WORLD LAW/Pakistan

JURIST's Pakistan Correspondents are Tasneem Kausar, formerly Law Lecturer at the Pakistan College of Law, Lahore, and Tipu Salman Makhdoom, Advocate of the High Court and partner in Jus & Laye, Lahore.
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[Lahore; Special to JURIST] In 712 AD, Muhammad bin Qasim successfully laid down the foundations of Islamic rule in India. A chain of Muslims ruled there afterwards, and it was the Muslim Great Mughals who ruled the whole of the Indian subcontinent for more than three centuries (1526-1857) until the British took over. During the period of Muslim rule in the Indo-Pak subcontinent, the law of the land was largely Islamic law. Even during British rule (1858-1947), the personal law for Muslims remained Islamic law. When the British left India, they left it under a system of parliamentary democracy. This ensured that Hindus, the overwhelming majority community in the united Indian subcontinent, would rule over the entire land and its diversified ethnic and religious population. The Muslims of India therefore demanded a separate homeland where they could lead their lives according to Islamic injunctions.

Against this background the state of Pakistan came into being in 1947. Though the state was won over from British, Hindus and Nationalist Muslims in the name of Islam, the matter of Islamization of Pakistan laws has remained a controversial issue. Along with opposition to Islamization from the ruling liberal elite, another problem has been the division of the Muslim population of Pakistan into different religious sects. All of these sects want their interpretation of Islam to be recognized and implemented at state level. This has proven to be a major hurdle.

After the transformation of East Pakistan into Bangladesh in 1971, the people of Pakistan, through their elected representatives, unanimously enacted the Constitution of the Islamic Republic of Pakistan, 1973 (the previous two short-lived Constitutions were enacted in 1956 and 1962). This federal Constitution envisaged a parliamentary form of Government. Provisions relating to Islam were fundamental to this document. However, by and large the Constitution was not very Islamic in the orthodox sense. Only with the 1977 coup led by General Zia ul Haq was the Constitution drastically amended and many new Islamic provisions introduced.

In 1980 a Constitutional amendment by General Zia ul Haq's regime introduced a new hierarchy of Islamic Courts. This hierarchy consisted of a Federal Shariat Court (at the level of High Court, the highest judicial forum in a Province) and a Supreme Court Shariat Appellate Bench (at the level of the Supreme Court of Pakistan, the highest judicial forum in the Country) as its sole appellate forum. The Federal Shariat Court was given the power of declaring any law repugnant to the Injunctions of Islam. In case of such a declaration, subject to appeal to the Supreme Court Shariat Appellate Bench, the said law would cease to exist on the date mentioned in the decision declaring it so. However, the Federal Shariat Court's jurisdiction was barred for ten years after its establishment from examining and declaring repugnant any fiscal, tax or banking law. This restriction was to expire on 25.06.1990.

In 1991, two important events took place. First, General Zia's regime promulgated the Shariah Act, which declared Islam as the supreme law of the land. Second, the Federal Shariat Court declared interest equivalent to “riba”, thus un-Islamic and illegal. Although the General Zia's Government had already announced in 1984 that all banks will adopt Islamic modes of financing and would eliminate riba (interest) from Pakistan, yet it had not been done in true spirit. After declaring its verdict in 1991, the Federal Shariat Court directed that all kinds of transactions, whether national or international and whether Governmental or private, had to take place on a non-interest basis. The Government and others filed appeals against this judgment, as a result of which the execution of the judgment was stayed. Only in 1999, after about eight years, did the Shariat Appellate Bench of the Supreme Court of Pakistan suddenly took up this matter and did not even allow the Government to withdraw it.

On 23.12.99, within 9 weeks of the military takeover of the Pakistan Government on 17.10.99, the Shariat Appellate Bench of the Supreme Court upheld the Federal Shariat Court ruling and declared interest illegal. The Court held (in its detailed judgment consisting of more than 1,000 pages) that any increase or gain over and above the principal amount of loan is riba, thus un-Islamic. In this regard, the Court declared there was no difference between the commercial loans for productive purposes and personal loans for consumptive purposes. Riba covered both usury and interest and thus applied to both exorbitant and minimal rates of interest. The Court declared that interest is riba regardless of whether a given transaction took place between rich, poor, Muslims, non-Muslims, or any combination of such parties. The Court further held that interest charged by banks or financial institutions or individuals today is riba, thus un-Islamic and illegal. The true alternative to interest, said the Court, is Profit and Loss sharing based on musharika (joint venture), modaraba (mutual investment fund) and morabaha (cost-plus financing). The Court also endorsed certain other non-interest based modes of financing such as ijara (lease), salam (sale) and istisna (a contract of acquisition of goods by specification or order, where the price is paid progressively in accordance with the process of a job completion).

Keeping in mind the huge foreign debt liabilities of Pakistan, the Court held that foreign debts are liabilities of special nature. It was stated in the judgment that these cannot be exempted from the prohibition against interest. The Court held, however, that this does not mean that foreign liabilities should be shunned. The Court suggested that Government should discuss some new arrangements for the foreign loans with the lender Governments and organizations. The Court allowed some time for conversion of foreign transactions into riba-free mode.

The Court acknowledged that to lay down economic and monetary policies and to frame laws is not its responsibility. On the insistence of the Government and taking advantage of large number of expert opinions, the Court has nonetheless provided detailed guidelines for establishment of an interest- free economic and legal framework in accordance with the injunctions of Islam. These guidelines include, among others, enactment of laws to provide for necessary prudential measures to ensure transparency, inter alia, along with the lines of the Freedom of Information Act, the Privacy Act and the Ethics Regulations of the United States, and the Financial Services Act of the United Kingdom; establishment of institutions like the UK serious Fraud Office to control white collar economic crimes; establishment of credit rating agencies in the public sector, establishment of a system of evaluators for scrutiny of feasibility reports, etc.

Of the laws declared illegal, the Court specified some (mainly concerned with money lending) that would cease to have effect from 31.03.2000 and others that would cease to have effect from 30.06.2001. Although a nationalized bank has filed a review petition against the judgment, the Government has accepted the verdict and has shown its willingness to implement it in toto.

Tipu Salman Makhdoom
JURIST Pakistan Correspondent

Lahore, PAKISTAN

June 7, 2000

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Discussion

• Your report on the decision of the Shariat Appellate Bench is quite interesting. I gather that post-judgment interest, as well as pre-judgment interest, would be considered riba and therefore unlawful. I also assume that the court's reasoning would apply to foreign judgments enforced in Pakistan as well as domestic judgments. Did the court's lengthy judgment deal with the question of its effect on treaties for the enforcement of foreign judgments (or arbitrations) that either include a component of interest or that provide for post-judgment interest? I assume that both would now be incompatible with the public policy of Pakistan. Is that in fact the case? Thank you very much.

  T.F. Cope
  Holme Roberts & Owen LLP
  Colorado, USA

  • Tipu Salman Makhdoom replies: In fact the Court (in its Shariat jurisdiction) does not have the jurisdiction to deliberate upon the question of what should be done on the basis of its judgment. It is supposed to declare what laws are unIslamic and therefore illegal, and on which date such laws will cease to have effect. The rest is to be done by the Govt. and legislatures (or the law-making man, given current circumstances here). The guidelines that the Court has offered will, it seems, be obiter of some kind and not more than that.

    The situation will be clearer when the Govt. enacts laws giving effect to this judgment. It seems that the laws will not be enacted with retrospective effect in this regard (they must not) in order to honour the principle of past and closed transactions. It is felt that international treaties will be honoured (these must, and will have to be) on the basis of the principle laid down by the Court regarding foreign debts.

• The following question is based on profound ignorance but also on equally deep puzzlement:

  I assume that in the absence of interest (i.e. some kind of payment for the use of resources), those who lend cannot be expected to forego some kind of payment for denying themselves the gratifiction of immediate use of the lent resource. So how does it work in Pakistan? Or am I wrong in assuming another (in name or in custom) form of such compensation? And my puzzlement is greater in light of the court's acknowledgment of the existence of interest on foreign loans.

  B. Kymlcka
  U. of Western Ontario
  London, Ontario, CANADA

  • Tipu Salman Makhdoom replies: The Constitution of Pakistan says that all laws that the Court would say are unIslamic would be void. Islam says riba is illegal and unIslamic. There had been a controversy as to whether modern day banking based interest is riba or not. The interest has been (and still is) prevalent in the Pakistan economy, as in any other economy of the World. Now, since the Court has declared that today's bank interest, etc. are all riba thus unIslamic and illegal, the economic system of Pakistan will now have to be changed.

    The Court has described other modes of doing business, which include sharing of profits and exclude lending of money on the basis of interest for running of the would-be transformed economy. Although a lot of work has been done on the Islamic mode of banking and economy and the Court has referred to that work intensively, yet there is still controversy in Pakistan as to whether that system will work in the present day real situation.

• What is the update on the "new arrangements for the foreign loans" of Pakistan? Will any new legislation be passed in this regard? Also, is Pakistan preparing to negotiate the restructuring of its loans?

  Branislav Maric
  The American Society of International Law
  Washington, DC
  

  • Tipu Salman Makhdoom replies: The Court had directed that the Federal Government should initiate serious efforts to relieve the nation from the burden of foreign debt as soon as possible, and to renegotiate the existing loans, and also to structure future borrowings, if needed, on the basis of Islamic modes of financing.

    The Court had observed that the concern of the foreign lenders is to get a return on their loans, and not to insist on a particular form. The Court suggested therefore that asset-based loans can easily be converted to leasing arrangements; that project-related loans can be reshaped on the basis of Istisna, and that for the purposes of new financing, an even wider variety of instruments is available and can be made to fit the Islamic mould. The Court added that all this will, however, be possible only if the government itself shows a firm commitment on its Islamic obligations and a true will to implement what Islam requires.

    It looks like the Govt. is determined to use the time the Court has granted it with regard to foreign debts. There is no news as yet of any effort to renegotiate the loans on the basis of the riba judgment (except for the extension of the current loans and provision of new ones!!!). Some new laws are expected in this regard but since the Govt. has at least until 30.06.01 when all the laws against Islam will cease to have effect (and the matter of foreign loans can be extended even beyond that date, as has been observed by the Court), nothing is on the scene as yet (and even apart from this the Govt. is too much involved these days with the tax survey and the traders' strike).