Dr. Irum Saba

Associate Professor

Institute of Business Administration, Karachi

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 Associate Professor Dr. Irum Saba. 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. Irum Saba: The decision is correct. It has come late, but it is the right decision. Even if it is late, it still paves way for the right direction by prohibiting bank interest as Riba. Therefore, I am satisfied with the judgement. What is important now is implementation and coordination between the stakeholders including State Bank of Pakistan and Ministry of Finance.  

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

Dr. Irum Saba: It seems little ambitious given the past track record. It took us about 20 years to reach 20% market share in banking. Having said that, the first step and phase is always difficult. We were operating in a dual banking system where Islamic banks did not have a majority market share and they were competing against the large conventional banking sector which already had a wide customer base, regulatory support and significant advantage in managing their liquidity by investing in interest based sovereign instruments like T-Bills and Pakistan Investment Bonds (PIBs).

Now, as conventional interest based banking is considered prohibited by the Federal Shari’at Court’s judgement, it is expected that the pace of market transformation and conversion will accelerate.

Nonetheless, we must not be overoptimistic given the past track record. It took us years to transform even a single bank like Faysal Bank. The share of sovereign Sukuk in government’s public finance is almost negligible at the moment. Therefore, a lot of ground needs to be covered in order to achieve the transformation within the ambitious timeframe of 5 years to Islamize the whole economic system including financial institutions and public finance.

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. Irum Saba: It is pertinent to establish a high-level committee having representation of relevant stakeholders to come up with a concrete plan with milestones. Until a well thought-out plan is made and unless it is pursued with rigour by all stakeholders, things will remain stuck. This is something we need to avoid.

The committee has to be given a time frame to come up with a plan in quick time. It should also be made necessary to have regular meetings of the committee. Coordination with central bank which sets monetary policy and ministry of finance which sets fiscal policy is necessary. Shari’ah scholars shall also be engaged so that alternate foundation of monetary and fiscal policy can be devised in coordination with the central bank and ministry of finance.

For creating awareness, the role of other stakeholders other than financial institutions is also important. To change the people’s perception, they shall hear about the prohibition of Riba and permissibility of Riba-free finance provided by Islamic financial institutions from the teachers, scholars and intellectuals. Mobilizing commitment is necessary for sustaining the efforts and achieve the aim of transformation of economy on Riba-free basis.

Regulators and policymakers would feel urgency when there is strong public sentiment about the need for Riba-free finance. Commitment which leads to action from the regulators and policymakers is key to implement the judgement and achieve the desired goal of having a Riba-free economy.

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

Dr. Irum Saba: Complacency and lack of coordination shall be avoided. Creating awareness is also very important. A lot of people are not using banking in the first place. There will be less effort required to convince that conventional bank interest is Riba and illegal in Pakistan after the court’s judgement, but more effort is required to inform and convince the general public that Islamic banking as a Riba-free alternative is Shari’ah compliant.

Unbanked population is not using banking partly due to religious reasons and partly because of lack of access to banks in the area, low levels of income and low levels of savings. Informal forced saving schemes at the community level in the form of rotating savings are common. For emergency funds and small business loans, people requiring financing lack documentation and collateral. Hence, they use the network including immediate family, relatives, employers, co-workers, neighbours, friends and independent private lenders to access financing.

Islamic banks have Shari’ah compliant products, but the problems of lack of awareness, lack of financial literacy, narrow outreach and incomplete documentation also need to be overcome. At the end of the day, we would like to see not only the conversion of banked population towards Islamic banking, but also the unbanked population to use Islamic banking in future.

Achieving this aim requires well-coordinated efforts among all the stakeholders in a committed way so that a conducive environment is created and bottlenecks are removed in the way of financial inclusion in a Shari’ah compliant Riba-free way.