بسم الله الرحمن الرحيم

The Question

On 28th April this year, the Federal Shariat Court (FSC) once again declared that riba (banking interest) was prohibited according to the injunctions of Islam and so it should be eliminated from the country within five years. The ruling established two clear sides: Islamists that became jubilant as they see this as a step towards the Islamization of our country, and Liberals that were critical considering this a regressive and impractical measure that will take the country backward. Which side is right?

Prior to answering this, let's refresh a brief history of the FSC, its role, and its rulings regarding the prohibition of riba.

Riba and the Attempts to Abolish It

First and foremost, it is ironic that the elimination of riba from the economy is, contrary to common knowledge, a constitutional requirement under article 38F which states, "The state shall eliminate riba as early as possible." However, the first practical steps in this direction were taken when the FSC was formed in 1980 via a Statutory Regulatory Ordinance (SRO). Ironically, upon its creation, its wings were clipped by permanently restraining it from judging in matters of the Constitution, Muslim Personal Law, or any law relating to the procedure of any Court or tribunal. Moreover, any fiscal law or any law relating to the levy and collection of taxes and fees or banking (riba/interest) or insurance practice and procedure were excluded from its ambit, originally for two, then another three, and finally for a total period of ten years.

Knowing well that if it's not restrained, the natural outcome would be the abolishment of riba, thereby jolting the economic system, so these laughable delaying tactics were made part of the constitutional amendment 203B. There can be no better proof that whenever humans are given the right to make laws, they will always safeguard their personal interests even if that means going against clear injunctions of Allah (swt)!

As soon as the 10-year time bar expired, the FSC took up the case and announced its verdict regarding the abolishment of interest on 14th November 1991. The court gave the government time till 30 June 1992, to eliminate all such provisions and make the economy riba-free. This decision was challenged in the Supreme Court's Shari'ah Appellate Bench (SAB) and was stayed till 23rd December 1999. Then an appeal of reconsideration was filed in the SAB, and the SAB on June 24, 2002 deemed the previous verdict null and void. Since then, till around 2020 the case was held in abeyance for almost two decades by the various governments.

Can a Zero-Interest Policy Work Within Capitalism?

Can a zero-interest policy be implemented within the capitalist economic system? The capitalist economic system has two distinct roles of interest:

First, the interest rate (policy rate) is used to regulate the money supply. An increase in the policy rate leads to more savings, thereby a cap on the money supply and a resulting expected decrease in inflation. Conversely, a lower policy rate leads to more spending and investment and also more borrowing from banks, creating a larger supply of money and consequently 'too much money chasing too few goods' — called inflation. Such boom and bust cycles are common all over the world.

Second, interest serves as a tool for financing all kinds of economic activity. Paradoxically, a zero interest rate would mean a lot of cheap money available for businesses, however practically it ends up in declining economic activity because there would be no monetary attraction for lenders to make their money available.

Another issue is that the interest rate is partly utilized in offsetting inflation. Some scholars have tried to justify interest in the garb of such inflation, instead of coming up with a solution for such cruel currency depreciation which happens primarily because of the endless minting of coins and printing of currency notes by governments whenever they are in need of money.

Anyone who would read the 1,100-page detailed FSC judgment would quickly realize that none of the issues has been convincingly addressed. That's actually not surprising at all — because remaining inside the capitalist economic system, and trying to escape interest, is just like tying someone's hands and feet and expecting them to swim across a river.

Islam's Economic Model

Before understanding how Islam deals with the above problems, it is important to appreciate the fact that Islam provides us with a complete system to govern our personal and collective lives. The ruling system based on sovereignty belonging to Allah (swt) alone, the social system, the penal system based on implementing the hudood of Allah (swt) are just a few examples. Similarly, Islam's economic system is a detailed and unique method to govern all kinds of economic transactions. The underlying principle is to avoid stagnation of wealth in a few hands.

One fundamental tenant of Islam's economic system is that currency needs to be backed by gold and silver, unlike the currently prevalent Fiat currency, which does not mandate any backing whatsoever. The Prophet (saw) said:

وَبِيعُوا الذَّهَبَ بِالْفِضَّةِ وَالْفِضَّةَ بِالذَّهَبِ كَيْفَ شِئْتُمْ

"Sell gold for silver as you please" (reported by Bukhari from Abu Bakra, and Muslim reported similar to it through Ubada Bin Al-Samit).

This was actually the standard worldwide not so long ago. For most of humankind's history, till 1971 when US President Nixon abruptly and unilaterally abolished the Bretton-Woods agreement, currencies were always tied to Gold either directly or through the dollar. A bi-metallic currency is almost inflation-free as it's free from manipulation by central banks and governments.

Another unique feature of Islam's economic system is that the State is the one undertaking mega-projects instead of the private sector, hence removing the need for funding by banks. Private ownership of certain resources, particularly energy ones, is strictly prohibited in Islam. The Prophet, peace and blessings be upon him, said:

الْمُسْلِمُونَ شُرَكَاءُ فِي ثَلَاثٍ فِي الْكَلَإِ وَالْمَاءِ وَالنَّارِ

"The Muslims are partners in three things: vegetation, water, and fire." (Sunan Abī Dāwūd 3477)

With regards to small businesses dependent on external financing, Islam solves that problem through partnerships instead of interest-based investors.

As for those international contracts which have already been made — like those with the IMF — the FSC judgment quotes a Hadith but incompletely, omitting the part where the exception for the fulfillment of contracts is clearly stated:

المسلمون عند شروطهم إلا شرطًا حَرَّمَ حلالًا أو شرطًا أَحَلَّ حرامًا

The Prophet [pbuh] said, "Muslims are bound to the conditions they make, except one that makes forbidden what is permissible and lawful what is forbidden." (Al-Tirmidhi 1352, Ibn-e-Majah 2353)

Conclusion

From the above it should be clear that the attempts at abolishing riba by the FSC are insufficient at best. They are nothing more than granting a life-line to the already struggling capitalist economic system which has been widely rejected by Muslims as exploitative and cruel.

It must be highlighted that even the complete Islamic economic system is not allowed to be established in isolation. The economic system is a part of the collective system of Islam which is intertwined with Islam's legal, judicial, educational, and political policies along with social and moral behaviors. As long as the other systems are absent, the economic system won't be fruitful in its entirety.

Moreover, had Pakistan truly been an Islamic state, the process would've been completely opposite — i.e. those in favor of interest would've been the ones with the burden of proof that interest is justifiable in the light of Quran and Sunnah. The discussion above seriously begs the question: "What are we trying to achieve by such delayed, half-hearted efforts, and that too in patchwork?" Is this an attempt to pacify the growing demand by Muslims to return to the Islamic way of life by providing a fig leaf to hide capitalism's ugly side?