SBP, four banks challenge in SC FST verdict on interest

ISLAMABAD: The State Bank of Pakistan (SBP) and four private banks Saturday challenged in the Supreme Court decision of the Federal Shariat Court declaring the present interest-based banking system against the Sharia, directing the government to switch to an interest-free economy.

Salman Akram Raja filed an appeal on behalf of the SBP under Article 203F (1) of the Constitution with respect to the judgment passed by the Federal Shariat Court April 28, 2022.

The SBP has made Dr. Mahmoodur Rehman Faisal, Chairman of the Tehreek-Inqlaab Islam, Ministry of Law and Justice, Ministry of Finance, Banking Council of Pakistan and Attorney-General of Pakistan as respondents.

In its appeal, the State Bank of Pakistan appreciated the spirit and the intent that has led to the substantive provisions of the judgment delivered by the Shariat Court April 28, 2022. However, it sought clarifications, as there are certain discrepancies in the judgment.

The SBP submitted that being the premier custodian and regulator of the financial and monetary framework of the Islamic Republic of Pakistan is deeply committed to ensuring compliance with the injunctions of Islam, in particular those pertaining to riba, while protecting the stability and security of the financial sector of the country that functions as part of the global financial system.

The appellant can, with considerable justification, take pride in the furtherance of the Islamic banking sector in Pakistan as a critical and growing part of the financial sector as a whole, the SBP submitted, adding that these efforts are noted by the Federal Shariat Court in its judgment of April 28, 2022, in paragraphs 82 to 88.

It further submitted that a gradual approach for the transformation of banking system into Shariah compliant banking was adopted at the start of this millennium wherein both the Islamic and conventional banks were allowed to operate simultaneously in the country.

This approach has proved to be a success and the Islamic banks now accounts for 19.4 percent of the country’s overall banking system in terms of assets while in terms of deposits the share is 20 percent (as of March 31, 2022). Currently, 22 Islamic Banking Institutions (IBIs) (5 full-fledged Islamic banks and 17 conventional banks having standalone Islamic banking branches) with a branch network of 3,983 branches along with 1,418 Islamic banking windows (Islamic banking counters at conventional branches) are operational across the country, the SBP contended.

It was further submitted that (SBP) has also been taking measures to bring the legal and regulatory infrastructure in compliance with Shariah principles.

It recalled that the SBP is among the few regulators in the world that have introduced a comprehensive legal, regulatory and Shariah compliant framework for Islamic banking.

The SBP submitted that in paragraph 132 on page 248 and paragraph 158 on page 287 of the judgment dated April 28, 2022, the FSC has directed that future financial engagements, including the availing of loans and advances, between Pakistan and international financial institutions and other bilateral as well as multi-lateral providers of finance be carried out on the basis of Shariah compliant modes of finance such as the issue of Sukuk.

The SBP submitted that the issuance of Sukuk or other similar instruments in the required quantum and frequency is presently not practical, adding that the assets available for the structuring of Sukuk transactions are limited.

The SBP submitted that a summary of the Sukuk issues made on behalf of the federal government or other instrumentalities of the federation is placed herewith the instant appeal while guidance is respectfully sought from the apex court as regards the directions made by the FSC with respect to savings certificates and domestically raised public debt in general.

The State Bank of Pakistan prayed the apex court that the judgment of the Federal Shariat Court of April 28, 2022, may kindly be modified so as to address the issues respectfully raised in the instant appeal.

It is pertinent to mention that on April 28, 2022, a three-member Federal Shariat Court headed by Chief Justice Muhammad Noor Meskanzai and comprising Justice Dr Syed Muhammad Anwar and Justice Khadim Hussain M Sheikh had declared that the prohibition of riba (interest) was absolute in all its forms and manifestations according to the injunctions of Islam and in accordance with the Holy Quran and Sunnah. Therefore, it should be eliminated from the country in five years.

The bench had held that five years period was reasonably enough for the implementation of the decision completely i.e convert economy of Pakistan into, equitable, asset-based, risk sharing and interest-free economy

“Therefore, we would specify the 31st day of December 2027 on which the decision shall take effect by way of the complete elimination of riba from Pakistan,” the FSC had held.