IEP Forum on FSC Verdict on Riba – Experts View – Raza Ali Sheikh – Islamic Economics Project

Muhammad Raza Ali Sheikh

Chief Executive Officer – Halal Alternative Solutions (HAS)

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 Raza Ali Sheikh. 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 Raza Ali Sheikh: The decision is appropriate. But, it is not productive to have a third verdict in three decades. The first verdict was enough to be implemented but 67 appeals were raised against it. Unnecessary delaying tactics were employed to waste time. At least, we have the right decision now. But, implementation is key.

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

Muhammad Raza Ali Sheikh: It is very much possible. In fact, I think it is too much time. Already we see signs of complacency and procrastination. In our part of the world, promises which are stretched too much in far future only promote relaxed attitude.

If there is will, the transformation is achievable inside five years. Part of the work needed in product development is already done. We do not need pilot testing. We already have successful Islamic financial institutions operating in banking, asset management, Islamic insurance and venture capital. There have been a variety of Sukuk issued in past, both by the corporate sector and also by the government. Such Sukuk have been subscribed successfully in the domestic market as well as in the international market.

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 Raza Ali Sheikh: Sincerity and political will is critical. There are some steps which banks can take. Islamic banking institutions are providing financial solutions in consumer finance and corporate finance. There are some measures which only regulators can take. For instance, Islamic banks and experts can suggest an alternate benchmark rate, but it is the regulator who has to approve and sanction the alternate benchmark rate for Islamic finance. In Pakistan it’s pending since February 2012 till date.

Then, there are certain steps which only government can take. For instance, laws can only be reformed by the government. Onus is also on public representatives in national assembly to steer amendments in existing laws and bring new bills in the national assembly to ensure legal impetus.

The delaying tactics were used by government itself in past to put the issue of Riba-free banking and economy on the back burner. Such tactics must not be used and no one should be encouraged to employ delaying tactics. By these tactics, we are only extending our war (Naozo-Billah) against Allah Subhanahu-wa-Talah and His Messenger Prophet Muhammad (Peace & Blessings Be Upon Him). We need to think that is this a right approach?

The concern which government officials in the ministry of finance may have is that from where and how they will cover the fiscal deficit if they cannot issue treasury securities. This concern is mainly due to of lack of awareness and ability to think out of the box. Sukuk can be an alternative for treasury securities. The modalities can be developed by the Shari’ah experts. But, there shall be a body or department in Ministry of Finance which should be given the task to reform government borrowing on Riba-free basis.

It is in the best interest of government to embrace Islamic modes of financing. Islamic financial institutions have liquidity and more appetite for longer maturity instruments. There can be an active secondary market. In Islamic instruments of finance, every institution can invest. But, Islamic banks cannot and would not invest in Riba-based treasury securities. Therefore, by using the Islamic modes of financing, the government will be able to source finance from a larger group of retail and institutional investors, both domestically and internationally.    

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

Muhammad Raza Ali Sheikh: Taking the measures which I highlighted in my answer to the previous question can also become obstacles if not taken. Delaying tactics, appeals, ignoring regulatory reforms and not setting targets and milestones will result in wastage of more time.

Even if there was apprehension about how Islamic finance would work in early 1990s, the current time period is different. Islamic banks maintained their growth momentum, captured one-fifth of the market and have shown appetite to subscribe Sukuk issued by the government or state owned enterprises. Almost all conventional banks have Islamic banking branches, and human resource to conduct Islamic banking. Therefore, transforming the financial system is not that complex if the will and intention is there.

There is another obstacle which is to deal with international establishment. USA has major influence on Pakistan’s economic policies directly. The influence of USA on international development finance institutions has pushed Pakistan into a weak bargaining position.

This economic crisis on the external front has been a result of weak economic policies and steps taken in the past. But, given this reality, a tactful approach shall be adopted. Islamic development bank and Muslim majority countries may also be approached for bilateral and multi-lateral financial assistance. Finance is no long-term permanent solution for wrong economic policies. Therefore, economic policies shall be developed to ensure self-sufficiency and independence from debt.    

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.