Of course, the context and economy of Pakistan cannot be compared to countries mentioned above; however, it has all the Unique Selling Points (USPs) to achieve the transformation of the economy. This includes the knowledge base and experience in the form of Shari’ah scholars, bankers, practitioners and academicians serving global Islamic banking and finance industry, especially in the GCC where people are serving in banks and multilateral institutions. The progressive regulators and policymakers in the form of SBP and SECP with dedicated departments for Islamic banking and finance are trying to provide a conducive environment for Islamic banking and finance to flourish. Lastly, well-known academic schools are offering Islamic finance degree programs. Along with that, there are several training institutions which are providing skills based training for human capital development in Islamic finance industry. The leaders from these segments can be invited to form a joint committee that can monitor and assist in the attainment of the desired goals and objectives.

However, after the 5 years’ period, the policymakers may decide to provide an extension on the basis of need in particular segments of the economy where the transformation requires more time. One area that is more challenging to transform is the external financing. However, political leadership can and should decide to make a decision of raising further financing only through Shari’ah compliant modes including Sukuk. The global Islamic finance industry has developed significantly in a number of countries and with greater number of transactions and partnerships with institutions in such countries, the transformation process can be further facilitated.

In markets like Pakistan, sovereign financing from banking sector is a significant segment. However, Government of Pakistan has just scratched the surface in terms of utilizing the liquidity in the Islamic financial institutions. This creates challenges for Islamic banks in their liquidity management and hence in managing commercial displacement risk and competitive pressures. Government can utilize the instrument of Sukuk to source financing. It will also allow Islamic institutional investors a solution to their liquidity management since they cannot invest in T-bills and PIBs.  

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

Dr. Rizwan Malik: For me, the need of the hour is to have a decision in place to transform the economy – a decision or policy that cannot be changed even if the political leadership changes in the country.

It is important to come up with a 5-year plan of transformation of the economy – which can be further broken down into short to medium term goals. An experienced and knowledgeable team / committee needs to be in place comprising of globally acclaimed and nationally experienced leaders with a can-do attitude. 

The regulators, in particular SBP, would need to revise its strategy document. From attainment of 30% (existing plan) Islamic banking market share, it should aim for 100% market share within 5 years. The regulators need to ask for a conversion plan from all conventional banks and financial institutions.  Accordingly, it needs to ensure that the short to medium term goals formulated by the banks are realistic so that they can be held accountable. All of this will add to the national transformation strategy document. At the same time, there is a need to further explore the role of Islamic social finance in particular the use of Zakah, Waqf and other charitable giving. This will also facilitate the transformation process by providing inclusive financial assistance to those who are underserved by banks and financial institutions.

Similarly, adoption of benchmark standards like those developed by international standard-setting bodies like AAOIFI, IFSB and IIFM should be fully mandated. This will assist in the transformation process. Accordingly, the capacity building programs offered by these institutions should become part of Fit & Proper criteria. At the same time, individual curriculums in national qualifications and degree programs should be amended to include Islamic finance.  

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

Dr. Rizwan Malik: Political will is definitely high up on the list in a country like Pakistan as a hurdle where the stability of government is at risk on a daily basis and fire-fighting is part of the daily rituals. Additionally, the will of those in power and who have a say and reach to the political leadership is also important. Those influential investors who are in the business of conventional finance might resist change because it will have a hit on their pocket. They may not directly oppose the transformation, but cite hurdles and obstacles as way to delay and narrow the scope of transformation. Their valid apprehensions shall be overcome through education, awareness and by engaging them to appreciate that it is in their best interest to operate Islamic banking and finance which has a greater appeal among the masses, which is now the only legal solution and which has shown resilience and stability through thick and thin.

The success of drafting a high level policy document in a short time span covering various facets is also important as it requires the input and acceptance by various national leaders and business owners – this in itself is a tedious task. We need to have leaders in the steering committee, national committee and regulatory committee who should all work as ambassadors of eliminating Riba from the society and do not bow down to excuses and issues that may arise as we go along the process. The other issue may be the external funding where we may not have the power or a say in changing mode of financing to a preferred one.

Disclaimer: The views shared by the interviewee in this forum are personal opinions and judgements and do not represent the official representation of the principal institution with which they are affiliated.

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