Role of Religion in Legal Reform
Islam was the basis of creation of an independent state (namely, Pakistan) within the undivided Indian Sub-Continent in 1947. Debate concerning the appropriate role of Islam in the political process and legal rule making have since then been in the fore front in Pakistan, the newly created ‘Muslim homeland’. Pakistan took nine years to adopt its first constitution and the major reason for the delay was the contention over prospective Islamic provisions in the document.
Similarly, on the basis of Islamic precepts, since the emergence of Pakistan, there has always been a strong demand for Islamization of the entire financial market in Pakistan and as such, all Constitutions of Pakistan have incorporated, within the principles of policy, the elimination of Riba (or interest) as an important objective of the State policy. In the revolutionary Riba judgment : Dr. M. Islam Khaki & Others vs. Syed Muhammad Hashim & Others, P.L.D. 2000 (Supreme Court 225), the Supreme Court of Pakistan in 1999 defined Riba as :
“Any amount, big or small, over the principal, in a contract of loan or debt, is Riba, prohibited by the Holy Quran, regardless of whether the loan is taken for the purpose of consumption or for some production activity.”
It is worth mentioning that there is a striking difference between a ‘secular capitalist system’ and an ‘Islamic capitalist system’. In a ‘secular capitalist system’ loans (or debts) are purely commercial transactions which would yield a fixed income to the lenders. Islam, however, does not recognize loans as ‘income-generating transactions’. Justice Maulana Muhammad Taqi Usmani in the Riba Judgement commented that “They (loans) are meant for only those lenders who do not intend to earn a worldly return through them. They (lenders), instead, lend their money either on humanitarian grounds to achieve a reward in Hereinafter, or merely to save their money through a safer hand.”
Islam has prohibited Riba. It is interesting to note that the prohibition of Interest is not limited to Islam only, but it is shared by Judaism and Christianity as well. Some of the old testaments have rendered Riba as ‘unethical’ (See Exodus 22:25, Leviticus 25:35-36, Deutronomy 23:20, Psalms 15:5, Proverbs 28:8, Nehemiah 5:7 and Ezakhiel 18:8,13,17 & 22:12). Similarly, Agibi Bank was established circa 700 B.C. in Babylonian and functioned exclusively on equity basis. The Holy Quran has mentioned the prohibition of Riba as follows:
“That which you give as interest to increase the peoples' wealth increases not with God; but that which you give in charity, seeking the goodwill of God, multiplies manifold.” (Surah Rome, Verse 39, The Holy Quran) “And for their taking interest even though it was forbidden for them, and their wrongful appropriation of other peoples' property. We have prepared for those among them who reject faith a grievous punishment.” (Surah al-Nisa', verse 161, The Holy Quran) “Believers! Do not swallow riba, doubled and redoubled, and be mindful of Allah so that you may attain true success” (Al Imran, Ayat 130, the Holy Quran) “Those who spend their wealth night and day, secretly and openly, they have their reward with their Lord ... Those who take riba (usury or interest) will not stand but as stands the one whom the demon has driven crazy by his touch. That is because they have said: Trading is but like riba. … Allah destroys riba and nourishes charities. …O those who believe, fear Allah and give up what still remains of the riba if you are believers. But if you don not, then listen to the declaration of war from Allah and His Messenger.” (Verses of Surah Al Baqarah: 274-281, the Holy Quran.).
Spirited by Islamic precepts, Pakistan, being an Islamic country from its onset, created the Council of Islamic Ideology (CII) in 1962. Efforts for economy wide elimination of Riba in Pakistan started during 1970s. In June 1980 the CII published a report on ‘Elimination of Riba’. This report highlights various prospects of Islamic banking and finance in Pakistan. While presenting a paper on “Evolution of Islamic Banking” in a seminar organized by Meezan Bank Ltd. in Karachi, Pakistan on February 12, 2004, Dr Ishrat Hossain, the Governor of the State Bank of Pakistan, claimed that this report is genuinely considered to be the first major comprehensive work in the world undertaken on Islamic banking and finance.
Following the report, in early 1980s, Pakistan took a number of practical steps to eliminate Riba from its financial economy. For example, elimination of interest from the operations of Specialized Financial Institutions (July, 1979 to July, 1985) and the commercial banks (January, 1981 to July, 1985); Commercial banks transformed their nomenclature during January 1981 to June 1985; from July 1, 1985 all commercial banking in Pak Rupees was made interest-free; Banking and other relevant laws viz. State Bank of Pakistan Act, Banking Companies Ordinance, Recovery Laws, Negotiable instruments Act, Companies Ordinance, etc. were amended to facilitate Riba free banking system.
Simultaneously, the judiciary in Pakistan in a series of cases declared that financial interest (Riba) of any kind as un-Islamic [Irshad H. Khan v. Parveen Ajaz, P.L.D. 1987 (Kar 466)]; collection of Riba is un-Islamic [Habib Bank v. Muhammad Hussain, P.LD. 1987 (Kar 616)]; Riba was not in the public interest [Shahbazad Chaudhry v. Services I. T. Ltd, P.L.D. 1988 (Lah 1)] or provisions in the Negotiable Instruments Act 1881 that provided for fixed interest rates were un-Islamic [Aijaz Haroon v. Imam Durrani, P.L.D. 1989 (Kar 304)].
Since 1984, Islamic Banking has become a popular notion in Pakistan. Pakistan opted for operating a Riba-free banking system using various Islamic modes of financing under the traditional legal and regulatory regime. It is stated that this Riba-free banking system was introduced in Pakistan as a part of the process of Islamization of financial markets therein. However, many of the Islamic modes of financing practised in Pakistani Banking System were challenged in the court of law in early 1990s claiming to be not consistent with pure Islamic precepts. In November 1991, such procedure adopted by banks was declared un-Islamic by the Federal Shariat Court (FSC).
Upon such declaration, the Government and some banks/DFIs preferred appeals to the Shariat Appellate Bench (SAB) of the Supreme Court of Pakistan. On December 23, 1999, the SAB adjudged the application of some of the most commonly used of these Islamic modes of financing under the Riba-free banking system to be inconsistent with the injunctions of Islam. This decision, popularly known as ‘Riba judgment’, has been striking in nature. This is because the Shariat Appellate Bench (SAB) of the Supreme Court of Pakistan in that judgment consequently ordered the total transformation of the entire existing financial system of Pakistan, both banking and non-banking, to one conforming to Shariah.
Therefore, the Riba Judgment initiated a new dawn of financial islamization in Pakistan. The economy was directed to move from Islamic Banking to an entire Islamic financial economy. It is very interesting to note that even though, on June 24, 2002, the Supreme Court of Pakistan upon a review petition, quashed its earlier judgment of December 23, 1999 on Riba and further remitted the cases to the FSC for fresh determination [United Bank Limited v. M/S Farooq Brothers etc., Supreme Court of Pakistan Order announced at Islamabad on June 24, 202 (unreported)], the government of Pakistan as a matter of policy, announced its willingness to promote Islamic financial system in the country [Paras. 53-54, Budget Speech, Minister for Finance & Economic Affairs, 2001-2002; Para. 90, Budget Speech, Minister for Finance & Economic Affairs, 2002-2003].
The government of Pakistan has already taken a number of steps in this regard, such as, - Issuance of detailed criteria for establishing Islamic commercial banks. In December 2001, the State Bank of Pakistan issued the detailed criteria for establishment of Islamic commercial banks in the private sector.
- Issuance of licence to Meezan Bank Limited to operate as a model Islamic bank. In January 2002, Meezan Bank Limited was issued a licence to operate as a full-fledged Islamic bank in Pakistan.
- Adopting several measures by the State Bank of Pakistan for capacity building in the areas of Islamic banking. In this regard, a full-fledged Islamic Banking Department has been created within the State Bank of Pakistan that would serve as a focal point for all matters relating to Islamic banking and finance in the country. The National Institute of Banking and Finance of State Bank (NIBAF) has started training of State Bank of Pakistan personnel in Islamic Finance; courses of Institute of Bankers Pakistan were revised to include topics on Islamic economics, banking and finance. Some other institutions like International Islamic University, Islamabad and Centre for Islamic Economics, Karachi have also conducted training courses in Islamic baking.
- Revising necessary regulations. For example, in order to allow existing banks to open subsidiaries for Islamic banking, section 23 of Banking Companies Ordinance 1962 has been amended and now the banks are authorized to open subsidiaries for Islamic banking. Also, House Building Finance Corporation Act has been amended to make its financing Shariah compliant.
- Setting up of a committee in the Institute of Chartered Accountants Pakistan (ICAP) for development/review and adoption of accounting standards for Islamic modes of financing. The Committee is reviewing the accounting standards prepared by Accounting and Auditing Organization for Islamic Financial Institutions, Bahrain (AAOIFI) with a view to adapt them to Pakistani circumstances and if considered necessary to propose new accounting standards.
- Issuance of Ijara Sukuk (government bond) based on Shariah. Ijara Sukuk is expected to replace the present T-Bill system in due course of time.
- Constitution of the Shariah Board of the State Bank of Pakistan. This board will supervise the Islamization of the financial system in Pakistan (“Islamization of Economy : Sharia Board to be Constituted”, The News, March 5, 2004).
It appears from the above discussion that the government of Pakistan decided at the initial stage to promote Islamic banking on parallel basis with conventional system, however, it aims today at achieving an entire Islamic Financial System for Pakistan in near future. The government of Pakistan is not leaving any stones unturned in this regard. The Ministry of Finance sought the technical assistance from the IMF for the Islamic transformation of financial system. It also seems that Pakistan has been successful in making the international donor agencies receptive to Islamic banking and financial system in Pakistan.
Besides, the State Bank of Pakistan has become one of the founding members of Islamic Financial Services Board. It may be mentioned that The Islamic Financial Services Board (IFSB) was established with the signing of the Articles of Agreement of the IFSB on November 03, 2002 by the founding members. These included Bahrain Monetary Agency, Bank Indonesia, Bank Markazi Jomhouri Islami Iran, Central Bank of Kuwait, Bank Negara Malaysia, State Bank of Pakistan, Saudi Arabian Monetary Agency, Bank of Sudan and Islamic Development Bank.
It may be stated that the ongoing process of islamization of financial system in Pakistan offers a different kind of “Law and Development Theory” to the rest of the world. Pakistan essentially recognizes that economic growth is the main transmission channel for development, however, believes that Islam does not contradict growth, rather Islam promotes sustainable development and growth. Pakistan follows the footsteps of non-Western countries like Bahrain, Malaysia, Sudan and Iran, the countries which have already made efforts for transformation of part of their economies to Islamic principles.
Example of Pakistan makes us to reshape our notions of legal reform in the context of law and development movement in developing world. We have seen that the legal reform in financial system in Pakistan is essentially linked with religious institutions of Islam. Pakistani experience suggests that measures relating to law and development movement might be linked with the religious aspects of a community. In other words, Pakistani example essentially establishes that religion does have a role to play in legal reform. Law and Development Movement theories (Modernization Theory, Dependency Theory, Institutional Theory and Micro-Development Theory) which currently provide the backdrop ideology to the development planners, both at national and international level, do not appreciate this aspect of religion in development planning.
This in turn takes us to generally realize the importance of ‘legal culture’ in legal reform for development. It is suggested that any legal reform must take into account the ‘legal culture’ of the target economy. The wholesale ‘legal transplantation’ from developing world might not be a good idea for development planning in developing world as the recipient legal culture might be resistant to the imported legal rules and regulations. If such conflict between two legal cultures (home-brewed and imported legal culture) remains for long, it will surely affect the pace of development.