Mufti Khawaja Noor ul Hassan

Senior Vice President

Resident Shari’ah Advisory Board Member

Sirat, 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 Mufti Khawaja Noor ul Hassan. 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?

Khawaja Noor ul Hassan: The decision is appropriate. It is a very detailed decision after a detailed working. Now, implementation is key. The verdict shall become a catalyst for change in the regulatory framework and then transformation of financial and economic structure of the country.

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

Khawaja Noor ul Hassan: It is possible provided there is thoughtful planning, committed efforts and regulatory impetus. To overcome some challenges, more efforts will be required. Conventional banks are used to having ‘risk free returns’ through money market and derivatives. Onus is on conventional banks with Islamic banking branches to transform their product line and engage in transformation and conversion without wasting time.

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

Khawaja Noor ul Hassan: Action plan needs to be developed at different levels for different tasks. Banking, mutual funds and insurance can be Islamized with readily available products which fulfil the economic needs competitively.

New branches which are opened from now onwards must all be Shari’ah compliant. Going in reverse direction needs to be stopped. Conventional banks with Islamic banking windows need to urged to submit conversion plan. The sooner this process starts, the closer we will be to achieve the aims in 5 years.

Instead of complacency and speculation, we shall start work. Thorough planning and setting targets is essential. Committees have been formed in past, but then no action was taken. We would not be able to expedite the process if the intention of making powerless committees is just to contain pressure while not implementing the recommendations of these committees. We have seen that in past and it must not repeat this time if we seriously want to transform the economy on Riba-free basis.

The central bank’s strategic plan which targets 30% share of Islamic banking in next few years needs to be revised and revisited in the light of Federal Shari’at Court verdict. But, so far, no commitment has come in this regard.  

The five-year timeframe is given by Federal Shari’at Court. But, there seems to be no urgency among the regulators to develop an action plan and constitute a high-level committee which can steer the transformation process.

In the context of Pakistan, there are already many issues of bad governance and lack of co-ordination. Regulators can play a crucial role in providing impetus and ensuring co-ordination by giving targets. Unless regulatory institutions force the agenda, the pace will not be picked and urgency will not be felt.

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

Khawaja Noor ul Hassan: Banks give more importance to the central bank as the chief regulator. Central bank can give targets, performs audit, ensures compliance, gives incentives, penalizes if instructions are not followed and can even revoke licenses if banks operate in breach of regulations.

Banks do not give as much importance to the Federal Shari’at Court decision. Federal Shari’at Court on its own cannot regulate banks and their operations directly. It has issued a judgement to provide conceptual and academic clarity on bank interest being Riba. But, unless, the regulators commit to comply with the verdict, banks on their own will be complacent.

Faysal Bank has transformed itself towards becoming a full-fledged Islamic bank. But, the other 17 banks do not have the same level of enthusiasm and urgency to transform their institutions by their own discretion. Even when Faysal Bank’s management itself wanted to transform the bank as full-fledged Islamic bank, it still faced issues of closing and transforming legacy products and operations in consumer finance, derivatives and money market.

So, regulatory impetus holds key going forward. If regulators want to genuinely strive towards implementing the Federal Shari’at Court verdict, they shall allow legal reforms, develop action plan for transformation and ensure commitment of financial institutions by giving them concrete targets.   

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.