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.1
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 future2. 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).3
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 concern4.
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.5
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.6
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.7
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 Empire8.
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.9
Interest was first proscribed for all citizens by Christian legislature in 789 under Charlemagne.10
Until 1050, interest taking was considered by the Church to be a sin and lack of charity.11
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.12
Ultimately, the Council of Vienna passed the harshest anti-usury law in 1317, which called for excommunication of usurers.13
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.14
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.15
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.16
(To be Continued)
_________________________
1. Time, of course, has proven that this hope expressed by the learned author could not materialize. (Editor)
2. Usmani, Justice M.Taqi, The Historic Judgment on Interest Delivered in the Supreme Court of Pakistan, Karachi: Idartul Maarif, 2000, pp.27.
3. Ibid., pp.24-25.
4. Ahmad, Shaikh, Mahmud, Towards Interest-Free Banking, Lahore: Institute of Islamic Culture, 1989, pp. 13-14.
5. Ibid.
6. Ibid.
7. Mills, Paul S. & John R. Presley, Islamic Finance: Theory and Practice, London: Macmillan Press, 1999, pp.103.
8. Ibid.
9. Ibid.
10. Ibid., pp.104
11. Ibid.
12. Ibid.
13. Ibid.
14. Ibid.
15. Ibid.
16. Ibid., pp.105