Articles on Islamic Finance

IEP Forum on FSC Verdict on Riba – Experts View – Asim Hameed Khan


Asim Hameed Khan

Product Head, Islamic Banking

Habib Metropolitan Bank

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 Asim Hameed Khan. 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: Can you give a historical perspective on the Federal Shari’at Court verdict on Riba?

Asim Hameed Khan: The Federal Shari’at Court (FSC) of Pakistan announced a historic judgement in December 1991 on the illegality of interest in financial transactions. The court fixed target date of June 30, 1992 for implementation of the decision for the Government.

In 1999, the Shari’at Appellate Bench (SAB) upheld the FSC judgment, and directed the government to transform the economy based on Shari’ah principles by eliminating all forms of interest-based banking within two years of time.

In 2000, the review petition was filed by UBL staff and the case was referred to SAB. Then in 2002, the FSC declaration of 1991 and SAB declaration of 1999 was set aside and the case was referred back to FSC for reconsideration.

Then after few hearings and exchange of many arguments, in April 2022, finally FSC has reinstated the same decision and declared that the prohibition of Riba was absolute in all its forms and manifestations according to the injunctions of Islam and in accordance with the Holy Qur’an and Sunnah. Therefore, it should be eliminated from the country in a maximum period of five years.

Question: As part of the Islamic finance industry, what do you think are the key first steps which must be taken in order to transform the financial system on Riba free basis?

Asim Hameed Khan: Firstly, a conversion committee should be formed at government level comprising members from Pakistan Banks’ Association (PBA), State Bank of Pakistan (SBP) and government officials from the commerce, industries and finance ministries.

Then, a strategic paper should be prepared by PBA Islamic Banking Committee for implementation of FSC decision. Furthermore, SBP Islamic banking department shall be requested to prepare a Road Map with industry feedback in the light of the FSC decision highlighting the changes required to be done for implementation of the decision with timelines.

Question: How critical is the role of government in steering transformation of the whole economy on Riba-free basis?

Asim Hameed Khan: In answering this question, I will echo the recommendations also shared by Ahmed Ali Siddiqui, SEVP, Product Development and Shari’ah Compliance Department, Meezan Bank Limited.

Any new issue of interest based T-bills and Pakistan Investment Bonds by Ministry of Finance will need to be converted to Islamic modes. The existing issues of PIBs with maturities after December 2027 either need to be converted to Islamic mode or need to be redeemed earlier.

Issuance of new interest based national saving scheme instruments shall be declared illegal or will become interest free loan with no interest payment. Existing interest based national saving scheme instruments need to be converted to Islamic or redeemed earlier. Else, they shall become an interest free loan as interest payment is illegal now.

In public finance, government shall use Sukuk instrument to source funds. Islamic financial institutions have liquidity. They can provide competitive solution which is first and foremost Riba-free and will be consistent with the legal framework provided by the constitution and this FSC verdict. All government departments and state owned enterprises need to convert their existing financing to Islamic modes before December 2027.

As compared to the 20% share of Islamic banking in the overall banking industry, the share of Islamic financing modes in public finance is negligible. Therefore, government needs to lead by example and avoid interest-based financing options from now onwards.

Question: How this decision will affect the financial landscape of the country and especially the conventional banking?

Asim Hameed Khan: Echoing the views of my senior colleagues from the industry, we would like to see that the rating of conventional banks needs to be lowered due to increased legal risk. It is because conventional banking as a ‘form of business’ has been declared illegal and against the 1973 constitution of Pakistan.

No interest based bank shall be allowed to mobilize interest based deposits after June 2022. Conventional banks must be given deadline after which they will either lose their license or they must convert their operations to Shari’ah compliant way of banking by December 2027.

It must be ensured that capital market instruments are also Riba-free. No new long term interest based deal or Term Finance Certificate (TFC) or syndicated financing with tenure beyond December 2027 shall be allowed.

All existing interest based consumer loans like housing will become interest free loan after December 2027 or need to be converted to Islamic modes of financing. This shall be clearly notified by the central bank so that in their best interest and those of the shareholders, the management of conventional banks shall observe urgency in transforming their consumer finance portfolios. Islamic banks and Islamic banking branches already have products to allow transformation of the facility to Riba-free basis. Hence, this is achievable without any hindrance.

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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