Muhammad Faisal Shaikh

Head, Islamic Banking,

Faysal 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 Muhammad Faisal Shaikh. 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?

Muhammad Faisal Shaikh: I am satisfied with the decision. It was long overdue. But, now the important thing is that when would the decision be actually implemented to achieve the aim of transformation of the economy within 5 years.  

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

Muhammad Faisal Shaikh: Important thing is to start and take first steps towards achieving this aim. Intention and political will is important to ensure committed and coordinated efforts. It is not productive to think now about whether it will be fully possible to transform the economy on Riba-free basis in 5 years or not. Complacency and procrastination would further delay the process.

Therefore, right now, strategic planning with strong coordination between regulators is necessary to develop realistic plan, milestones and to start the process. Without developing strategic plan, setting targets and strengthening regulatory impetus to expedite action and implementation, things may remain stuck.     

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

Muhammad Faisal Shaikh: Legal reforms are necessary. After 18^th amendment, many provincial laws have been independently enacted in different provinces. The relevant federal and provincial laws need to be amended as well. Monetary policy and fiscal policy needs to also take the FSC verdict seriously. Treasury securities can be replaced with Sukuk. In public finance, instead of relying on interest based instruments, Shari’ah compliant instruments shall be utilized.

National Saving Scheme instruments based on interest shall be fully redesigned to ensure that they are Riba-free. This will also help the government in mobilizing more savings as many people prefer to avoid interest based instruments in order to avoid Riba. When people will know that the savings instruments are Shari’ah compliant, they will be willing to invest in Shari’ah compliant instruments. The recent trend of people preferring Roshan Digital Accounts more through Islamic banks and Islamic windows gives further credence to this factor.

Creating awareness is also necessary among the masses. A lot of people understand that bank interest is Riba. But, they also have apprehensions and lack of knowledge about Islamic banking. There is a misperception that Islamic banking is similar to conventional banking in every respect. What is important is to understand that it is different in the most important characteristic, which is compliance with Shari’ah. Apparent similarities in some product characteristics are only because they serve the similar legitimate financing needs in the existing economic and financial system.

It is important to understand that legitimate financing needs must be catered through legitimate ways. Islamic banking is a Riba-free solution to meet the legitimate financing needs. It is the only Shari’ah compliant option. When the size of Islamic banking grows in future, it will automatically become more competitive and efficient in economic terms too. Already in housing finance, car finance and recent issues of Sukuk, the Islamic solution has proved to be competitive and superior in pricing terms. Most importantly, the Islamic banking solution is the only Riba-free solution. That is the most important thing even for the clients who want to avoid Riba.   

When Islamic banks will have a critical market share, their systematic importance will rise. Islamic benchmarking solution would develop and become the norm as the share of Islamic banking rises further. There can be a market-driven pricing benchmark or an administered or managed pricing benchmark. As per Shari’ah, what is not Haram is Mubah (permissible) in socio-economic matters. There is a precedent in past of administered profit rates. In addition to that, market based profit rate determination is also possible. What is important is that underlying transaction or economic activity from which an average benchmark profit rate is determined, it has to be Shari’ah compliant and avoid elements of Riba, major uncertainty and mere speculation.  

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

Muhammad Faisal Shaikh: Every project of transformation would have obstacles. But, they can be overcome provided we make committed efforts with targets and milestones to guide our journey. Faysal Bank is a classical success story. It is already one of the largest banks in Pakistan with more than 600 branches. Almost all branches have now been completely transformed to Islamic way of banking. There are many banks in Pakistan which have a comparatively smaller branch network than Faysal Bank. If Faysal Bank can achieve transformation with committed efforts of its executive leadership, then it is certainly possible for smaller banks to emulate the same experience.

In public finance, we need to travel a greater distance. Islamic banking has already captured one-fifth of the market, but the share of Islamic financing instruments in sovereign finance is small. The instrument of Sukuk with different structures can be used in public finance in the area of development finance, infrastructure finance and green finance. Some minor obstacles of asset registration and transfers may appear. After 18^th amendment, there is also a division of jurisdiction and ownership and management of national assets and infrastructure among the federal and provincial government.

But, these obstacles are easily manageable. Even the non-Muslim majority countries have used Sukuk in sovereign financing. The economic and financial objectives of public finance can be achieved with Sukuk and more importantly in a Shari’ah compliant way.

Pakistan is one of the countries with very low financial inclusion and savings rates. Part of the reason is that people wish to avoid Riba in banking deposits and national saving schemes. Going towards promotion of Islamic banking and Islamizing the national saving schemes is in the best interest of our economic policy to raise levels of financial inclusion, savings and thus capital formation which leads to economic growth and development.

Therefore, it is important to come up with strategic plan to reforms laws, transform institutions and their finance oriented functions in a gradual and prudent approach. Initially, the pace could be slow, but momentum must not be lost and complacency must be avoided. The sooner we start, the better it is.  

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.