Indexation of Loans

Some people argue that in a period of secular inflation, the purchasing power of the money erodes over time. Therefore, the creditor should be compensated for this erosion in the real value of money. This can be done, goes the argument, by indexing the interest-free loans with the price level of a basket of commodities. It would be fair and equitable so far as creditors are concerned. The court discussed this issue at great length. Besides quoting from the contemporary economic texts, it brought evidence from the classical Islamic legal sources to show that in case of price increase, the principal sum lent will have to be returned in the same quantity and in same currency in which the loan was taken in the first in- stance. There are various reasons for this.

First, it is so similar to interest that it would be impossible to differentiate one from the other. Second, the erosion in value due to inflation has not been caused by the debtor or by his use of the money, therefore, it seems inequitable to ask the debtor to compensate for it. At best, the state can be asked to do so. But in practice it would be difficult to implement such a proposal as the number of transactions taking place everyday is so large that the state will not be able to examine each case and make payment. Moreover, it would turn the flow of resources from the taxpayers to the wealthy class which itself is against the objectives of the Islamic economic system. Third, demanding indexation of loans gives a privileged position to capital as compared to other factors of production which are also affected by inflation in one way or the other. Fourth, it is difficult to agree on one such basket of commodities which affects all types of creditors uniformly. Fifth, indexation would tend to induce the savers to shy away from risk capital which has been emphasised in the Islamic value system. Sixth, the supporters of indexation do not recommend a reduction in the debt during times of deflation which is inequitable.

While examining the issue, the court also took up the point raised by Mr Justice Wajihuddin Ahmad in Aijaz Haroon vs Inam Durrani ( PLD 1989, Karachi 304) in the light of a 13th century jurist Ibn Abidin Shami’s argument. The FSC judgement reproduced from the original text of Ibn Abdin Shami’s book, Tanbih al-Raqud ala Mdsa’il al-Naqud. It showed that the original text did not support the point taken by Mr Justice Wajihuddin Ahmad. The jurist Shami had argued quite clearly that in case the value of the currency undergoes a reduction over time, the debtor will still pay back the same quantity of money in the same currency. It was only in case the currency in which the money was lent becomes altogether useless or is demonetised by the government that the debtor can claim his debt in the currency in use at the time of payment. But then too the value of the loan will be the same as at the time of lending, (p. 193)

The court has cited the opinion of various authorities in support of its conclusion. Some of the scholars are: Dr Umar Chapra, Dr Hasanuz Zaman, Abdul Rahman al-Jaziri, Mawlana Taqi Usmani, Ghulam Rasool Saccdi, Dr Munawar Iqbal and Afzalur Rahman. From among the jurists, the court has brought evidence from al-Kasani, Zaila’i, al-Sarkhasi, Ibn Qudama, Fatawa Alamgiri, Council of Islamic Ideology of Pakistan, Islamic Fiqh Academy of OIC countries, Islamic Fiqh Academy of India and the resolution of the seminar on indexation held at Jeddah during 1987.

The court, however, recognised that: “there should be a means of redressing these evils (of inflation), and indexation is claimed to be one such technique. But an evil, as already discussed above, should not be redressed by a similar or a bigger evil. Muslim economists should try to explore the ways of Fighting inflation within the sanctions provided by the Shari'ah” (p.177). We shall take up this question in the next section of this paper where we shall present a solution to this problem within the Shari‘ah framework.

Mark-Up

The court discussed the legality of the mark-up system introduced by the Pakistani banks in the wake of Islamisation in the ’80s and concluded that it is nothing but interest and should be abolished. The court quoted from Mawlana Taqi Usmani extensively to argue that the mark-up is the price of time allowed on a debt which is interest, pure and simple.

The court touched on the question of increase in the price of a commodity due to deferred payment of its price. It mentioned that there is a difference of opinion among the jurists (p.224). It did not dilate upon it further. But it has reproduced in Appendix A the replies given by different scholars. We shall take up this question further in the next section.

Leasing and Lease-Plrchasing

The court has discussed the question of financing on the basis of leasing. It has accepted it as lawful within certain conditions, (p.330)

Similarly, the court has accepted lease-purchasing as lawful, within certain conditions.

Relief in Cases Pending Before the Courts

Some petitioners prayed that they should be given relief from payment of interest on the loans taken by them in the past. The court remarked that all such petitioners being Muslim were aware of the illegality of interest at the time of con- trapting the loans. Anyhow, the FSC expressed its inability to grant any relief to such petitioners since such an examination was outside the jurisdiction of the court. We shall take up this question as well in the next section.

Interest in International Transactions

The court took up the question of interest in international transactions. It quoted from a note by Dr Syyid Tahir. The note argued that the financing of export can be done by banks acting as trader rather than financiers. This is being done by other Islamic banks. For the future, the government should do all financing on the basis of equity. Foreign exchange markets will continue to operate as usual. There is a support for them in the Shari'ah in the law of bai’ salam. The court also quoted from Anwar Iqbal Qureshi’s book, Islam and Theory of Interest.

Some Unresolved Issues

We shall discuss here some unresolved issues relating to the debate on interest which were either outside the scope of the court or the court felt that some more research was needed to resolve them. While discussing these issues we shall, in all humility, like to present some tentative thoughts which may help pave way for future policy formulation.

Protecting the Value of Money

The arguments against indexation, both from the Shari'ah and economic point of view, are well taken. But the question remains: how can we protect the value of money over time against fluctuations in prices, which is a fact of life and which at times is also desirable? The question will keep on nagging the creditors. The fact is that if a satisfactory solution to this problem is not found then the creditors will shy away from lending money on the basis of qard-e-hasan, while in an Islamic society the system should be such as to encourage people to lend money as qard-e-hasan.

One suggestion is that the government should float a new currency under a new nomenclature, say, Pakistani dinar. The value of the Pak dinar should be equal to a basket of commodities. The price of these commodities should be announced everyday on the basis of the market price of these commodities. Those who want to hedge themselves against price fluctuations should deal in Pak dinar rather than Pak rupee. Thus, all loans, salaries, wages, contracts, etc, should be denominated in Pak dinar. While borrowing, the debtor should accept Pak dinars and return the same number of Pak dinars on the maturity date. The Pak dinars should be available from all banks at the declared rates. There should be one single rate of the Pak dinar for buying as well as for selling so that the exchange dealers do not make any commission from its purchase or sale. It will also take care of speculation in this currency. The proposal has the following merits:

• It is covered by the Shari‘ah rules. There is no excess in borrowing or selling. The loans are taken in Pak dinars and returned in the same currency.
• It is equally applicable both in time of inflation and deflation. So it does justice to all irrespective of the trend of the general price level.
• It is applicable to all such contracts which mature over time, such as wages, salaries, contracts for construction or supplies, etc. It provides protection to everyone and not to wealthy people only.
• It is easy to use. The government announces daily rates for foreign currencies. It can do so for Pak dinar as well. Since the new currency will be availbale at all banks, there will be no problem of its liquidity.
• There will be one rate for buying and selling, therefore, the problems of speculation and earning commission by sale and purchase of Pak dinars will not arise.

Muhammad Akram Khan

Source: Elimination of Riba, Khurshid Ahmad, Khalid Rahman and Zahed A. Valie. Republished with permission.