IEP Forum on FSC Verdict on Riba – Experts View

Mufti Dr. Muhammad Wasie Fasih Butt

Research Scholar & Member Shari’ah Board, Zarai Taraqqiati Bank Limited,

Editor Hamdard Islamicus & Assistant Professor, Hamdard University, 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 Mufti Dr. Muhammad Wasie Fasih Butt. 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 Dr. Muhammad Wasie Fasih: Indeed, the decision is need of the hour. The decision is very detailed and well-articulated. The draft of the judgement is well researched. The rigour of the research can be seen from the fact that in interpretation of a single verse, the judgement referred to around 100 commentaries of Qur’an and from different schools of thoughts.

All the nine or so apprehensions on position of bank interest being Riba had been dealt with in an objective and academic manner. Every apprehension is answered thoroughly in the light of Islamic sources of knowledge.

The third appreciable point about the judgement is that it has not carried out research in closed doors. It invited opinions and views of all stakeholders involved including academic experts, Islamic economists, religious scholars and people from banking industry. No stakeholder could feel that it was neglected. It gave ample time and chance for the minority of people contesting the unanimous position of ‘bank interest being Riba’ to present their arguments. The judgement gives a clear and substantive rebuttal to the position that bank interest is not Riba. The judgement reaches the right conclusion that bank interest is Riba and hence prohibited.  

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

Mufti Dr. Muhammad Wasie Fasih: It is very much possible. The central bank in its public pronouncements has itself informed that Islamic banking has achieved phenomenal growth of 30% in just the last year. Even if market share of Islamic banking is 20% currently, what is important to see is the product variety and alternative for genuine financial needs.

Even before this judgement came out, the central bank had set target of 30% market share in its strategic plan for Islamic banking, which is to be achieved by 2025. SBP also wants Islamic banks to achieve the target of 10% and 8% share of its private sector financing to SMEs and Agriculture, respectively by 2025. After the FSC judgement, not only this goal should be pursued with more rigour. Rather, there is need for more concerted efforts to exceed this target.

Capturing the first 20% share of the market took nearly 20 years. However, with FSC judgement and provided that government along with stakeholders work keenly to achieve Islamization of financial system in future, taking the later quintiles of market share should not take as much time.    

Islamic banking has solution for short term finance as well as long term finance for corporate sector. It has successfully subscribed all government issues of Sukuk till now with an appetite for more.

In many product segments, Islamic banking has surpassed conventional banking. For instance, in housing finance, Islamic banking now has more share at around 60% than conventional banks. Similarly, in auto finance, Islamic banking has around one-third market share.

In mutual funds industry, Islamic mutual funds have almost one half share of the market. In some mutual fund categories, Islamic mutual funds are leading the market. Hence, it cannot be said that Islamic banks are lagging in product variety and innovation. There are some product segments in which Islamic banks are already market leaders.

When it comes to transformation, we have successful stories of Faysal Bank which by the start of next year, will become a full-fledged Islamic bank with its branch network of over 630 branches.

We have many other episodes of Islamic banks acquiring the stakes of conventional banks, such as Meezan Bank taking over operations of Societe Generale and HSBC, Bank Islami taking over Citibank and KASB and Faysal Bank taking over stakes of Royal Bank of Scotland previously. Thus, transformation is very much possible. Such restructuring can help in boosting the market share in an expedited manner.

Lastly, on the demand side, Pakistan is one of those countries where financial exclusion due to religious reasons is one of the highest. The Knowledge, Attitudes and Practices (KAP) survey conducted by central bank in near past revealed that as many as 93% people regard bank interest as Riba. As many as 98% of the unbanked population in Pakistan regard bank interest as Riba and prohibited. Majority of them would be willing to use Islamic banking if it is offered. Hence, promotion of Islamic banking is necessary for financial inclusion, raising the national savings rate, enhancing capital formation and to put the economy on the path of sustainable economic growth.        

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

Mufti Dr. Muhammad Wasie Fasih: Transformation needs to be planned in a proper way. First, there is need for a roadmap. A National Action Plan is needed which can help set direction and targets. It will provide impetus to the transformation efforts. Until the goals are set, they are not going to be realized.

All stakeholders need to be engaged. The regulatory bodies of stakeholders need to give impetus to the transformation efforts. Coordination and strong leadership is necessary to build and sustain the momentum. Targets shall be set in coordination and consultation with relevant stakeholders to enhance engagement and ownership of the transformation process.

There is a strong role of media as well to make people aware about Islamic banking and clearing their misconceptions. Academia also has a role in creating sensitization about prohibition of Riba and also to train the required human resource to meet the industry demands of expansion.

Since Riba was also prohibited in a gradual way, the transformation has to be carried out in well planned, gradual and segmented way. Government institutions and State Owned Enterprises shall be discouraged and stopped from using interest based financing. For public finance, government shall utilize Sukuk exclusively. It is encouraging to note that National Saving Schemes are also being transformed to comply with Shari’ah principles. It will help in boosting savings. Inspite of greater returns on these schemes as compared to returns on banking deposits, many retail investors used to avoid investing in interest-based National Saving Scheme instruments. When Shari’ah compliant option will be available, many financially excluded investors will come forward to invest in Shari’ah compliant saving and investment schemes.

Corporate sector shall also be educated and persuaded by chambers of commerce and industry and industry bodies to use Islamic modes of financing. In this regard, it is important to provide tax incentives and subsidies exclusive to those which opt for Islamic modes of financing. Almost every conventional bank has an Islamic banking division. Hence, they are not going to lose business. They just need to sell the right product to retain the customers. Given that retail investors have 95% willingness to use Islamic banking while businesses have 73% willingness to use Islamic banking as per KAP study, there will be no commercial displacement.     

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

Mufti Dr. Muhammad Wasie Fasih: Political instability, policy inconsistency and more pressure on sovereign indebtedness at external front may trigger complacency and put attention away from the goal of transformation of financial and economic system on Riba free basis in the next 5 years.

Therefore, it is important to come up with National Action Plan and also activate regulatory bodies to steer changes in their respective circle of influence.  

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.