The Federal Shariat Court (FSC) on Thursday ruled that the elimination of interest (riba) is a legal obligation as per Islamic injunction as it ordered the government to eradicate the interest-based banking system by the end of 2027.
The decision was made on petitions against riba after the Supreme Court referred the case back to the court in 2002 following the appeals against the decision of the FSC.
In its order after hearing the case for at least 17 years, the federal court said interest-free banking was possible all over the world and it disagreed with the government’s argument which had cited negative impacts of the interest-free banking model.
It said the elimination of interest was a religious and legal obligation as parliament had already agreed to make sharia-compliant laws. The ruling read out by FSC Justice Syed Mohammad Anwar said the amount received by the banks that exceeded the actual loan fell under the category of interest. “Every kind of interest of banks is called riba,” it added.
The ruling said that the Islamic banking system was “risk-free and against exploitation” and added that eradication of riba from society was one of the basic Islamic injunctions. The court also banned the payment of interest over late payment of bank loans. “The government should immediately remove the word ‘interest’ from all laws,” the decision said
The court further directed the government to take internal and external loans under an interest-free system and added that an interest-free system would be more beneficial.
It declared the West Pakistan Money Laundering Act and the Interest Act 1839 against Shariah. “All laws and regulations that facilitate interest are considered illegal,” the court said, adding that such laws should be abolished from June 1, 2022.
The Shariat Court said it was understood that the transition towards an Islamic system would take time but the bank’s deposit “could be cleared of riba immediately”. The court also said it could not understand why the government needed more time to eliminate the riba system since the case had been pending for 17 years.
In its arguments, the federal government had argued that the interest-based could not be eradicated as it would damage the already fragile economy. It had supported a parallel interest-free banking system already functioning in Pakistan. It had also urged the court to leave this matter to parliament as it had far-reaching consequences.
