Comments on Pakistan Supreme Court Judgement on Riba & Tabung Haji

The Institute of Policy Studies’ timely initiative in organizing this seminar on a topic that is focus of attention for government is laudable. The Supreme Court judgement on riba has brought this issue at the center stage of policy planning in Pakistan. We need to gain greater understanding of the practices and methods adopted by others in effectively discharging our responsibilities towards development of new system.

As you know the government is engaged in evolving methods and procedures that would be consistent with requirements of Islamic financing in light of the Supreme Court judgement. Before, I make a few remarks relating to the challenges posed by the problem of elimination of riba, let me quickly share with you the steps government has taken to implement the decision of the Supreme Court.

First, a Commission has been constituted in the State Bank of Pakistan, under chairmanship of Mr. I A Hanfi, the former governor, SBP, which is developing the basic framework that would be used to transform banking practices in conformity with tenets of Islam. Eminent bankers, law and Shari‘ah experts, chartered accountants and economists are members of this Commission. The Commission will deal basically with banking transactions relating to private parties.

Second, a Task Force has been set-up in the Ministry of Finance to study ways in which borrowing operations of government can be brought under Islamic modes of financing. This task force headed by a former civil servant with long experience of working in finance division is dealing with budgetary matters. Its members also include, besides senior civil servants, law and Shari‘ah experts, chartered accountants and economists.

Finally, a Committee has been formed in the Ministry of Law under chairmanship of Dr. Mahmood Ahmed Ghazi, Member National Security Council, to study relevant laws with a view to bringing them in conformity with the requirements of Islamic injunctions.

These three initiatives are running parallel and it is on basis of their recommendations that specific measures will be adopted for freeing economy of riba-based transactions.

While this work is going on, we need to learn more from experiences in this field that have been going on in other parts of the world. Islamic banking, undoubtedly, is now a fairly well known phenomenon the world over. It is a matter of special privilege for me to come to this seminar where experience of one of the pioneers in the field is studied and debated.

Tabung Haji is a great story of success. I have a very special place in my heart for Malaysia as I have had the privilege of serving in Kuala Lumpur. I have been an old admirer of Tabung’s success and the innovative approach it has adopted in creating a solid market for its services. I am only pleased to learn that the process of success is continuing and today Tabung boasts an assets portfolio of more than RM7.3 billion, savings of more than RM6.7 billion and a depositor base of 3.4 million people. These are indeed very impressive numbers.

It is in fact the success of Tabung Haji that has given confidence to the Malaysian investors in Islamic banking. I am sure now there is a sizeable number of financial institutions and specialized funds in Malaysia operating on basis of Islamic financial principles and the Central Bank has created a special framework suitable for regulating such institutions. Similar success stories, though of lesser degree, can be found in many other countries, especially in the Middle East.

While seeking guidance and inspiration from these experiences, we must keep in view a fundamental difference between them and our own case. Perhaps with exception of Iran and Sudan, where one hears of similar efforts though with scant literature, Pakistan is the only country where issue of riba is approached from the point of view of changing the entire system, as opposed to creating a room for an alternative method. Obviously, this is not to suggest that there is anything wrong about it. Rather, it is to highlight that our problem is somewhat more complex and challenging than one faced by most of the countries.

Let me note a few challenges that are unique to our own situation and where experience of our brother Muslim countries is of little help.

First, since we are confronted with a system-wide change, we have to confront problems of transition such as, whether to protect the existing transactions and apply new system prospectively or force a conversion. There are no such problems faced when an access is sought in system which otherwise is based on traditional methods.

Second, the entire legal framework regulating financial sector needs restructuring as the existing framework, evolved over a long period of time, was designed to support traditional methods of financing. Here again, no such problem is faced by individual experiments as they basically maneuver a space for their existence within the existing legal framework. Undoubtedly, that poses challenges for Islamic institutions, but experience has shown that it is not prohibitive.

Third, and perhaps the foremost, is the problem of government finances. This problem is obviously not there at all. But in our case this is the most formidable problem that we are confronted with. Everywhere, governments are not merely borrowers in market, very often they are the largest. Government securities are known as risk-free securities, not because government has sound portfolio of assets backing them, but because it controls the money supply.

Then, there is the issue of the conduct of monetary policy of which interest is one of the major instruments. It is not clear whether the alternative system would have an equally effective instrument to allow efficient conduct of monetary policy.

Above all and more related to our own situation, Pakistan is heavily indebted. Even the domestic debt is around Rs.1.5 trillion, imposing an interest liability of Rs.170 billion during the year. Settling such huge liabilities or finding an appropriate alternative will need to be looked into very closely.

These are all the problems that we have to address if we would like a smooth and un-disruptive change to the new system. I understand that literature on Islamic banking has addressed these problems and hopefully satisfactory answers to these problems do exist. There is a greater need to address Islamic banking practices within context of system changes as in the case of Pakistan. I will convey my own experience in Saudi Arabia, Malaysia and other countries in the Middle East and with setting-up and dealing with the Islamic Banking, could help come up with a holistic approach to achieve our objectives. I have worked with all the leading Islamic institutions to meet their country’s need.

I am sure that IPS and other research bodies will expend efforts in enlightening policy-makers with their research on these problems. The government need advice, input and critique on implementation in this area.

Question: We bring back the interest in terms of mark up. According to the 25th report of the Islamic Development Bank, the interest was incorporated in different modes. It emerged in the system in the garb of mark up, profit and commission. The conclusion seems that interest cannot be abolished in a practical way. Is it then that we are imposing the Islamic economic system like punishment on ourselves? We are laboring to abolish that which cannot be abolished?

Answer  There are instruments available today for investment, which do not involve interest. This is my own first hand experience with the Islamic banking community. However, the indicated point is deeper as different systems exist parallel in an overall economic or banking system. We have not seen a holistic system. That is why the need to come up with a realistic economic game plan and a realistic implementation strategy covering all aspects of the issue has increased manifold. The Supreme Court’s giving time for evolving a riba-free alternative is also in keeping with this real posed problem. Harvard University has a permanent chair on Islamic Banking where the world’s best experts in finance deliberate on the issue. Elimination of riba is a challenge and to respond to it, Pakistan has to be a part of the global system and global economy. We have to make efforts to come up with ways.

Question  Do you think the Islamic economic system can run parallel to international financial institutions? Shall they tolerate peaceful co-existence of different economic systems?

Answer  Yes. I do not think there shall be tussle of interests if we come up with an implementable and practical system of economy that allows growth. However, if whatever we come up with does not allow us to grow, forget about the international financial institutions, we ourselves shall have to be answerable. We should stop giving extra consideration to the international financial institutions. They are humans like us. Nobody has an exclusive right to wisdom. We should give credit to our own people who occasionally come up with new and original ideas. People in Pakistan have wrongly assumed that foreign international institutions are the main spring of innovative ideas.

That the foreign financial institutions have no desire to lend Pakistan money is not true. Equally, this is also a misconception that they are pushing their money down our throat. It is usually the other way round. One of the reasons we are so dependent on foreign lending institutions is that for years we have lived beyond our means and we have borrowed more than we have earned. This is simplistic, but it is true; whenever one lives beyond means, he is subjected to influences which might have been avoidable had it opted living within means.

A holistic economic sovereignty shall take a lot of effort. We cannot stop relying on inflows of capital overnight lest the growth suffers. The international financial institutions will get involved only on our own calling. We will need them if we are short of capital or if we somehow could not have managed our affairs. That is why, one of the key pillars of our economic revival plan is self-reliance, which does not mean isolation. However, it means prudent borrowing for the right projects, investments in the right projects. That is the part we have to see.

Source: Towards Islamic Banking: Experience and Challenges, Institute of Policy Studies. Republished with permission.