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Historical Background
In 1980 a Constitutional amendment by General Zia ul Haq's regime introduced a newhierarchy of Islamic Courts. This hierarchy consisted of a Federal Shariat Court (at thelevel of High Court, the highest judicial forum in a Province) and a Supreme CourtShariat 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 Courtwas given the power of declaring any law repugnant to the Injunctions of Islam. Incase of such a declaration, subject to appeal to the Supreme Court Shariat AppellateBench, the said law would cease to exist on the date mentioned in the decisiondeclaring it so. However, the Federal Shariat Court's jurisdiction was barred for tenyears 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 theShariah Act, which declared Islam as the supreme law of the land. Second, the FederalShariat Court declared interest equivalent to ³riba´, thus un-Islamic and illegal.Although the General Zia's Government had already announced in 1984 that all bankswill adopt Islamic modes of financing and would eliminate riba (interest) fromPakistan, yet it had not been done in true spirit. After declaring its verdict in 1991, theFederal 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 eightyears, did the Shariat Appellate Bench of the Supreme Court of Pakistan suddenlytook 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 on17.10.99, the Shariat Appellate Bench of the Supreme Court upheld the FederalShariat 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 andabove the principal amount of loan is riba, thus un-Islamic. In this regard, the Courtdeclared there was no difference between the commercial loans for productive purposes and personal loans for consumptive purposes. Riba covered both usury andinterest and thus applied to both exorbitant and minimal rates of interest. The Courtdeclared that interest is riba regardless of whether a given transaction took place between rich, poor, Muslims, non-Muslims, or any combination of such parties. TheCourt 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 jobcompletion).Keeping in mind the huge foreign debt liabilities of Pakistan, the Court held thatforeign debts are liabilities of special nature. It was stated in the judgment that thesecannot be exempted from the prohibition against interest. The Court held, however,that this does not mean that foreign liabilities should be shunned. The Court suggestedthat Government should discuss some new arrangements for the foreign loans with thelender Governments and organizations. The Court allowed some time for conversionof foreign transactions into riba-free mode.The Court acknowledged that to lay down economic and monetary policies and toframe laws is not its responsibility. On the insistence of the Government and takingadvantage of large number of expert opinions, the Court has nonetheless provideddetailed guidelines for establishment of an interest- free economic and legalframework in accordance with the injunctions of Islam. These guidelines include,among others, enactment of laws to provide for necessary prudential measures toensure transparency, inter alias, along with the lines of the Freedom of InformationAct, the Privacy Act and the Ethics Regulations of the United States, and the FinancialServices Act of the United Kingdom; establishment of institutions like the UK seriousFraud Office to control white collar economic crimes; establishment of credit ratingagencies 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 moneylending) that would cease to have effect from 31.03.2000 and others that would ceaseto 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 shownits willingness to implement itTipu Salman MakhdoomJURIST Pakistan Correspondent
U turn by Supreme Court.
Pakistan's Supreme Court has reversed its own ruling that outlawed charging interest
 
on bank transactions as un-Islamic.The case has been referred back for further deliberationThe Islamic or Shariat bench of Pakistan's Supreme Court in 1999 ordered thegovernment to abolish the interest charges, known as "riba".The u-turn comes just six days ahead of the deadline set by the Supreme Court for financial institutions in the country to adopt the Islamic system of banking.A number of financial institutions had warned the government the new system wasnot viable and some of the foreign banks hinted they might have to shut down their operations in the country.Financial appealThe court's original ruling more than two years ago clearly stated that all forms of interest charged during the financial transactions falls into the category of riba, whichaccording to the Islamic teachings, is forbidden.An appeal by Pakistani banks for the court to review its earlier decision was backed by the government, which claimed the initial ruling was flawed and that modern banking was not against Islamic principles.The government also argued interest-free banking would create a financial anarchy inthe country.The country's Conservative Islamic Lobby was outraged and some religious groupssent their own lawyers to defend the earlier ruling.Despite the court's u-turn, it has sent the case back to the Federal Shariat Court to startfresh hearings.Analysts expect this may take several more years, giving the government some breathing space to carry on with its policies to try to revive the country's falteringeconomy.The point that I am trying to make here is simply this.The whole idea that Interest Free society can not exist, or Riba is a Mullah issue is
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