1. Introduction
On
November 23, 1999, the Sharī‘ah Appellate Bench of the Supreme Court of Pakistan
announced a historical judgement, disposing off a number of appeals against the
Federal Sharī‘ah Court Judgment on Ribā of November 1991. The Appellate Court
endorsed the judgement of the Federal Sharī‘ah Court and declared that all types
of interest fall in the purview of the Qur’ānic prohibition of Ribā. At the same
time, the Appellate Court gave a deadline of 30 June 2001 to the government of
Pakistan for enforcing a law to prohibit all transactions involving interest and
also to introduce an alternative system of Islamic finance. The government has
expressed its intention to comply with the court’s order. Necessary preparatory
work is going on. It seems quite probable that from 1st July 2001, the
government would abolish interest on all transactions.
At the same time, there is a certain amount of fear in the
government circles about smooth transition to the Islamic financial system. The
government of Pakistan had set up a commission for the transformation of the
economy on Islamic lines. Reportedly, the commission has submitted its interim
report. Besides, a number of subcommittees in the Ministries of law, religious
affairs, and finance have made their contributions to the development of an
alternative system based on Islamic principles. At present, a high-powered Task
Force headed by Minister for Finance is fine-tuning the proposal that may be put
in practice from July 2001.
The objective of this paper is to discuss the approach
adopted by Pakistan in eliminating interest from the economy. The struggle to
usher in an Islamic state and more specifically an Islamic economy has adopted a
legal route. The religious lobby, rather than economic and financial experts,
has spearheaded the struggle since the middle of the last century. Most of the
effort has been directed towards searching a legal solution to the problem of
eliminating interest from the economy. The primary aim of this paper is to
examine whether this approach is appropriate.
The main conclusion of the paper is that interest on loan
finance is an economic phenomenon and if we want to eliminate it from the
economy, we shall require economic solutions rather than legal solutions. The
paper argues that elimination of interest is not a state responsibility. It is
an element of personal behavior and the Sharī‘ah has left it to individuals to
decide whether they would like to abstain from it or indulge in it. It is like
most of the Islamic Sharī‘ah in which an individual has the freedom to decide
about his actions and omissions with responsibility for their consequences in
the Hereafter.
Scheme of the Paper
The paper summarises the background debate about elimination
of interest from the economy and various lines of thought adopted by different
people. The discussion spills over to the main argument of the paper: Is
elimination of Ribā a legal issue? It then discusses the most appropriate
strategy for eliminating interest from the economy. In the last part, the paper
takes up related issues and some of the objections that can be raised on the
suggested strategy. The last part consists of concluding remarks.
2. The Debate on
Ribā and Interest
The roots of
debate over elimination of interest lie in the yearnings of the Muslim Ummah to
create a homeland where it can practice its religion and way of life in its
pristine form. The urge for creating such a homeland precipitated in the form of
Pakistan when it came into being in 1947 as a result of partition of the Indian
sub-continent. Soon after the creation of Pakistan, the ulema raised a demand
for transforming Pakistan into a modern Islamic state. Naturally, such a demand
would present the most awkward situation where the financial institutions of the
country were being run on the basis of interest. The popular demand was that
since interest was prohibited by the Sharī‘ah, therefore, the financial
institutions should be reformed and based on some interest-free basis. The early
day thinking was quite rudimentary and those who raised this slogan were not
quite sure about the alternative basis of interest. However, they invoked two
types of response. First, a sizeable number of people in Pakistan and other
Islamic countries accepted their position and started thinking and suggesting
alternative models of interest-free banks (as they were called in those days).
The second response came from the western-educated modernist elite. They feared
that the demand for creating an Islamic order may take the society to the
seventh century days. They had the vision of making progress and treading with
the currents of time. At the same time, they had a sincere affiliation with
Islam’s broader vision life. They adopted a different route in discussing the
prohibition of Ribā. They argued that the Qur’ān has prohibited Ribā, which most
probably, related to usury on consumption loans taken by the poor and the
indigent. The main plank of their argument was that this type of Ribā should, of
course, be prohibited as had been done in other developed countries. However,
the interest on commercial loans should remain intact, as it was neither unjust
nor usurious. Instead, it helped in the development of trade and industry. This
line of argument was led by such eminent scholars as Fazalur Rahman, Jafar Shah
Phulwarwi and Abdullah Yusuf Ali, in Pakistan and Muhammad Abduhu and Rashid
Rida in Egypt. While these scholars were arguing their case on the above lines,
scholars of the more conservative creed continued with their intellectual
effort.
A turning point
came when in 1975, the Islamic Development Bank came into being in Jeddah,
asserting that it intended to operate on a basis other than interest. It was
followed by the First International Conference on Islamic Economics in Makkah in
1976 in which a few hundred Muslim scholars and economists participated. The
conference unequivocally declared that interest and Ribā were one and the same
thing. Subsequent to that, scores of conferences and hundreds of documents
consisting of thousands of pages have argued that interest and Ribā were one and
the same thing. Beside, such authoritative bodes, the Council of Islamic
Ideology of Pakistan, OIC Fiqh Academy, Fiqh Academy of India, the Azhar
university, Sharī‘ah Supervisory Board of International Association of Islamic
Banks, Federal Sharī‘ah Court of Pakistan, Sharī‘ah Appellate Bench of the
Supreme Court of Pakistan and hundreds of fatwas and rulings by individual ulema
have argued that Ribā and interest were one and the same thing. We think, the
debate is finally settled in favor of the classical ulema. However, we still
listen to some voices of disagreement here and there. We feel that the argument
in favor of the classical position, which argues that interest and Ribā are one
and the same thing, is conclusive and has been widely accepted by the Muslim
ummah.
The first
conclusion about the strategy for eliminating interest from the economy is that
those who like to retain interest by re-interpreting the Qur’ān are trying to
fight a losing battle. The fact is that the Qur’ān has prohibited Ribā and
interest prevalent in conventional financial institutions is Ribā , which
therefore, should be eliminated from the economy. The stance of retaining
interest by providing a set of lame arguments does not have much intellectual
support.
After
successfully arguing that interest and Ribā are one and the same thing, the
religious lobby adopted a legal course of action. They approached the Federal
Sharī‘ah Court of Pakistan, requesting it to issue an injunction against
interest and to oblige the government of Pakistan for restructuring the entire
financial system of the country on some alternative basis. At the same time, the
Council of Islamic Ideology undertook a detailed exercise in studying all laws
of Pakistan, clause by clause, and pointed out the sections or parts that should
be deleted or modified because, they contained some reference to interest. The
government of Nawaz Sharif, knuckling under the pressure of the religious lobby,
appointed a committee headed by Raja Zafarul Haq for proposing changes in the
financial system of the country. The main plank of that committee’s report
(although not made public so far), was that the government should pass a law
prohibiting interest. In fact, the committee also proposed a draft of the law in
its report. At least two other countries, Iran and Sudan, took a similar route.
They also passed laws prohibiting interest. In the next part of this paper, we
shall examine the religious roots of this approach and comment on its
suitability for achieving the objective of eliminating interest from the
economy.
3. Is the
Elimination of Ribā from the Economy a Legal Issue?
3.1 Religious Roots of the
Idea
The idea that
interest should be abolished by a legal decree has its roots in the contemporary
interpretation of the religious text. In this section we shall examine the
genesis of this idea and comment on its ability to provide a suitable strategy
for elimination of interest from the economy.
a. The Qur’ān
has categorically declared interest as unlawful
Verse 2:275
says:
Those who
take Ribā will not stand but as stands the one whom the demon has driven crazy
by his touch. That is because they said: Trading is but like Ribā. And Allah has
permitted trading and prohibited Ribā. So, whoever receives an advice from his
Lord and stops, he is allowed what has passed, and his matter is up to Allah.
And the ones who revert back, those are the people of Fire. There they remain
for ever.
From this
verse, it is clear that Ribā or interest is prohibited. The conventional
interpretation is that since interest has been categorically prohibited,
therefore, an Islamic state should decree its enforcement through a law and
compel all financial institutions to restructure themselves on an alternative
basis. If it is not done, the will of Allah will remain unfulfilled. We feel
that it is an over-zealous interpretation of the verse. It is true that interest
is prohibited but it does not suggest that its prohibition should be enforced by
a law. As we shall show below that this is only a recent interpretation of this
verse and has no support from the earlier days or sources of Islam. Even the
text of the Qur’ān talks of punishment in the Hell-fire and says that those who
had taken interest in the past, their matter would be decided by Allah (in the
Hereafter). The first part of the verse also refers to the state of
interest-eater on the Day of Judgment. The whole slant of the verse is toward
the Hereafter. Generally, in all those matters where reward in hereafter is
referred to the individual is given the freedom to choose from good and evil and
decide with his free will. It seems that the prohibition of interest on loans
falls in this category of prohibitions where an individual is allowed the
freedom to choose. It is not one of those things which are to be enforced by the
state.
b. The Qur’ān
only allows return of the principal
Verse 2:278
says:
O those who
believe, fear Allah and give up what still remains of the ‘Ribā’ if you are
believers. (2:278)
On the basis of
this verse, the Prophet Muhammad (sws) declared during his last pilgrimage that
he abolished all claims of interest and first of all abolished the claims of his
own uncle Abbās Ibn Abdu’l Muttalib. On the basis of this action of the Prophet
(sws), it is argued that an Islamic state is supposed to enact prohibition of
interest and courts shall not entertain any such claims in future.
It is possible to construe the above verse and the action of the Prophet (sws)
in this sense. However, it seems that it is an over-ambitious interpretation.
The Prophet (sws) declared all interest claims as void and first of all those of
his own uncle, to set an example. However, he did not promulgate any law even
then. The characteristic of the law is that it always has a bite so that if some
one violates it, some sort of punishment or action is taken against him. In this
case, the Prophet (sws) could easily announce some broad features of such a law.
The fact is that neither the Prophet (sws) nor the Qur’ān has announced any law
relating to interest, as in the case of theft, adultery or murder. The attempt
to convert these injunctions into a public law are very recent.
c. The Qur’ān
has given an ultimatum of war to those who take interest
Consider the
following verse:
If you do
not [desist from taking interest], then listen to the declaration of war from
Allah and His Messenger. (2:279)
This verse has
been most vehemently quoted by the proponents of legal recourse against
interest. The verse obviously says that those who deal in interest, should get
ready for a war against them from Allah and His Messenger. An ultimatum of war
from Allah and His Messenger naturally diverts the mind toward the worst type of
state crime. Only a person who revolts against the Islamic state can be
considered worthy of such an ultimatum. Most of the ulema have, therefore,
considered this verse as the most critical piece of evidence in their
interpretation and in support of their insistence for a public law against
dealings in interest.
This
interpretation would be most plausible if we read the verse in isolation from
the historical event which necessitated the revelation of this verse. Its
historical context has been most clearly documented by Justice M. Taqi Usmani.
He says:
Then the
holy Prophet (sws) proceeded to Tā’if which could not be conquered, but where,
later on, the inhabitants of Tā’if who belonged to the tribe of Thaqīf came to
him and after embracing Islam surrendered to the holy Prophet (sws) and entered
into a treaty with him. One of the proposed clauses of this treaty was that the
Banū Thaqīf would not forego the amounts of interest due on their debtors but
their creditors would forego the amount of interest. The holy Prophet (sws)
instead of signing the treaty simply wrote a sentence on the proposed draft that
the Banū Thaqīf would have the same rights as the Muslims had. The Banū Thaqīf
having the impression that their proposed treaty was accepted by the holy
Prophet (sws) claimed the amount of interest from Banū Amr Ibn al-Mughīrah, but
they declined to pay interest on the ground that Ribā was prohibited after
Islam. The matter was placed before ‘Attāb Ibn Asīd (raa), the governor of
Makkah. The Banū Thaqīf argued that according to the treaty they were not bound
to forego the amounts of interest. ‘Attāb Ibn Asīd (rta) placed the matter
before the holy Prophet (sws) on which the following verses of Sūrah Baqarah
were revealed: O those who believe, fear Allah and give up what still remains of
Ribā if you are believers. But if you do not, then, listen to the declaration of
war from Allah and His Messenger. And if you repent, yours is your principal.
Neither you wrong nor be wronged. (2:278-79).
The above explanation shows that this ultimatum was a
specific reference to the historical situation. Since the Banu Thaqif were
intending to break the peace treaty they were given the ultimatum of war. It was
not because, dealing in interest was by itself a crime requiring such an
ultimatum. It was because, even after this verse, neither the holy Prophet (sws)
himself, nor the first four caliphs nor any subsequent Islamic government ever
enacted any law against the prohibition of interest. We come across several
Ahādīth where a companion of the Prophet (sws) transacted a deal and the other
companion warned him that the deal involved Ribā. In none of such cases do we
note that any legal punishment was awarded to the person who dealt in such
transactions. The only action was to undo the deal. Similarly, the books of
Islamic jurisprudence deal in Ribā. Nowhere do they prescribe any punishment for
dealing in Ribā. They define the limits of transactions and warn against
entering into any deal that involves Ribā. The most recent example of codified
Islamic law is the Majallah Ahkām al-Adliyyah enforced by the Ottoman caliphate.
This law does not contain any chapter on the law of Ribā. Similarly, the most
recent compilation of Islamic law, the Encyclopaedia of Islamic Fiqh, is being
published by the Ministry of Religious Affairs and Awqāf of Kuwait. It has
published 39 volumes so far. But the encyclopaedia does not contain any Islamic
law on Ribā. If we scan through any authentic book of Fiqh, produced throughout
Islamic history, we do not find any law relating to Ribā. The chapters dealing
with Ribā, of course, discuss its nature and what makes a transaction lawful or
unlawful. But no where a public law, enforcing the prohibition of interest
through legal action or through courts, is available in the whole of Islamic
literature. It is only the contemporary move towards creating an Islamic state
that has diverted the attention of the ulema to stress upon the creation and
enforcement of such a law.
3.2 Past Attempts by Jews and Christians to Enforce
Prohibition of Interest also did not Succeed.
We think that one reason why our ancestors did not attempt to
enforce prohibition of interest through a legal decree was their understanding
of the history. The followers of earlier religions, especially Jews and
Christians, did not succeed in eliminating interest through legal action. We
shall summarize below the attempt of these people. It would show that any
attempt to enforce prohibition of interest through a public law has not
succeeded in the past. There is very little likelihood that it would succeed
this time.
Throughout
history, there has been a temptation among the religious elite, reformers and
social workers to devise some legal mechanism for abolishing interest. Some of
them launched a relentless struggle to achieve this objective. Unfortunately,
almost always, legal solutions of the problem have led to two outcomes: first,
almost always, there developed a black market for interest-bearing credit,
pushing the rates of interest even higher and thus defeating the very purpose
for which interest a was banned by a law. Second, people were induced to devise
a series of subterfuges and legal ruses to camouflage interest, trying to bypass
the legal sanctions. An evidence of this latter outcome can be seen in the form
of a number of subterfuges, which the present Islamic bankers have devised in
the name of mark-up, buy-back, ji’ala, murabaha, etc.
Hammurabi
(2123-2081 BC), the ruler Babylonia, in his Code prescribed maximum rates of
interest for various types of loans and also suggested profit-loss sharing to
avoid interest. All great religions, and philosophers have opposed interest. But
the idea had never been acceptable to wealth-owners and hence could not become a
going concern.
Jews in
Babylonia established the earliest interest-free bank in 700BC by the name of
Agibi Bank on the basis of mortgage of productive assets to the bank for getting
an interest-free loan. The bank was allowed to make use of the asset, like a
house, a horse, land or slave etc. It did not work out as it did not provide an
answer to very short-term loans and discounting of bills. One of the Jewish
rabbis, Maimonides, decreed that a discounting of the bill was not interest.
Thus he tried to overcome the problem.
The
Christians evolved the concept of service charge. Soon the banks levying a
service charge evolved into savings banks, where they started offering interest
on deposits as well.
In 594 BC,
Solon ameliorated the plight of debts after Athenian riots by the debtors. He
cancelled debts and banned debt slavery and compounding of interest. But he did
not ban interest altogether.
In the Roman
Empire, in 450 BC, the maximum rate of interest was fixed at 10%, and then
reduced to zero percent in 342 BC. But this ban on interest did not survive for
long. In practice people started dealing in interest, until in 88 BC, the rate
of interest formally adopted was 12%. It continued until the fall of the Western
Empire.
In 306 AD,
the Church fathers were unanimous in condemning interest on grounds of greed and
selfishness. The Council of Elvira enacted proscription of interest in that
year. Father Augustine declared interest as theft.
Interest was
first proscribed for all citizens by Christian legislature in 789 under
Charlemagne.
Until 1050,
interest taking was considered by the Church to be a sin and lack of charity.
In late
eleventh century, Church reclassified it as a sin of injustice. In succeeding
centuries, theologians and scholastics developed various arguments to prove
interest as immoral.
Ultimately,
the Council of Vienna passed the harshest anti-usury law in 1317, which called
for excommunication of usurers.
The harshness of anti-usury laws was diluted when the kings granted exemptions
to the Lombards and other influential Jewish bankers for lending to state on
interest.
Within the
Catholic Europe, anti-usury stance continued to have some practical force until
the 18th century. The Vatican recognized the legitimacy of interest only in
1917. However, Protestant Europe vehemently debated the interest question for
most of the 16th century. Ultimately, Calvin grudgingly conceded that interest
charged from a rich person was not prohibited. This became a milestone in the
history of usury.
In England, the last Act condemning all interest as contrary
to God’s law, was passed in 1571. However, punishments enacted were very severe
for charging interest over 10%. This set the natural rate of interest at that
level. After 1600, the debate was whether interest should be banned altogether
or a maximum rate be fixed. The parliament periodically reduced the maximum rate
to 5% by 1714. Ultimately, the argument emerged that a cap on interest rate
subsidized rich borrowers, raised black market rates and constituted a
paternalistic restriction on economic freedom. In 1854, in England, Moneylenders
Act abolished the 5% interest law. However, in 1927, a limit of 48% was again
imposed. But since 1974, when Consumers Credit Act was passed, there is no such
restriction. The onus is now on the borrower to prove in the court of law that
he was a victim of exploitation.
(To be Continued)
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