Pakistan’s highest Islamic court calls on government to introduce interest-free banking system by 2027

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Pakistan’s highest Islamic court on Thursday ruled the interest-based banking system was against Sharia law and ordered the government to replace it with an interest-free system by the end of 2027.

Announcing the verdict in a long-pending Riba (interest) case, the Federal Shariah Court (FSC) ordered the government to facilitate all loans under an interest-free system.

The FSC issued its verdict after the Supreme Court sent the case back to court in 2002 following appeals against the FSC’s decision.

A full FSC bench consisting of Chief Justice Muhammad Noor Meskanzai, Justice Syed Muhammad Anwar and Justice Khadim Hussain M Shaikh heard a number of constitutional motions and reserved a verdict on April 12 after the case was concluded.

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In its long-awaited verdict, the FSC ruled that the elimination of interest was a religious and legal obligation because parliament had already agreed to make Sharia-compliant laws.

In the written judgement, the bench said that banning Riba is the “cornerstone of the Islamic economic system”.

“Therefore, we have decided that every loan which extracts an additional amount on the debtor’s principal is Riba, therefore, any transaction which contains Riba, even at a lesser level, falls under the category of Riba thus prohibited. Further, all predominant forms of interest, whether in banking transactions or in private transactions, fall within Riba’s definition,” according to the verdict.
The decision read by Justice Anwar said that the amount received by the banks which exceeded the actual loan fell under the category of interest. “Each type of bank interest is called riba,” he added.

The ruling said Islamic banking was “risk-free and against exploitation”. “All laws and regulations that facilitate interests are considered illegal,” the court said, adding that such laws should be abolished from June 1, 2022.

The court also prohibited the payment of interest on late payment of bank loans. “The government should immediately remove the word ‘interest’ from all laws,” the ruling reads.

The court further ordered the government to take out internal and external loans under an interest-free system and added that an interest-free system would be more beneficial. However, he acknowledged that the transition to an Islamic system would take time but that the bank’s deposit “could be riba-free immediately”.

However, he said the government can totally make the economic system irrelevant by the end of 2027.

The federal government had argued that the interest-based banking system could not be eradicated as it would harm the already fragile economy and said it had backed an interest-free shadow banking system already operating in Pakistan. He had also urged the court to leave this issue to parliament as it had far-reaching consequences.

However, the court disagreed with the government’s argument which cited the negative impacts of the interest-free banking model and said that interest-free banking is possible anywhere in the world.

Usury or interest is strictly forbidden in Islam. Consequently, Muslims in Pakistan and elsewhere have faced the dilemma of paying interest or earning interest while being part of the traditional banking system.

The first petition for the abolition of the interest-based banking system in Pakistan was filed with the FSC on June 30, 1990. The Chief Justice of the FSC, Dr. Tanzeelur Rehman, had constituted a bench of three members which rendered judgment in the case on November 14, 1991 and requested its execution by April 30, 1992.

However, the then Pakistan Muslim League-Nawaz (PML-N) government challenged the decision in the Supreme Court, which years later, on December 23, 1999, upheld the FSC decision and ordered the authorities to ensure its implementation by June 30, 2000. Subsequently, an appeal for review was filed in 2002 with the highest court and, on June 24, 2002, the decision of the Sharia court was suspended and the matter was referred to the FSC for interpretation of the Riba.

The case has been pending for about two decades, while nine FSC chief justices have completed their terms. It was finally decided.
But that may not be the end of the story as judgments can be challenged in the Supreme Court.

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