Federal Shariat Court declares interest-based banking system against Sharia

The Federal Shariat Court (FSC) on Thursday announced a verdict in a long-pending case on Riba (interest), declaring the prevailing interest-based banking system as against the Sharia and directed the government to facilitate all loans under an interest-free system.

In its long-awaited verdict, the court ruled that the federal government and provincial governments must amend relevant laws and issued directives that the country’s banking system should be free of interest by December 2027.

The court observed that banks were receiving more than the loan amount when fell under the category of usury. “Islamic banking system is risk-free and against exploitation,” Justice Dr Syed Muhammad Anwar remarked.

“Almost two decades have elapsed but the governments have not taken any decisions against the interest system,” Justice Anwar said.

The court also declared all the provisions of the Interest Act 1839, which facilitate interest, as unlawful.

The FSC had reserved its verdict in the case on April 12.

The full FSC bench comprising Chief Justice Muhammad Noor Meskanzai, Justice Dr Syed Muhammad Anwar, and Justice Khadim Hussain M Shaikh had heard a number of constitutional petitions filed against the interest-based banking system in the country and reserved the decision of the case after the completion of arguments of the lawyers of the parties.

In the written judgment, the bench said the prohibition of Riba is the “corner stone of the Islamic economic system”.

“Therefore, we have decided that every loan which extracts any additional amount upon the principal from the debtor is Riba, hence, any transaction that contains Riba even at a slightest level, falls within the category of Riba thus prohibited. Furthermore, all the prevailing forms of interest, either in the banking transactions or in private transactions fall within the definition of Riba.”

The FSC said the “speedy proliferation and exponential growth” of interest-free banking not only in Pakistan but in the whole Islamic world and even worldwide is “a reality that has established that the interest-free banking system is not only practicable but feasible too”.

“With this backdrop based on facts, we do not agree with the apprehensions shown by the Federal Government that introduction of Interest-free Banking in the economic system of Pakistan may have a negative impact on the overall economic system of Pakistan,” the judges found.

The ruling added that “elimination of Riba from our economic system is our religious as well as our constitutional duty; hence it has to be eliminated from Pakistan”.

Meanwhile, Finance Minister Miftah Ismail welcomed the court’s decision. He said the government and the central bank would “carefully study this important decision and then seek guidance and clarification from the FSC about the process, steps and timeframe” for its implementation.

The case

The first petition for the abolition of the interest-based banking system in the country was filed in the FSC on June 30, 1990.

The then chief justice of the FSC, Dr Tanzeelur Rehman, had constituted a three-member bench that delivered judgment in the case on November 14, 1991, and sought its implementation by April 30, 1992. The then PML-N government had challenged the decision in the apex court.

Years later on December 23, 1999, the Supreme Court upheld the decision of the FSC and directed authorities to ensure its implementation by June 30, 2000.

Subsequently, a review appeal was filed in 2002 with the top court, and on June 24, 2002, the decision of the Shariah Court was suspended and the case was referred back to the FSC for interpretation of Riba.

The case against the interest rate system had been pending in the Shariat Court for the last 19 years. Around nine chief justices of the FSC have completed their terms since then, but the case remained undecided until its verdict was announced today.

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