Legal Framework for an Islamic Financial System

Islam is a universal religion and its fundamentals are and will be applicable for all times to come. But no wonder that even today we have quite a few people among us in the 20th century who do not take any religious fundamentals or ideology seriously unless it expresses itself in its practical manifestation. For a few, unfortunately, the religious injunctions are a legacy of the past which cannot be made applicable to the present times because Islam, in their opinion, is medieval and not applicable to the present times. This attitude persists, although the world has had enough of gigantic problems handed down by various economic orders and systems so much so that the interest-based economic system is almost on the brink of disaster. It is in times like these that the phenomenon of Islamic resurgence has started making its impact and is affecting many fields of human activity, but, in my view, it is in the sphere of socioeconomic order where the effect is likely to be most significant and pronounced.

As a sequel to the judgement of the Federal Shari‘ah Court on riba we are confronted with a host of practical problems in our efforts in transformation to interest-free economic system in accordance with the fundamental tenets of the Shari‘ah. But I believe that since Islam is not merely a spiritual formula but a complete code of life in itself envisaging economic well-being of an individual as well as society upon sound foundations and Divine instructions, we would, inshaallah, in course of time surmount our transitional problems. So universal and effective is the message of Islam that the depth, scope and comprehensiveness of change, which the transition from materialism has been brought about with the dawn of the Islamic era, is incomparable in dimension and substance to any cultural change in history we are aware or can conceive of.

Contemporary Confusion and the Challenge

Time and again it is not uncommon to hear either someone whisper or have the tenacity to challenge aloud, is riba per se necessarily obnoxious? A section of intellectuals and the press also seems to labour under illusion, manifest in their views, insisting that simple interest is not riba and go on to advocate why money (in which banks deal) not be treated like the commodity it can buy. Following this line of thinking it is viewed with skepticism and astonishment why the increase earned on loan money is riba while the increase earned in the trade of a commodity that money buys is not. We also find questions whether interest charged in modem time in its present form is all that interest which, to use the Qur’anic terminology, is riba. It is also mooted in certain quarters that the present-day confusion has been artificially created by labelling agreed profits or interest as riba. How strange it is and how unfortunate still it is today that in the matter of our attempts towards the Islamisation of the society and economy even after 1400 years since the Revelation, the same kind of doubts and aspersions are expressed as in the days of the Prophet (pbuh) that profit in trade or bai and riba are accretions of the same kind and are on the same footing, so why legitimise the former and condemn the latter? It is to people with these views die Holy Qur’an has directed its admonition in the following words:

“Those who swallow usury cannot rise up save as he ariseth whom devil hath prostrated by (his) touch. That is because they say: the trade is just like usury; whereas Allah permitteth trade and forbideth usury.’’ (al-Qur’an, 2:275)

The Holy Qur’an is replete with candid injunctions prohibiting and forbidding riba in all its forms and, therefore, instead of debating and juggling with semantics, it is in the fitness of things as Muslims that we take the Qur’anic warning given to those who continue to deal in riba with the seriousness it deserves. By saying this, is not to demonstrate an escapist attitude or to water down the need to understand fully why after all is riba forbidden and prohibited by the Shari‘ah but any attempt in that direction would be beyond the scope of my paper. There is ample room for disagreement with my viewpoint that once we are in the fold of Islam, it is indignant and insolent to question why is this permitted and that forbidden. Accordingly, therefore, it would not be in keeping with the theme of my paper if I would at this forum have reacted to certain views which hold that interest on consumers’ credit is essentially reprehensible but interest on business loans docs not come within the ambit of the scope of riba. For, to me an approach of that kind is tantamount to condemning theft and legalising robbery.

At this stage, it is apt to ask: what should be the legal framework of an Islamic financial system and what fundamental changes docs the interest-free system of financing envisage as compared to the existing interest-bearing arrangements? In general terms, the answer is easier to seek, for, under the existing system, regardless of the fate of the project or the operational results of an enterprise using borrowed funds, interest has to be borne and paid in all events at the cost of making an entity, to use the present-day terminology, totally sick. Such is the interest-based system that even in times of financial stringency, the financier wishes to have his pound of flesh in the form of interest, no matter the capability for repayment is totally impaired. As against this, under the system contemplated by profit-sharing arrangements, the provider of funds as a partner in the project has a share not only in the profits but shall also be liable to bear the losses. Since he is a partner in the enterprise, he should be willing to forego any claim in times of economic and financial crisis until the situation reverts back to the normal. The financial arrangements invoked under participation term certificates (PTCs), term finance certificates (TFCs) as also under musharakah arrangements raise many questions of propriety and reasonableness in the light of the principles enunciated by the Shari‘ah particularly for the sharing of profits and losses which I may discuss later. However, any system in its preliminary stages is anything but totally perfect and, therefore, attempts to free our interest-bearing system from the curse of riba would be no exception. I am hopeful that with an eye on Divine instructions and blessings of Allah on the one hand and sincerity of purpose and clarity of direction on the other, we would in due course be able to evolve a truly interest-free system which shall serve as a model and guide for other Muslim countries to follow, who, for want of a prototype system to adopt may not have yet ventured even to make a beginning. To me, what matters is that a beginning should be made and, therefore, efforts directed towards a virtuous goal are, inshaallah, bound to succeed.

In transforming the entire economic system in accordance with the fundamental tenets of Shari'ah, the elimination of interest alone will not be sufficient unless our entire economic behavior is so moulded as is conducive to the creation of socioeconomic order, satisfying the demands of equality and justice and principles of morality as enshrined in the Qur’an and Sunnah. Nevertheless, the fact remains that elimination of interest occupies the key position in the establishment of Islamic economic order which the people of Pakistan have set out to achieve as one of the fundamental goals. In our attempts to find a workable, viable and legitimate solution in the form of interest-free economy, it is indeed imperative to undertake the exercise with a frame of mind totally reconciled to the philosophy as a Muslim that interest in all its manifestations is forbidden and prohibited by Islam. Unless we approach the problem with this attitude, we would not see urgency of the need to contemplate and seek organised form of interest-free financing in accordance with norms laid down by the Shari'ah. There is something inherently wrong in the present-day financial system of fixed return without a probability of suffering any loss implicit in any interest-ridden financial system.

Ebrahim Sidat


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