Interest-free economy

Published November 11, 2022

FINANCE MINISTER Ishaq Dar’s announcement that the ruling coalition would withdraw the legal challenge to the April judgement of the Federal Shariat Court that gave the government until the end of 2027 to eliminate interest-based banking must have come as a surprise.

Mr Dar said the government wants to eliminate riba as soon as possible. He also said that both the State Bank and the state-controlled National Bank would immediately take back the appeals against the FSC decision. But it still isn’t clear how the government plans to achieve this goal and meet the court’s deadline. Nor is it clear whether or not the private banks that have also challenged the decision, which declares interest-based banking “in all its forms and manifestations” against Islamic teachings, will withdraw their appeals.

The matter has lingered since 1991 when the FSC first declared that ‘simple interest’ charged on all kinds of financial transactions — domestic and international — to be riba, and against the injunctions of Islam, due to its far-reaching implications for the banking and financial system, and the country’s dealings with the outside world.

Islam prohibits riba out of the concern that it results in what has been described as “profiteering and money-making in a multiplication mode of economic exchange”, which doesn’t involve labour and effort by the owner of economic resources. But, as pointed out in this space previously, many scholars argue that riba shouldn’t be equated with simple interest charged on modern financial transactions, because it is based on rational, mutually agreed contracts of economic exchange, and sharing of risks, liabilities and profits.

Even if the banking system is ‘rid’ of riba, how would we know that the new system conforms to Islamic edicts?

Read: Is it possible for Pakistan to shift to an interest-free banking system?

Islamic banking has grown reasonably fast in the last two decades in Pakistan and many have shifted to it, trusting the fatwa of the so-called Sharia boards of the banks. Yet many doubt that the Islamic financial instruments being offered are actually riba-free or conform to the framework laid down by the leading schools of thought in Islam.

Conversion to a riba-free financial system, or what some describe as Islamic finance, demands thorough and extensive research to understand and define what really constitutes riba. That is important because the shift to an interest-free economy in a complex, globally integrated financial system can be extremely challenging if not impossible.

Sadly, in more than three decades, neither the FSC nor successive governments nor the banks have given any thought to comprehensively studying the issue or its implications. It is advisable that the government, the FSC and other stakeholders move cautiously on this path, instead of rushing into it for political reasons.

It doesn’t matter whether or not the government withdraws its challenge to the FSC decision. What matters is that whatever decision is taken should be done on the basis of thorough research.

Published in Dawn, November 11th, 2022

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