Annexure in MS EXCEL:   annex 1      annex 2

DEDICATED TO

 Late Professor Shaikh Mahmud Ahmad.

He was Pakistan’s most outstanding economist and research scholar. He conceived the idea of institutionalizing Islamic principle of Qard Hasan. He devised a financial instrument based on Qard Hasan and named it Time Multiple Counter Loan-TMCL which can perform in Islamic way all the financial intermediation functions performed by interest in the modern banking system. He pleaded for eliminating interest by replacing it with TMCL in the banking system. May Allah reward him graciously for his magnificent and unique effort in devising practicable way to interest-free banking. The writer of this booklet has drawn freely from the valuable arguments and information given in his most precious books ‘Towards Interest-free Banking’ in English and ‘sood ki mutabadal assas’ in Urdu.

FOREWORD

“O YE WHO BELIEVE FEAR ALLAH AND

GIVE UP WHAT REMAINS OF INTEREST

IF YE ARE BELIEVERS AND IF YE DO IT

NOT BE WARNED OF WAR FROM ALLAH

AND HIS RASOOL (SAWS)… .” (2:278,279)

THE PRELUDE

If the above Quraanic Command and Warning are properly understood and heeded no Muslim can ever undertake any interest-based business, no Muslim economist can ever suggest continuation of interest-based transactions for any reason and no Muslim ruler can ever permit interest-based transactions in any circumstances, because nothing can be as disastrous as an act of war against Allah and His Rasool saws.

THE TRAGEDY

In total disregard of the ideological base of our country, our economy managers in collusion with self-serving corrupt rulers and vested interests, promoted interest-based policies and ruined the economy to such an extent that even for debt servicing we have to beg for fresh loans and when a loan on interest is doled out to us for meeting a debt commitment it is pronounced to be a sign of recovery of economy whereas in fact it increases our debt burden and leads the country to drown ever deep into the debt morass. Merchants of Venice are dictating conditionalities and pushing us into economic slavery. They are near grabbing our strategic and profit earning installations like PTCL to permanently disable us to come out of the debt trap.

THE REMEDY

Rekindle the faith in Allah’s Message and arouse the belief that abiding by Islamic teachings always brings good results and that whatever is ordained in Quraan is practicable at all times and in all circumstances. And resolve to finish immediately the disastrous on-going war against Allah and His Rasool saws by abolishing interest at once in one stroke as gradualism in eliminating interest amounts to step-by-step cease-fire which is an absurdity.

THE CHALLENGE

The final verdict of the Supreme Court of Pakistan (Shariat Appellate Bench) in the Riba case that interest in all its forms is Riba prohibited in Quraan has shifted the debate to the question as to what is the alternative financial instrument which can effectively replace interest in the modern banking system. Advocates of interest are trying hard to convince the concerned authorities that such an alternative does not exist and that even Islamic banks including their leader Islamic Development Bank cannot do without interest. They are pointing out shortcomings of Islamic banks to frustrate the movement for abolition of interest. One of them Dr.Aqdas Ali Kazmi has posed pinching questions about Islamic banks in an article published in DAWN of 12^th Feb 2000, of which the following quoted challenging questions are difficult to answer because Islamic banks have not yet felt the compulsion or necessity to commence pure lending operations like conventional banks. Adoption of TMCL as loaning device for lending operations will enable the Islamic banks to overcome their shortcomings and attain true Islamic character.

(i)         Is there any single bank in the Islamic or Non-Islamic world which is truly run on an interest-free basis?

(ii)        Can a Central Bank conduct its monetary policy without a norm of interest?

(iii)       Are not the practices of Islamic banks a queer blend of interest-based modes of finance carrying a façade of Islamic names?

(iv)       What are exactly the Islamic compliant instruments of finance? Can these instruments meet the             myriad and diverse needs of modern trade, finance and banking?

(v)        When and where have these instruments been applied and with what degree of success?

(vi)       Does the Islamic Development Bank as the model Islamic bank operate on interest-free basis? If             that is the case why did it offer to extend a loan to the government of Pakistan after nuclear             detonation at an interest rate of 5% above LIBOR?

(vii)      By what mechanism can Islamic banks undertake financial intermediation which is the primary             function of all commercial banks throughout the world?

THE ANSWER

Satisfactory answer to all the above quoted challenging questions lies in true Islamic banking based on TMCL which is the Islamic alternative of interest. Just as it is absurd to conclude from the failings and shortcomings of millions of Muslims that Islamic teachings are impracticable, it is also absurd to conclude from the shortcomings of existing Islamic banks that interest-free true Islamic banking is impracticable and that there is no equally efficient and effective Islamic alternative financial instrument which can replace interest in the banking system. This booklet amply demonstrates that the non-exploitative Islamic financial instrument TMCL which is based on Islamic concept of Qard Hasan is as effective and efficient lending instrument as interest and that it can perform in Islamic way all the financial intermediation functions performed by interest in the modern banking system and that TMCL can easily replace interest in one stroke without causing any disruption in the banking system.

THE PROCEDURE 

i)          Enforce immediately total ban on interest-based transactions and declare negotiations for any such transaction to be a cognizable offence. 

ii)        Enforce immediate total ban on interest-based saving schemes and prize bonds. 

iii)        Order immediate stoppage of all interest payments and receipts in the country and declare paying and charging of any interest to be cognizable offence. Our Prophet Mohammad saws who was of all mankind the most just, the most truthful and the most benevolent person and whose ways are all exemplary, invalidated all interest earnings which were due for payment on debts outstanding at the time of revelation of the Quraanic verse prohibiting interest. The method for retiring government domestic debts under TMCL banking system is fully described in this booklet. 

iv)        Order immediate commencement of negotiations for converting domestic outstanding interest-based loans into TMCL-based transactions. 

v)         Order all banks and financial institutions to immediately stop granting of loans on interest and commence granting of loans on TMCL basis. 

vi)         Howsoever urgent a requirement may be, no fresh foreign loan on interest shall be taken. Avoiding an act of war against Allah and His Rasool saws is far more urgent a requirement than any other requirement. However outstanding foreign debt commitments shall have to be fulfilled, although foreign lenders can be requested to accept suitable alterations in loan contract agreements. The method for retiring foreign debts under TMCL banking system is fully described in the booklet.  

THE REWARDS

 The booklet demonstrates how TMCL-based banking will raise loaning capacity of banks, reduce un-employment, increase production, raise government revenues, enable the country to retire foreign and domestic debts and save large sums of money for spending on development and social welfare projects.

Adoption of TMCL as loaning instrument by Islamic banks will bring the following benefits to Islamic banks and the Muslim ummah; 

1.    It will facilitate inter-bank interest-free loan transactions. 

2.    It will facilitate setting up of a Central Depository for mobilizing surplus funds of Islamic banks and governments on TMCL basis and advancing to them in times of need TMCL-based interest-free loans.

3.    It will facilitate utilization of the financial resources of the Muslim ummah in developing Muslim countries through the Central Depository, instead of being diverted to western financial markets.

 10-11-2000                            Abdul Wadood Khan                        

PROHIBITION OF INTEREST AND GOVERNMENT’S DUTY

 Interest is so severely prohibited that Quraan holds warding off interest as condition of Iman and declares war from Allah and His Rasool saws against perpetrators. If Allah’s message has any meaning interest cannot exist in any Muslim society. However during the past several decades our economy managers promoted interest-based policies which ruined the country’s economy.

In its exhaustive judgment of 23rd Dec. 1999, Supreme Court of Pakistan (Shariat Appellate Bench) finally set aside all the misleading contentions in support of interest and held that interest in all its forms, big or small, and regardless of the purpose of loan, is Riba prohibited by the Holy Quraan. The apex court also passed an order to transform the existing financial system to the one conforming to shariah.

Now the die-hard advocates of interest have started propagating that there is no viable alternative of interest and that the whole banking system will be disrupted if any attempt is made to eliminate interest. This booklet demonstrates that TMCL (Time Multiple Counter Loan) is as good a loaning instrument as interest and that it can effectively replace interest instantly without any difficulty and disruption in the banking system. The last chapter gives solutions of all the problems regarding elimination of interest, raised by the previous government in its petition of 13-2-1999 to the Federal Shariat Court.

Elimination of interest is the fundamental prerequisite for Islamizing the banking system and saving the country from drowning ever deep into the debt morass. It is a wrong notion that elimination of interest will be harmful if it is enforced without first bringing about other radical improvements in the socio-economic structure. Islamic way of evolutionary process for eradicating evils from the society is to struggle for finishing all evils and not to make elimination of one evil dependent on the elimination of other evils because such an approach sets up a vicious circle of evils and no evil is finished. Extinction of interest alone may not cure all economic evils, but it will certainly bring immense good as it will finish the on-going war with Allah and His Rasool saws. Task to reform the entire socio-economic structure must be undertaken but it will be a folly to postpone elimination of interest and continue warring against Allah and His Rasool saws which would only aggravate socio-economic miseries and render accomplishment of reform task impossible.

Our finance and economy managers will do well if they ignore baseless contentions and unfounded fears propagated by advocates of interest and instead pay heed to Allah’s warning in Quraan : “WHOSOEVER VIOLATES MY COMMANDS VERILY FOR HIM LIVELIHOOD WILL BECOME DISTRESSFUL” (20:124).

They should proceed unhesitatingly to implement Divine Command to abolish interest laying trust in Allah’s assurances in Quraan : “WHOSOEVER FOLLOWS MY GUIDANCE WILL NOT LOSE HIS WAY NOR FALL INTO MISERY” (20:123) and : “TO HIM WHO BELIEVES IN ALLAH AND THE LAST DAY AND FOR THOSE WHO FEAR ALLAH HE (ever) PREPARES A WAY OUT. AND HE PROVIDES FOR HIM FROM (sources) HE NEVER COULD IMAGINE. AND IF ANYONE PUTS HIS TRUST IN ALLAH, SUFFICIENT IS ALLAH FOR HIM” (65:2,3).

The apex court order is final, unchallengeable and binding upon the government. It is comprehensive, unequivocal and exact and leaves no loop-hole or excuse whatsoever for allowing the curse of interest to continue to ravage our economy.

Rule of law demands enforcement of the apex court order and as such it is the bounden duty of the government to ensure elimination of interest and earn Allah’s blessings which are necessary for taking the country out of the social and economic turmoil.

Nothing can be as repugnant to common sense as to suggest division of a Divine Command into parts and recommend elimination of interest in several phases. At any point of time one can be either a faithful or a rebel and either at peace or at war but in no case both faithful and rebel or partly at peace and partly at war. Fundamental principle of Islamic jurisprudence is that the shariah laws which had reached finality during the lifetime of our Prophet saws must be fully implemented at once and not in parts. Every Divine Command was acted upon immediately after revelation. Clearly gradualism in abolishing interest is an absurdity.

Upshot of the above discussion is that in order to save themselves and the nation from Allah’s wrath arising from indulgence in the most heinous crime in Islamic jurisprudence, our rulers should at once stop interest-bearing savings schemes and put a complete ban on taking fresh loans on interest and on paying and charging of interest and declare it to be a cognizable offence with immediate effect. This can be done by issuing an ordinance as has been done in the past on many occasions. The time schedule given in the apex court order should be used only for legislation and framing of rules and procedures and not for continuing interest-based activities. Hon. Justice Wajihuddin Ahmad has aptly stressed in the judgment “There should be no misgivings, in any quarters that this or the Federal Shariat Court would brook any unnecessary delay during the implementation phase of the judgment of this Court. Thus, time schedule or not, no one, be it the government itself would any longer be countenanced to conduct any further avoidable Ribawi dealings, here or with the outside world. Transgressions, if any, can be appropriately brought to the notice of the Court”.

ISLAMIC ALTERNATIVE OF INTEREST

Modern banking system has played a key role in the economic and industrial development by providing finance widely and freely to industry and trade through interest-based credit and loans, although interest payments are exploitative as these are from those who have money less than what they need to those who have money in excess of their needs. Islamic approach to un-Islamic institutions has throughout been to use them beneficially after eliminating un-Islamic elements from them. After the conquest of Makkah, only the idols from Kaabah were removed and every thing else was left intact. Umer-bin-Khattab rta instructed governors appointed in newly conquered territories not to interfere in the local customs and traditions unless there was something un-Islamic in them. In our case sensible strategy is to make the established banking system Islamically acceptable by injecting only essential modifications most important of which is to replace interest by a non-exploitative Islamic lending device which can perform in Islamic way all the financial intermediation functions performed by interest in the present system.

Basic objective of Islamic Financial System is need fulfilment and needs may be for financing industry, trade, agriculture or consumption. For need fulfilment Zakat and Qard Hasan are Islamic financial instruments. Zakat caters for the needs of the poor and destitute whereas Qard Hasan caters for financial needs of others. Qard Hasan is loaning without additional charge over and above the principal amount. It can be used widely and freely in financial intermediation between those having money in excess of their needs and those having money less than their needs and that is what the banks do.  It is absolutely wrong notion that Qard Hasan is meant only for the poor and destitute and not for development financing. Islam actually encourages widespread use of Qard Hasan for need fulfilment as according to a Hadith of our Prophet saws reward for lending is eighteen times whereas reward for charity is ten times. There is no bar in Islam on borrowing for business or production. Only those borrowers who do not repay loans are severely reprimanded.

Practical application of Qard Hasan for eliminating interest is strongly recommended in the research thesis ‘PREVENTIVE MEASURES IN ISLAM AGAINST INTEREST’ on which Dr.Fazl-e-Ilahi was awarded Ph.D. He has emphasized in his thesis the vital role which Qard Hasan can play in abolishing interest. He concluded the chapter on Qard Hasan with the assertion “expanding the field of this way of lending will by Allah’s grace, aid in blocking the way of interest. Therefore in this context I urge upon all those who want to abolish interest to do whatever they can to expand the field of this way of lending”.

Council of Islamic Ideology in its report of June 1980 held profit/loss sharing or Qard Hasan to be ideally the real alternatives of interest under an Islamic Economic System. Profit/loss sharing system cannot meet the financial needs of credit-worthy entrepreneurs unwilling to share profit. Credibility of most of the entrepreneurs willing to share profit is doubtful. Council of Islamic Ideology also acknowledged in its report “difficulties faced in the practical application of the profit/loss sharing system in its pure form on account of the prevalent standards of morality in the society”. Thus in our circumstances Qard Hasan remains the only ideal practicable alternative of interest.

Late Professor Shaikh Mahmud Ahmad (identified in the apex court judgment as our country’s most outstanding economist and researcher) devised a financial instrument based on Qard Hasan and named it TMCL-Time Multiple Counter Loan. It can perform in Islamic way all the financial intermediation functions of interest-based banks. Perhaps because he was not a professional economist TMCL did not get any publicity. Also it did not receive any official attention because self-serving past rulers of our country had no will to abolish interest and pull the country out of the debt morass. Now, for implementing the apex court’s order, our economy managers must genuinely be looking for a true Islamic alternative of interest which can effectively replace interest swiftly and easily without any disruption in the banking system. TMCL meets all these requirements and it is the surest, simplest and quickest means to convert the present banking system into interest-free system. This objective cannot be achieved by the banking products currently used by Islamic banks.

A TMCL transaction between two parties consists of two simultaneously executed separate interest-free loan (Qard Hasan) contracts such that the multiple of the amount and period of one loan equals the multiple of the amount and period of the other loan. It facilitates interest-free borrowing of large amounts against counter loans of much smaller amounts advanced for proportionately longer periods. For example, an entrepreneur needing Rs. 10 million for one year can get this loan (against collateral as at present) by advancing a loan of Rs. 1 million to the bank for 10 years. Thus TMCL fulfils the client’s financial need and also enables the bank to earn profit from long-term investment of the counter-loan money. The bank does not earn any interest on the loans advanced by it and whatever gain or loss it earns comes from long-term investment of counter-loan amounts which are actually borrowed sums and in Islam there is no bar on investing borrowed sums in business.

In a TMCL transaction the bank and the client do good to each other and as such it conforms with the Quraanic precept “Hal jaza-ul-ihsan illa-al-ihsan” and the noble teaching of our Prophet saws that a favour done to any one should be reciprocated. TMCL also paves the way to interest-free banking which is the most urgent need of the Muslim ummah and particularly of Pakistan at the present juncture.

OPERATION OF TMCL-BASED INTEREST-FREE BANKING SYSTEM

1.     GENERAL

Replacement of interest by TMCL is the surest, simplest and instant means to eliminate interest without any disruption in the banking system. In the interest-free regime banks will continue to function as at present with the following basic changes.: 

(i)               No interest will be charged or paid 

(ii)              Transactions involving credit will be based on TMCL 

(iii)             Instead of earning interest, banks will earn profit by investing in shariah-compliant modes of their choice

Excepting compliance with applicable foreign exchange regulations same procedures will apply to local and foreign currency accounts and transactions. Following salient features of TMCL-based Banking make it quite clear that switch-over to interest-free system can be carried out smoothly without any interruption or difficulty. 

2.   ADVANCEMENT OF LOANS

All loans will be interest-free and will be advanced on TMCL basis (against collateral as at present). In the beginning time multiple ratio in TMCL is proposed to be ten which can be altered later on, if necessary. For example a loan of Rs 10.0 M required for one year will be granted against counter-loan of Rs 1.0 M advanced to the bank for 10 years. If the borrower requires extension in the repayment period the bank may agree to it if the borrower advances another appropriate counter-loan to the bank. For example if an extension of 3 months is required in the above mentioned case the bank would require the borrower to advance another counter-loan of Rs. 0.25 M for 10 years. If the borrower is unable to advance another counter-loan, the bank may accept his request if he agrees to receive his original counter-loan money from the bank in 12 ½ years instead of 10 years. In the event of default the bank may make recovery from collateral or through legal action as at present. In case of delay in recovery the bank may retain the borrower’s counter-loan money for an appropriate extended period. 

In certain cases, if so needed by the borrower or the bank, they may agree on any time multiple ratio other than the normal ratio. Normally the Monetary Authority need not interfere in this matter, but if at any stage it is considered necessary, for controlling the credit availability or for any other reason, the Monetary Authority may fix the time multiple ratio or vary it periodically. 

3.   SETTLEMENT OF OUTSTANDING INTEREST-BASED LOANS

Upon interest becoming illegal, outstanding interest based loans will have to be converted into TMCL-based transactions. The borrower will repay the principal amount of the loan on due date and instead of paying interest, the borrower will advance to the bank a counter-loan such that the multiple of the loan amount he took and the period of the loan availed equals the multiple of the counter-loan amount and the period of counter-loan. Interest already paid prior to initiation of interest-free regime will not be subject to recovery. 

Example 1: Loan of Rs. 10.0 M was taken from bank for 1 year and is now due for repayment in the interest-free regime. The borrower will repay the principal amount Rs. 10.0 M to the bank and instead of paying interest will advance to the bank counter-loan of Rs. 10.0 M for 1 year or by mutual agreement Rs. 5.0 M for 2 years, or Rs. 2.0 M for 5 years, or Rs. 1.0 M for 10 years etc. 

Example 2: Loan of Rs. 10.0 M was taken from bank for 2 years of which 1 year has passed and no interest has been paid. The borrower will return the principal amount Rs. 10.0 M on due date and instead of paying interest will advance a counter-loan of Rs. 10.0 M to the bank for 2 years or by mutual agreement Rs. 5.0 M for 4 years, or Rs. 4.0 M for 5 years or Rs. 2.0 M for 10 years etc. 

Example 3: Loan of Rs. 10.0 M was taken from bank for 2 years of which 1 year has passed and interest for 1 year has been paid. On due date falling in interest-free regime the borrower will return the principal amount Rs. 10.0 M to the bank and instead of paying interest for the 2^nd year will advance counter-loan of Rs. 10.0 M to the bank for 1 year or by mutual agreement Rs. 5.0 M for 2 years, or Rs. 2.0 M for 5 years, or Rs 1.0 M for 10 years etc. 

4.    ENCASHMENT OF BILLS, BONDS, DEBENTURES ETC.

As no interest will be payable in interest-free regime bills, bonds and all such other interest-bearing documents will be encashed at face value and the interest content in them will be converted into appropriate TMCL such that the multiple of the amount and the period availed equals the multiple of the amount and the period of counter-loan. Interest payments already made prior to initiation of interest-free regime will not be subject to recovery. 

Example 1: As per contract A provided to B goods/services for Rs. 1.0 M payable after 1 year. A draws a bill of Rs. 1.0 M on B payable after 1 year and sells the bill to C against cash payment of Rs. 0.90 M. On maturity date falling in interest-free regime C presents the bill to B for payment. B will pay Rs. 0.90 M to C and Rs. 0.10 M to A and A will advance an interest-free loan of Rs. 0.90 M to C for 1 year or by mutual agreement Rs. 0.45 M for 2 years or Rs. 0.10 M for 9 years or Rs. 0.09 M for 10 years etc. 

Example 2: As per contract A provided to B goods/services for Rs.1.0 M payable after 1 year. A draws a bill of Rs. 1.0 M on B payable after 1 year. A sells the bill to C against cash payment of Rs. 0.95 M half year before maturity date. On the maturity date falling in interest-free regime C presents the bill to B for payment. B will pay Rs. 0.95 M to C and Rs. 0.05 M to A and A will advance to C an interest-free loan of Rs. 0.95 M for ½ year or by mutual agreement Rs. 0.475 M for 1 year or Rs. 0.095 M for 5 years, or Rs. 0.0475 M for 10 years etc.

Example 3: As per contract A provided to B goods/services for Rs. 1.0 M payable after 1 year. A draws a bill of Rs. 1.0 M on B payable after 1 year. A sells the bill to C against cash payment of Rs. 0.95 M ½ year before maturity date. C sells the bill to D against cash payment of Rs. 0.975 M ¼ year before maturity. On the maturity date falling in interest-free regime D presents the bill to B for payment. B will pay Rs. 0.975 M to D and Rs. 0.025 M to A and A will advance to D an interest-free loan of Rs. 0.975 M for ¼ year or by mutual agreement Rs. 0.4875 M for ½ year or Rs. 0.24375 M for 1 year or Rs. 0.024375 M for 10 years etc. 

Example 4: 4 ½ years prior to initiation of interest-free regime A issued a bond of Rs. 1.0 M face value at discount of 2 percent with interest payable every year and maturity period 5 years. B bought the bond at the time of issue against cash payment of Rs. 0.98 M and received interest from A for 4 years. On the maturity date falling in interest-free regime A will pay to B Rs. 0.98 M and instead of paying interest for the last year A will advance to B interest-free loan of Rs. 0.98 M for 1 year or by mutual agreement Rs. 0.098 M for 10 years or Rs. 0.49 M for 2 years etc. 

Example 5: 4 ½ years prior to initiation of interest-free regime A issued a bond of Rs. 1.0 M face value at 2 % discount, interest payable every year and maturity period 5 years. B bought the bond at the time of issue against cash payment of Rs. 0.98 M to A. After 4 years, having received interest for 4 years, B sold the bond to C against cash payment of Rs. 1.02 M. On the maturity date falling in interest-free regime A will pay Rs. 1.02 M to C and instead of paying interest for the last year A will advance to C an interest-free loan of Rs. 1.02 M for 1 year or by mutual agreement Rs. 0.51 M for 2 years or Rs. 0.102 M for 10 years etc. 

Example 6: A is a holder of a bill of face value Rs. 1.0 M drawn on B. A wants to encash the bill 30 days before maturity. The bank will pay Rs. 1.0 M to A against a counter-loan of Rs. 0.10 M for 300 days or by mutual agreement Rs.0.20 M for 150 days or Rs. 0.05 M for 600 days etc. The bank will recover Rs. 1.0 M from B on the maturity date and will return the counter-loan money to A on the agreed date. 

5.   CUSTOMERS’ BANK ACCOUNTS

Banks will continue to receive deposits in customers’ accounts and issue cheque books to account holders. There will be two types of accounts, demand deposit and investment accounts. Existing account holders will be given the choice to convert their accounts into demand deposit and/or investment accounts.

Demand Deposit Accounts: Refund on demand of part or full amount in these accounts will be guaranteed by the bank. The bank will have the right to invest the amounts in these accounts at its own risk and responsibility. The bank will not share any profit or loss incurred with the account holders. Banks will have the discretion to fix minimum balance to be maintained in these accounts.

Investment Accounts: Banks at their own discretion will invest the amounts in these accounts in business or industry and will share the profit or loss earned with the account holders on daily product basis. Addition of profit or deduction of loss will be adjusted in the accounts on yearly or half-yearly basis. Withdrawals from these accounts may be subject to certain limitations as are savings accounts at present.

Interest-Earning Saving Accounts will cease to earn interest in the interest-free regime. All savings account holders will presumably opt for investment accounts. It is misleading contention of the advocates of interest that non-payment of interest will induce account holders to withdraw their savings from banks. No doubt interest earnings will cease but there would be positive chances to earn more profit from investment accounts in banks. Moreover it would be very unwise for savings account holders to withdraw their money from banks because there is no alternative available to them to keep their money in safe custody with facility of making payments by cheques and receiving payments against crossed cheques marked “payee’s account only”. Even if some account holders angered by non-payment of interest to them withdraw their deposits from banks, their money will come back to the banking system through somebody else’s account as and when they invest or spend the withdrawn money. 

6.   ISSUE OF LETTERS OF CREDIT, BANK DRAFTS, BANK GURANTEES ETC.

Legal and financial papers not involving any credit will be issued by banks as at present against appropriate fees and charges. In the event of bank having to advance any credit or blocking its money for the client, the client will advance an appropriate interest-free loan to the bank such that the multiple of the loan amount and its period equals the multiple of the credit advanced by the bank or the money blocked by it and its period. For such eventuality the bank may require the client to make some deposit in advance, but in no case interest will be charged or paid. For example, if the bank has to part with or block Rs. 1.0 M for one week the client will advance to the bank Rs. 1.0 M for 1 week or by mutual agreement Rs. 0.1 M for 10 weeks or Rs. 0.05 M for 20 weeks etc. 

7.   CENTERAL BANK AND DEPOSITORY-CUM-LENDER OF LAST RESORT

In the interest-free regime there will be no role of interest-based treasury bills and bonds etc. and all such documents will cease to be issued and no function involving interest will be undertaken by the Central Bank. Other functions not involving interest will be performed as at present. The Central Bank will set up under its auspices a framework of Central Depository-cum-lender of last resort for mobilizing surplus funds of banks and federal and provincial governments and autonomous bodies and advancing interest-free loans to them in times of need. The Central Depository will receive deposits and advance interest-free loans on TMCL basis. For example, if a bank has a surplus of Rs. 5.0 M for 1 month, it may deposit this sum for 1 month with the Central Depository and obtain an interest-free loan of Rs. 0.5 M for 10 months. If a bank is short of liquidity and requires Rs. 10.0 M for 1 week, it will obtain from the Central Depository an interest-free loan of Rs. 10.0 M for 1 week by depositing Rs. 1.0 M with the Central Depository for 10 weeks. 

8.   OPEN MARKET OPERATIONS

In the interest-free regime open market operations will be confined to exchange of interest-free loans and counter-loans with the Central Depository and commercial banks and purchase and sale of stocks and shares until such time as Islamic Economists and Bankers come up with some other marketable asset-based shariah-compliant instruments. 

9.   GOVERNMENT BORROWINGS

In the interest-free regime interest-bearing saving schemes, treasury bills and bonds etc. will not be available to the government for raising funds. For financing budgetary deficit and meeting other urgent financial requirements like procurement of war funds, the government will borrow from Central Depository and/or commercial banks on TMCL basis. 

10.   LIQUIDITY ARRANGEMENT

Banks will deposit 20% of each counter-loan amount with the Central-Depository for 10 years against which Central Depository will allow banks to draw 200% of counter-loan amount for 1 year. This will provide 20% liquidity for the banks. Additional 2% liquidity will be obtained by keeping 20% of counter-loan amount as till money in the banks. Thus total liquidity achieved by the banking sector will be 22%. For example, let total deposit in a bank be Rs. 100.0 M all of which is loaned out against receipt of counter-loans totaling Rs. 10.0 M. 20% of Rs. 10.0 M (=2 M) will be deposited with the Central Depository for 10 years against which the bank will be able to draw 200% of Rs. 10 M (= 20 M) for 1 year. This will provide 20% liquidity for the bank. Additional 2% liquidity will be obtained by keeping 20% of total counter-loan amount (i.e. Rs. 2.0 M) as till money. This will raise the liquidity of the bank to 22% which is more than sufficient. However if the Monetary Authority so desires the liquidity percentage can be raised or lowered by varying the percentage of counter-loan money to be deposited with the Central Depository. 

11. PROFIT EARNING BY BANKS

As shown in the previous clause on liquidity arrangement, from the total counter-loan money received by the banks 20% will go to the Central Depository and 20% will be held as till money. The remaining 60% of the total counter-loan money will be available to the banks for long-term investment in shariah-compliant profitable modes of their choice. The banks will be free to enter into profit/loss sharing arrangement with entrepreneurs whom they consider to be trust-worthy. Banks themselves will decide how much and where they should invest. 

12. CREDIT CONTROL

At present interest rate mechanism is used to control credit availability. In the interest-free regime this function will be performed by raising or lowering the time multiple ratio in TMCL.

BENEFITS OF TMCL-BASED INTEREST-FREE BANKING

Following are the relevant extracts from the writer’s book ‘METHOD FOR STARTING INTEREST-FREE BANKING’ printed in February 1999.

Economic and Financial gains to accrue from interest-free banking are many, of which several conspicuous ones are as follows:-

1.      PRICES OF CONSUMER GOODS AND NECESSITIES OF LIFE WILL FALL :

Our Prophet Muhammad saws said that Allah imposes dearness of necessities of life upon the society in which interest gains prevalence. Keynes said the same thing in different words by laying down that direct relationship between interest and prices is one of the most completely established empirical facts within the whole field of quantitative economics. Experience in Pakistan also shows that with continuous rise in interest rate and its spread, prices have consistently risen and they reach new heights every year. Without abolishing interest, consistent rise in prices cannot be checked.

In the present system industrialists borrow large sums of money on interest from banks. Interest on the borrowed money paid by the industrialists to the banks is charged to the cost of manufacture. Ex-factory prices of manufactured goods include interest and also an element of profit on the amount of interest. Stockists, distributors, whole-salers and even some retailers also take loans on interest for investing in their business. At each stage of transfer of goods interest charge is added to the cost of goods. Ultimately the consumer bears the entire burden of the interest-charge together with addition of profit element also on the interest charge at each stage of the transfer of goods.

In the interest-free system there will be no interest charge at any stage. Therefore, other cost factors and profits remaining the same, consumer price level of manufactured goods in interest-free system will be much lower than that in interest-based system. Here is a solid example. Let the cost of material and labour in manufacturing an article be Rs. 1000. Allowing a margin of 20% for overheads and profit, ex-factory price of the article to the stockist will be Rs. 1200. Allowing the same percentage margin for the stockist the wholesale price to the retailer will be Rs. 1440. With the same percentage margin the retailer will sell the article to the consumer at Rs. 1728. If the manufacturer, the stockist and retailer are borrowing money for their business at interest of 20%, the manufacturing cost of the article including interest will be Rs. 1200, allowing the percentage margin of 20% ex-factory price of the article to the stockist will be Rs. 1440. Adding 20% for interest paid by the stockist and 20% for his margin the wholesale price to the retailer will be Rs. 2073. Again adding 20% for interest paid by the retailer and 20% for his margin the retail price to the consumer will be Rs. 2984. Thus an article at present priced at Rs. 2984 will be available at Rs. 1728 to the consumer after elimination of interest. This reduction in price due to elimination of interest comes to about 42%. Similarly extinction of interest from business and trade will lower prices of non-manufactured goods and other necessities of life also. 

2.      CONSTRUCTION COSTS AND HOUSE RENTS WILL FALL :

With the steep rise in interest rate and its spread in the country the cost of construction and house rents, as for other necessities of life, have also risen tremendously. In major cities of the country houses of moderate size and standard costing about Rs100,000 were rented at about Rs500 per month in 1965 when interest rate was 9% now cost more than Rs500,000 and fetch rent of about Rs2,500 per month when interest rate is about 20%. Apparently construction costs and house rents and prices in general have risen in geometric progression along with the rise in interest rate.

Overall effect of tremendous rise in construction costs and consequent extremely high house rents beyond the reach of most wage earners is that fewer people are building houses for renting out and housing shortage is becoming acute day by day. The reason is that most people having surplus money are enticed by schemes like crorepati and other savings schemes in which they get about 15% without doing anything.

With extinction of interest, surplus money will find its way into healthy investment activities including house building, which will cost much less due to fall in prices of construction materials. Availability of more houses will result in provision of living accommodation to more people and at reasonable rents within reach of honest living earners.

3.      SAVINGS AND BANK DEPOSITS WILL INCREASE :

Lower prices of goods and reduction in house rents will result in less expenditure and more savings which will of course come to the banks in the form of deposits in customers’ accounts. Thus in interest-free system bank deposits will boost.

4.      BANKS WILL OBTAIN CAPACITY OF INFINITE ADVANCEMENT OF LOANS:

Interest and statutory bank reserve are the two principal and essential instruments of interest-based banking system. In the capitalist exploitative system capital is held to be the main driving force for all economic activity and interest is charged as price of capital. As no price can justifiably be charged for anything which is bountiful, artificial scarcity is injected in the supply of capital by statutory reserve. As in interest-free banking no interest is charged as price of capital, there is no necessity of creating any artificial scarcity of capital and as such statutory bank reserve is also done away with.

In the interest-free system loaning capacity of banks will rise firstly due to increase in deposits and secondly to a very much higher level due to deletion of statutory bank reserve which injects artificial scarcity in the supply of capital. Black-marketers hoard and create artificial shortage of goods and then exploit the consumers by charging unduly much higher prices on the pretext of scarcity in supply of goods. In interest-based capitalist system, interest is charged as price of capital and it is argued that its payment is necessary to attract capital which is scarce, although capital in fact is bountiful and scarcity in its supply is artificially injected into the capital market by statutory bank reserve. Keynes in his famous ‘GENERAL THEORY’ wrote: “Whilst there may be intrinsic reasons for the scarcity of land, there is no intrinsic reason for the scarcity of capital. Thus we might aim in practice at an increase in the volume of capital until it ceases to be scarce so that the functionless investor will no longer receive a bonus”. In this quotation obviously bonus refers to interest and functionless investor refers to lender of money at interest.

Following is elaborated the role of statutory bank reserve in creating artificial scarcity in supply of capital. In the present system with statutory bank reserve of 35% loaning capacity of bank is limited to 2.86 multiples of total bank deposits. If statutory bank reserve is reduced to 20%, loaning capacity of banks will rise to five multiples of total deposits. If it is reduced to 1%, the loaning capacity of banks will rise to 100 multiples of bank deposits. Thus in the present system the banks are constrained to limit their advances of loans to maximum amount arrived at by dividing the total deposit by the percentage of statutory bank reserve.

In the interest-free system no interest will be paid as price of capital, therefore there will be no necessity for creating artificial scarcity in the supply of capital. No doubt statutory bank reserve is useful in providing liquidity to the banking sector in the present system. In the interest-free system as already shown in the chapter ‘operation of interest-free banking system’ liquidity will be arranged without any statutory bank reserve. Thus there will be no constraint like statutory bank reserve on advancing of loans by banks and consequently the banks in interest-free system will obtain capacity of infinite advancement of loans.

 5.      EMPLOYMENT OPPORTUNITIES WILL RISE AND EVERYBODY  WILLING TO WORK WILL             GET EMPLOYMENT :

With capacity of infinite advancement of loans, there will be no dearth of capital in interest-free banking system and credit will be available for all productive industrial and agricultural projects including labour and capital intensive ventures. Entrepreneurs will get credit for all new projects and also for revitalizing and modernizing existing slack industrial units. With the required capital being available entrepreneurs will go ahead with their production plans which will provide employment to presently unemployed millions and nobody willing to work will remain unemployed. Only those who are not willing to work will remain unemployed and such people are not likely to exceed 0.5% of the able bodied. So it can be concluded that elimination of interest will lead to virtual extinction of unemployment.

 6.      INDUSTRIAL AND AGRICULTURAL PRODUCTION WILL BE BOOSTED :

Availability of capital in plenty in interest-free system, together with all the other three elements of production namely skill, labour, and materials already available in plenty in the country, will give boost to industrial and agricultural production. Self-sufficiency in food will soon be achieved and in foreseeable future surplus food will also be available for export. In the industrial sector product costs will be reduced considerably due to elimination of interest from the cost of production. The cost reduction in production will generate considerable export potential and also expand the area of import substitution which will result in considerable reduction in import bill.

 7.      BUDGET DEFICIT WILL VANISH AND DOMESTIC DEBT RETIREMENT CAPABILITY WILL BE           GENERATED :

With boost in production and extinction of unemployment, income levels will rise and budgetary receipts will increase. Due to extinction of interest, budgetary expenditure will reduce considerably. Increase in budgetary receipts and substantial reduction in expenditure will produce surplus budget which would enable the government to retire domestic debt which is ever rising higher and higher under the present system. Following examples support the above contention.

According to State Bank of Pakistan’s annual report for the year 1986-87 the consolidated budgetary receipts for that year were Rs99.55 billion, the total expenditure was Rs155.98 billion and the total deficit was Rs53.65 billion after excluding Rs2.78 billion available as surplus of autonomous bodies. The revenue receipts formed 16.5 percent of gross domestic product. Pakistan economic survey 1984-85 gives the figure of 4% for unemployment but adds that under-employment accounts for one-fourth of the employed persons. This means that besides 4% who were unemployed 24% were under-employed. Taking 24% under-employment to be equal to 12% unemployment, the total unemployment comes to 16% for the year 1984-85. Same figure of unemployment can safely be assumed to hold for the year 1986-87 for which budgetary receipt and deficit are given above. As already discussed, inception of interest-free banking will reduce unemployment to 0.5%, therefore in the year 1986-87, interest-free banking could have cured 15.5% of unemployment.

Increase in GNP resulting from 15.5% reduction in unemployment can be measured by “Okun’s” law enunciated by Professor Arthur M.Okun. According to ‘Okun’s’ law each percentage point reduction in unemployment lifts GNP by 3.2 percent. This means that introduction of interest-free banking in the year 1986-87 would have increased the GNP by 15.5x3.2=49.6 percent. With the same taxation level this would have raised budgetary receipts by Rs99.55 X 0.496 = Rs49.37 billion. On the expenditure side interest-free banking would have provided saving of Rs15.32 billion which is the amount government of Pakistan paid as interest on domestic debt in that year. Thus gain from interest-free banking in the year 1986-87 would have been Rs49.37 billion increase in budgetary receipts and Rs15.32 billion reduction in budgetary expenditure. These together would have converted the budget deficit of Rs53.65 billion into surplus of Rs11.04 billion in the Federal budget for the year 1986-87.

In the budget announced for the financial year 1998-99 total expenditure is given as Rs606.3 billion and total income is given as Rs593.7 billion including external assistance of Rs142.0 billion and bank borrowings of  Rs43.0 billion which would in fact be debt burdens and not real income. Thus the budget deficit in fact would be Rs197.6 billion and not Rs12.6 billion. Net revenue receipts are estimated at Rs367.1 billion. In the economic survey for the year 1997-98 unemployment percentage is given as 5.37 and the employed also include all those who are employed only part-time for even one hour per working day. It means that out of every group of 10,000 persons 537 are fully unemployed. From the remaining 9463 persons it can optimistically be assumed that 50% that is 4732 are fully employed, 25% that is 2366 are half-time employed (i.e. half-time unemployed) and 25% that is 2366 are 3 quarter time employed (i.e. quarter time unemployed). 2366 half-time unemployed means 50% of 2366 = 1183 fully unemployed. 2366 one quarter time unemployed means 25% of 2366 = 591 fully unemployed. Thus from a group of 10,000 persons fully unemployed are 537 + 1183 + 591 = 2311 = 23.11%.

In the prevailing circumstances of golden hand-shakes unemployment is likely to rise but assuming it to remain at the same level as last year the curable unemployment to be brought about by interest-free banking would be 23.11% - 0.5% (incurable) = 22.61%. Applying Okun’s law to the financial year 1998-99 increase in budgetary receipts due to inception of interest-free banking will be Rs. 22.61 X .032 X 367.1 = Rs265.6 billion. On the expenditure side interest free system will provide saving of Rs164.6 billion which is the amount of interest payable on domestic debt. Thus increase of Rs265.6 billion in budgetary receipts and reduction of Rs164.6 billion in expenditure will convert the deficit of Rs197.6 billion into budget surplus of Rs232.6 billion.

It should be quite clear from the above calculations that with the inception of interest-free banking it will become possible to commence retiring the domestic debt which can then be totally cleared within a few years and after that surplus in the budget can be used in social welfare and development projects. Such a happy situation of our economy cannot be visualized so long as the curse of interest persists in our banking system.

 8.      BALANCE OF PAYMENTS WILL TILT IN OUR FAVOUR AND FOREIGN DEBT RETIREMENT           CAPABILITY WILL BE GENERATED :

Self sufficiency in food combined with high export potential and reduced import bill will substantially improve the country’s balance of payment position. Export earnings during the year 1997-98 were around $8.5 billion. “Exports must foot the annual import bill of $10.0 billion” this is the main objective of the new trade policy and “ the devaluation aims at supplementing the National effort to boost exports to the level of $10 billion”.

Owing to reduction in cost of production in the interest-free system, all exportable goods manufactured in the country could be sold at competitive prices in the foreign markets. With the reduction in unemployment, production of exportable goods will also rise in the same proportion as GNP. Applying Okun’s law to production of exportable goods and taking into account the present foreign exchange earning from exports, increase in foreign exchange earning in the interest-free system will be $8.5 X 22.61 X .032 = $6.15 billion. The increase of $6.15 billion in foreign exchange earning will convert the current negative balance of $1.5 billion into surplus of $4.65 billion without having to devalue our currency. Thus inception of interest-free banking will boost foreign exchange earning which will generate foreign debt retirement capability and the country will soon be able to come out of the foreign debt trap.

Foreign debt liability has consistently been rising for the past several decades and if we continue to cling to the same interest-based system the same snowball trend in debt increase will continue and nothing will be able to stop our economy from drowning ever deep into the morass of foreign debt. Therefore, for protecting national liberty and honour, it is imperative that the interest-based system which has laden the country with unbearable burden of foreign debt should be done away with and replaced by interest-free TMCL-based banking system and the earlier it is done better it will be for the nation.

 9.      CORRUPTION IN GRANTING LOANS WILL BE ELIMINATED AND TOTAL LOSS IN CASE           OF BANKRUPTCY AND WILFUL DEFAULT WILL BE AVERTED :

As in interest-free banking system every loan will be granted against a counter loan, discretion and consequent corruption involved in granting loans to favourites on special concessionary terms will be eliminated. Any rescheduling required will also be done on the basis of counter-loan. In rare cases of bankruptcy and wilful default the bankers will recover the prime loan from collateral as at present. Inordinate delays involved in recovery will be compensated by retention of the borrower’s counter loan money for a proportionately extended period.

DOMESTIC DEBT RETIREMENT IN TMCL-BASED INTEREST-FREE REGIME

Following are the relevant extracts from the writer’s book ‘METHOD FOR STARTING INTEREST-FREE BANKING’ printed in Feb’99

 With the government’s declaration to abolish interest, all interest earnings will cease to be paid with immediate effect. Lenders of money with no ideological allegiance and for whom money is above every thing will be shocked and displeased with the stoppage of their income from interest-bearing instruments (forbidden by Allah), and they may claim that the government has no right to go back on its commitment and arbitrarily stop payment of interest. In this connection it would suffice to say that our Prophet Muhammad saws said “what about the people who stipulate conditions which are not present in Allah’s Laws? Whoever imposes conditions which are not present in Allah’s Laws, then those conditions will be invalid, even if he imposed these conditions a hundred times. Allah’s conditions (Laws) are truth and are more solid”. The government, by freezing foreign currency accounts, has already demonstrated its power and capability to take drastic measures violating its own commitments and solemn guarantees. There is no valid reason whatsoever which should deter the government from complying with Allah’s Law and the ruling of His Rasool saws.

Stoppage of interest payments will be far less shocking and much less grievous for the interest earners than freezing of foreign currency accounts and compelling the account holders to buy Dollars in the black market for meeting their foreign exchange needs and convert their Dollars into Rupees at a rate much lower than prevalent market rate or accept interest-bearing bonds sale and purchase of which flagrantly violate Quraanic injunction. It goes without saying that stoppage of interest will be for much nobler cause and good of the people and must be welcomed by all who have any allegiance to Islam and the government should consider it to be an honour to follow the example of our Prophet Muhammad saws, who upon revelation of the Quraanic injunction to give up interest, stopped payment of all interest earnings including even those which had accrued in the past and were outstanding for payment.

According to the Quraanic injunction to give up interest, the lenders are entitled to receive their original sums only. Therefore whilst the lenders will not be paid any interest, their original sums will have to be returned to them by the government. According to a statement of our Finance Minister, government’s total domestic debt burden is worth $31 billion = Rs1,426 billion which is the total of the capital sums of the lenders and interest accrued on them. In the absence of any definite information on the build-up of the total debt it can be assumed that out of Rs1,426 billion an amount of Rs426 billion is interest and the remaining balance of Rs1000 billion is the total of original sums which the government must return to the lenders. Inception of interest-free TMCL-based banking system will enable the government to retire the entire domestic debt within a few years as explained below. The fast deteriorating state of our economy which may compel the government to declare moratorium on foreign debt servicing, unless a bail-out package is doled out to us, should move the rulers to look towards Allah and declare abolition of interest immediately.

Hopefully if 1998-99 is the first financial year of inception of interest-free banking system, the government will require Rs1000 billion to meet the demand of the lenders to return their capital sums. As is shown in the chapter ‘economic and financial benefits of interest-free banking’ of this booklet, interest-free banking will facilitate conversion of the Federal Budget deficit of Rs197.6 billion into surplus of Rs232.6 billion.

From the above mentioned surplus of Rs232.6 billion, Rs147 billion will be used to retire a portion of the domestic debt leaving balance debt of Rs853 billion. After settling debt of Rs147 billion the balance from surplus of Rs232.6 billion will be Rs85.6 billion.

For clearing the balance debt of Rs853 billion the government will obtain a loan of Rs853 billion for one year from the money market by advancing counter loan of Rs85.3 billion for 10 years. Thus in the first year of inception of interest-free banking the government will have cleared the entire domestic debt accumulated during the past several decades. However the fresh loan of Rs853 billion taken by the government will be required to be paid back in the next financial year. In the next financial year interest-free banking is expected to make surplus available in the budget more than that in the previous year, but assuming it to remain the same Rs232.6 billion will be available to the government for paying back the loan of Rs853 billion taken by it in the last year. Out of the available Rs232.6 billion the government will use Rs163 billion in repaying part of the loan of Rs853 billion carried over from last year leaving balance loan of Rs690 billion for settlement of which the government will take a loan of Rs690 billion from the money market for one year by advancing counter loan of Rs69 billion for ten years. Thus the debt burden to be carried over to third financial year will be Rs690 billion.

In the third financial year, again from the available surplus of Rs232.6 billion Rs181 billion will be used in repaying a part of the loan of Rs690 billion carried over from the last year leaving balance loan of Rs509 billion for settlement of which the government will take a loan of Rs509 billion from the money market for one year by advancing counter loan of Rs50.9 billion for ten years. Thus the debt burden to be carried over to fourth financial year will be Rs509 billion.

In the fourth financial year, again from the available surplus of Rs232.6 billion Rs200 billion will be used in repaying a part of the loan of Rs509 billion carried over from the last year leaving balance loan of Rs309 billion for settlement of which the government will take a loan of Rs309 billion from the money market for one year by advancing counter loan of Rs30.9 billion for ten years. Thus the debt burden to be carried over to fifth financial year will be Rs309 billion.

In the fifth financial year, again from the surplus of Rs232.6 billion Rs224 billion will be used in repaying a part of the loan of Rs309 billion carried over from the last year leaving balance loan of Rs85 billion for settlement of which the government will take a loan of Rs85 billion from the money market for one year by advancing counter loan of Rs8.5 billion for ten years. Thus the debt burden to be carried over to sixth financial year will be Rs85 billion.

In the sixth financial year, again from the surplus of Rs232.6 billion Rs85 billion will be paid in full settlement of the loan carried over from the last year. This will leave surplus of Rs147.6 billion with the government.

Thus within six years after inception of interest-free system the government will not only have retired the entire domestic debt, but will also have surplus of Rs147.6 billion in hand for development projects and Rs244.6 billion in five counter loans receivable after ten years of each advancement.

Conclusion : From the above calculations it is quite clear that with the  inception of interest-free banking system we will be able to retire the entire domestic debt and will also have sufficient funds available for education, health, and provision of other basic necessities of life like clean drinking water, construction of roads and sewage services on which the government at present spends very little sums which do not fulfill even ten percent of the requirements.

N.B. As mentioned above, lenders should be paid only their original sums and no interest. However, if the concerned authorities are adamant to pay interest as well, the government will proceed as follows and come out of the debt trap in ten years instead of six years.

In the first year Rs100 billion from the available surplus of Rs232.6 billion will be paid in part payment of the total debt of Rs1,426 billion leaving balance debt of Rs1,326 billion and surplus balance of Rs132.6 billion. For paying balance debt of Rs1,326 billion, a loan of Rs1,326 billion will be taken from the money market for one year by advancing counter loan of Rs132.6 billion for ten years.

In the second year Rs111 billion will be paid in part payment of loan of Rs1,326 billion carried over from the first year leaving balance loan of Rs1,215 billion for settlement of which a loan of Rs1,215 billion will be taken for one year from the money market by advancing counter loan of Rs121.5 billion for ten years.

In the third year Rs123.4 billion will be paid in part payment of loan of Rs1,215 billion carried over from the second year leaving balance loan of Rs1,091.6 billion for settlement of which a loan of Rs1,091.6 billion will be taken for one year from the money market by advancing counter loan of Rs109.16 billion for ten years.

In the fourth year Rs137.1billion will be paid in part payment of loan of Rs1,091.6 billion carried over from the third year leaving balance loan of Rs954.5 billion for settlement of which a loan of Rs954.5 billion will be taken for one year from the money market by advancing counter loan of Rs95.45 billion for ten years.

In the fifth year Rs152.3 billion will be paid in part payment of loan of Rs954.5 billion carried over from the fourth year leaving balance loan of Rs802.2 billion for settlement of which a loan of Rs802.2 billion will be taken for one year from the money market by advancing counter loan of Rs80.22 billion for ten years.

In the sixth year Rs169.3 billion will be paid in part payment of loan of Rs802.2 billion carried over from the fifth year leaving balance loan of Rs632.9 billion for settlement of which a loan of Rs632.9 billion will be taken for one year from the money market by advancing counter loan of Rs63.29 billion for ten years.

In the seventh year Rs188.1 billion will be paid in part payment of loan of Rs632.9 billion carried over from the sixth year leaving balance loan of Rs444.8 billion for settlement of which a loan of Rs444.8 billion will be taken for one year from the money market by advancing counter loan of Rs44.48 billion for ten years.

In the eighth year Rs209 billion will be paid in part payment of loan of Rs444.8 billion carried over from the seventh year leaving balance loan of Rs235.8 billion for settlement of which a loan of Rs235.8 billion will be taken for one year from the money market by advancing counter loan of Rs23.58 billion for ten years.

In the ninth year Rs232.1 billion will be paid in part payment of loan of Rs235.8 billion carried over from the eighth year leaving balance loan of Rs3.7 billion for settlement of which a loan of Rs3.7 billion will be taken for one year from the money market by advancing counter loan of Rs0.37 billion for ten years.

In the tenth year, after paying the loan of Rs3.7 billion carried over from the ninth year, from the available balance of Rs232.6 billion, amount of Rs228.8 billion will be left in hand with the government and Rs670.65 billion in nine counter loans receivable after ten years of advancement of each counter loan.

FOREIGN DEBT RETIREMENT IN TMCL-BASED INTEREST-FREE REGIME 

Following are the relevant extracts from the writer’s book ‘METHOD FOR STARTING INTEREST-FREE BANKING’ printed in Feb’99

Pakistan’s predicament of foreign debt-trap is depicted in Research paper no.44 published by Islamic Research and Training Institute of Islamic Development Bank Jeddah as follows:-

“Despite the awareness about riba as cited above, at the present, Pakistan is posed to face a real debt crises: all new foreign borrowings of the country are exhausted in servicing existing riba-based debts. Total internal and external outstanding public debt of the country is equivalent to about 90% of its gross domestic product, servicing this debt yearly requires 3.2 billion US dollars, making it the first largest expenditure item of the nation’s fiscal year 1996 budget. In March 1996, the governor State Bank of Pakistan warned that his country is likely to enter the ‘debt-trap’; Pakistan may accumulate riba arrears, and continuously request for debt rescheduling. Pakistan - a nation committed to eliminate riba, during 1996, spent more on servicing riba-based debts than even on its national defense. This is a predicament of a country where a lucid definition of riba in the form of the above quotation has long been known, where the goal of replacing the riba-based financial transactions with some alternatives consistent with the Islamic Law has always remained in the national agenda and where political will in this regard has always been visible throughout the process of forming a national consensus on constitutional issues.”

Our Finance Minister mentioned in May’98 that foreign debt liability was $30 billion which according to some analysts has gone up to $32 billion by the end of July’98.

Whilst the government can very well stop payment of interest on domestic debt it cannot do so for foreign debt and the total foreign debt of $32 billion which includes substantial amount of interest will have to be paid in full. However the government can and must avoid to receive any further foreign loans on interest.

For retiring the foreign debt no concrete steps have so far been taken nor there is anything in sight except abolition of interest which can enable the government to take the country out of the foreign debt trap. According to a statement of our Finance Minister an amount of $3 billion is required for servicing the total debt every year. As is shown in the chapter ‘economic and financial benefits of interest-free banking’ of this booklet, interest-free banking will facilitate conversion of annual deficit of $1.5 billion into surplus of $4.6 billion in our balance of payments.

Foreign debt can be retired in one of the two following ways depending upon whether or not dollarization of our economy continues and sufficient foreign currency is available in the local money market :-

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A.     FOREIGN DEBT RETIREMENT WITH SUFFICIENT FOREIGN CURRENCY AVAILABLE IN THE         LOCAL MONEY MARKET :

A1.     $1.55 billion from the above mentioned available surplus of $4.6 billion will be used to retire a portion of the foreign debt of $32 billion leaving balance debt of $30.45 billion and surplus of $3.05 billion in hand. For retiring the balance debt of $30.45 billion the government will obtain a loan of $30.45 billion from the money market by advancing counter loan of $3.045 billion for ten years. Thus within the first year of inception of interest-free banking the government will have cleared the entire 

foreign debt accumulated during the past several decades. However the fresh loan of $30.45 billion taken by the government will be required to be paid back in the next financial year.

A2.      In the second financial year, interest-free banking is expected to make foreign exchange surplus available higher than that in the first year, but assuming it to remain the same, $4.6 billion will be available to the government for paying back the loan of $30.45 billion taken by it in the first year. Out of the available surplus of $4.6 billion the government will use $1.72 billion in repaying part of the loan of $30.45 billion carried over from last year leaving balance loan of $28.73 billion for settlement of which the government will take a loan of $28.73 billion from the money market for one year by advancing counter loan of $2.873 billion for ten years.

A3.      In the third financial year, again from the available surplus of $4.6 billion, $1.91 billion will be used in repaying a part of the loan of $28.73 billion carried over from the last year leaving balance loan of $26.82 billion for settlement of which the government will take a loan of $26.82 billion from the money market for one year by advancing a counter loan of $2.682 billion for ten years.

A4.      In the fourth financial year, from the available surplus of $4.6 billion, $2.13 billion will be used in repaying a part of the loan of $26.82 billion carried over from the last year leaving balance loan of $24.69 billion for settlement of which the government will take a loan of $24.69 from the money market for one year by advancing counter loan of $2.469 billion for ten years.

A5.      In the fifth financial year, from the available surplus of $4.6 billion, $2.25 billion will be used in repaying a part of the loan of $24.69 billion carried over from the last year leaving balance loan of $22.44 billion for settlement of which the government will take a loan of $22.44 billion from the money market for one year by advancing counter loan of $2.244 billion for ten years.

A6.      In the sixth financial year, from the available surplus of $4.6 billion, $2.61 billion will be used in repaying a part of the loan of $22.44 billion carried over from the last year leaving balance loan of $19.83 billion for settlement of which the government will take a loan of $19.83 billion from the money market for one year by advancing counter loan of $1.983 billion for ten years.

A7.      In the seventh financial year, from the available surplus of $4.6 billion, $2.90 will be used in repaying a part of the loan of $19.83 billion carried over from the last year leaving balance of $16.93 billion for settlement of which the government will take a loan of $16.93 billion from the money market for one year by advancing counter loan of $1.693 billion for ten years.

A8.      In the eighth financial year, from the available surplus of $4.6 billion, $3.23 billion will be used in repaying a part of the loan of $16.93 billion carried over from last year leaving balance loan of $13.70 billion for settlement of which the government will take loan of $13.70 from the money market for one year by advancing counter loan of $1.370 billion for ten years.

A9.      In the ninth financial year, from the available surplus of $4.6 billion, $3.58 billion will be used in repaying a part of the loan of $13.70 carried over from the last year leaving balance loan of $10.12 billion for settlement of which the government will take a loan of $10.12 billion from the money market for one year by advancing a counter loan of $1.012 billion for ten years.

A10.    In the tenth financial year, from the available surplus of $4.6 billion, $3.98 billion will be used in repaying a part of the loan of $10.12 billion carried over from the last year leaving balance loan of $6.14 billion for settlement of which the government will take a loan of $6.14 billion from the money market by advancing counter loan of $0.614 billion for ten years.

A11.    In the eleventh financial year, from the available surplus of $4.6 billion, $4.42 billion will be used in repaying a part of the loan of $6.14 billion carried over form the last year leaving balance loan of $1.72 billion for settlement of which the government will take loan of $1.72 billion form the money market for one year by advancing a counter loan of $0.172 billion for ten years.

A12.    In the twelfth financial year, from the available surplus of $4.6 billion. $1.72 billion will be paid in full settlement of the loan carried over from the last year. This will leave balance surplus of $2.88 billion with the government.

Thus within twelve years after inception of interest-free banking system, the government will not only retire the entire foreign debt, but will also have minimum surplus of $2.88 billion in hand and also $20.157 billion in eleven counter-loans receivable after ten years of each advancement.

B.            FOREIGN DEBT RETIREMENT WITH SUFFICIENT FOREIGN CURRENCY NOT                AVAILABLE IN THE LOCAL MONEY MARKET :

B1.      In the first financial year of inception of interest-free banking the government will pay the entire available surplus of $4.6 billion in debt retirement which will leave balance of $27.4 billion from the total debt of $32 billion.

B2.      In the second financial year debt liability will be $27.4 billion plus interest payable on it. Assuming rate of interest to be 10% p.a., total debt liability will be $30.14 billion. Again the entire surplus of $4.6 billion will be paid in debt retirement leaving balance of $25.54 billion.

B3.      In the third financial year debt liability including interest will be $28.094 billion. Again after paying the entire surplus of $4.6 billion in debt retirement balance of debt will be $23.494 billion.

B4.      In the fourth financial year the debt liability including interest will be 25.8434 billion. Again after paying the entire surplus of $4.6 billion in debt retirement balance of debt will be $21.2434 billion.

B5.      In the fifth financial year debt liability including interest will be $23.3677 billion. Again after paying the entire surplus of $4.6 billion in debt retirement balance of debt will be $18.7677 billion.

B6.      In the sixth financial year debt liability including interest will be $20.6444 billion. Again after paying the entire surplus of $4.6 billion in debt retirement balance of debt will be $16.0444 billion.

B7.      In the seventh financial year debt liability including interest will be $17.6488 billion. Again after paying the entire surplus of $4.6 billion in debt retirement balance of debt will be $13.0488 billion.

B8.      In the eighth financial year debt liability including interest will be $14.3536 billion. Again after paying $4.6 billion in debt retirement balance of debt will be $9.7536 billion.

B9.      In the ninth financial year debt liability including interest will be $10.7289 billion. Again after paying $4.6 billion in debt retirement balance of debt will be $6.1289 billion.

B10.    In the tenth financial year debt liability including interest will be $6.7417 billion. Again after paying $4.6 billion in debt retirement balance debt will be $2.1417 billion.

B11.    In the eleventh financial year debt liability including interest will be $2.3558 billion. Again after paying $2.3558 billion in debt retirement from the available surplus of 4.6 billion the government will have in hand $2.2442 billion.

Thus within eleven years of inception of interest-free banking system, the government will not only have retired the entire foreign debt but will also have available surplus foreign exchange.

UNJUSTIFIED BIAS AGAINST TMCL

Some times logic fails to prevail upon prejudice and innovative fruitful ideas are arbitrarily rejected to the detriment of mankind. This happened in Pakistan with TMCL (Time Multiple Counter Loan) conceived and presented by Late Professor Shaikh Mahmud Ahmad who was undoubtedly our country’s most outstanding economist and researcher. Perhaps because he was not a professional economist TMCL did not get any publicity and it remained unknown outside Pakistan. Allah’s laws are all enforceable and easy to implement in all times and climes because Quraan declares “Allah intends every facility for you; He does not want to put you in difficulties” (2:185). Syed Abou-al-Aala Maudoodi in his famous book ‘SOOD’ in Urdu stressed “interest shall have to be banned by law in one single starting step”.

Council Of Islamic Ideology (CII) accepted the principle of TMCL but unfortunately without giving any reason did not approve of its use for eliminating interest from the banking system. Relevant paragraph in CII report of June 1980 reads “Time Multiple Counter Loans - Under this method a bank may give by way of interest-free loan a multiple of interest-free deposit by a client so that the product of the money and time for which the money is given is the same in both cases. It would, however, not be correct to use this method by way of a permanent alternative system to the interest-based system. However, in order to provide personal loans to people of small means banks may instead of the above stipulations, adopt it as a principle that they would provide loans for personal and non-productive purposes to those persons who already hold accounts with them. In laying down the repayment schedule and the amount of the loan, however, the banks may keep in view the amount of the deposit of the applicant for the loan and the period over which he has maintained his deposit with the bank”.

Queerly CII rejected TMCL which could eliminate interest instantly without any disruption in the banking system and made recommendations such as the following without defining any specific plan of action and which could only produce faint hope of elimination of interest in some distant time :-

(i)          during the period of about 1 year and 8 months that now remains within the 3 years time               limit set by the President the rest of the measures for the elimination of interest from the                domestic transactions should be taken in three clearly defined phases with specific time               schedule,

(ii)        The interest-bearing foreign loans channeled by the Federal Government to the Provincial     Governments may, however, continue on the basis of interest till a viable alternative compatible with Shariah is found in respect of borrowings from abroad,

(iii)       Government’s borrowings from external sources will have to be continued for the time being, on the basis of interest,

(iv)       The operations of foreign branches of Pakistani banks, foreign currency deposits held with commercial banks in Pakistan and certain other transactions of banks with banks abroad would have to continue on the basis of interest,

(v)        PICIC’s foreign currency borrowings may continue to be on interest-basis until a viable alternative conforming to Shariah is available”.

 Only God knows what prompted CII to reject one readily available shariah-compliant means to finish interest and to recommend continuation of an act of war against Allah and His Rasool saws for an indefinite period. About twenty years have already passed and still the awaited alternative arrangements have not become available.

Following writings show that Islamic economists neither offer a shariah compliant alternative of interest workable in the prevailing low standard of morality in the society nor do they accept TMCL, which is neutral to moral hazard, as a means to eliminate interest from the banking system.

In his book ‘TOWARDS A JUST MONETARY SYSTEM’ Dr. M. Umer Chapra writes :-

 (i)         If the Islamic commercial bank faces a liquidity crisis and is unable to make an alternate              arrangement for liquidity, the central bank cannot afford to remain indifferent. It should act as              lender of last resort within the framework suggested later, but, of course, with appropriate              penalties and warnings accompanied by a specially-tailored corrective program,

(ii)         The method of Time Multiple Counter Loans could be adapted for small-scale financing particularly within the framework of co-operative institutions. For commercial banks, it would be of limited applicability,

(iii)        It would, nevertheless, be a mistake to try to achieve the transition from the conventional capitalist money and banking system now prevalent in the Muslim world to the just Islamic model in one stroke or over a very short period of time,

(iv)       Interest should be declared illegal, allowing a certain grace period over which it may be tolerated as a necessary evil, but after the expiry of which it should be abolished from all domestic transactions,

(v)        All interest-oriented financial institutions should be converted gradually, irrespective of whether they are domestic or foreign origin, into profit-sharing institutions,

(vi)        The best way to accomplish the conversion would be to enable all financial institutions to bring about a certain percentage decrease in their interest-based assets and liabilities with a corresponding percentage increase in their profit-and-loss-sharing assets and liabilities until the total transformation has taken place over an agreed number of years,

(vii)       All normal international transactions would, however, have to remain on the basis of interest until the Muslim countries can free themselves from the interest element through an expansion in their mutual relations and some reciprocal arrangement with non-Muslim countries. This cannot be done until the economies of Muslim countries become stronger and capable of satisfying their mutual needs.

Whilst TMCL can easily fulfil banks’ short-term needs of liquidity Dr. Chapra prefers unspecified procedures which may or may not be workable! Dr. Chapra does not give any reason as to why TMCL will be of limited applicability for commercial banks and as to what is the logic behind continuing an act of war against Allah and His Rasool saws for indefinite period or for agreed number of years especially when it can be finished in one stroke by replacing interest with TMCL in the banking system.

The contention that TMCL can be used only for small scale financing is unfounded and misleading. Use of TMCL for large scale financing is demonstrated in tabular form in ANNEX-1 which shows how a large industrial project currently under execution in Saudi Arabia could have been financed on TMCL basis. Particulars of the project and financing agreement between the Industrialist and Bank are as follows:-

Total capital requirement                   = SR 133.0M

Owner’s equity                                    = SR   33.0M

Bank loan requirement                        = SR 100.0M

Loan advanced by bank in year 1        = SR   50.0M

Loan advanced by bank in year 2        = SR   50.0M

Rate of interest on bank loan             = 8 % p.a.

Project construction period               = 2 years

Commencement of production and earning from project  =  3 years after completion

Repayment of bank loan and interest from project earnings to commence in year 6 and completed in 10 yearly installments of SR 25.2, 24.1, 22.96, 21.84,20.72, 19.60, 18.48, 17.36, 16.24, 15.12M.

Total amount to be paid to the bank = Principal 100.0M + interest 101.62M = 201.62M

The executives of the project and the bank who negotiated the financing agreement, during a discussion on TMCL in Jeddah, asked the writer as to how the above project could be financed under TMCL. Thereupon the writer prepared ANNEX-1 which shows how the project worth SR 133.0M could be completed under TMCL system with the available equity of SR 33M and without having to pay any interest and without any profit-sharing with the finance provider. Following are narrated the steps to be taken for financing the project under TMCL System :-

 Year 1 – a loan of 66.8M for 5 years (repayable in year 6) is taken against counter-loan of 16.7M for 20 years (66.8 X 5 = 16.7 X 20)

Year 2 – a loan of 66.3M for 4 years (repayable in year 6) is taken against counter-loan of 15.6M for 17 years (66.3 X 4 = 15.6 X 17)

 Year 6 – amount of loan to be repaid to bank = 66.8 + 66.3 = 131.1M

Cash available = (Balance from capital) + (Loans received – Expenditure on project) + Amount from project earning = (33.0 – 16.7 – 15.6) + (133.1 – 133) + 25.2 = 0.7 + 0.1 + 25.2 = 26M.

13.1M paid to the bank from 26M leaves balance of 12.9M and bank loan of 131.1 – 13.1 = 120M for settlement of which loan of 120M is taken for 1 year against counter-loan of 12M for 10 years. Thus cash balance of 0.9M is carried forward and loan of 120M for settlement in year 7.

 Year 7 – Loan to be repaid to the bank = 120M

Cash available = Balance from year 6 + amount from project earning = 0.9 + 24.1 = 25M

12M paid to bank from 25M leaves balance of 13M and bank loan of 120 – 12 = 108M for settlement of which loan of 108M is taken for 1

year against counter-loan of 12M for 9 years. Thus cash balance of 1M is carried forward and loan of 108M for settlement in year 8

 Year 8 – Loan to be repaid to the bank = 108M

Cash available = Balance from year 7 + amount from project earning = 1 + 22.96 = 23.96M

12M paid to bank from 23.96M leaves balance of 11.96M and bank loan of 108 – 12 = 96M for settlement of which loan of 96M is taken for 1 year against counter-loan of 9.6M for 10 years. Thus cash balance of 2.36M is carried forward & loan of 96M for settlement in year 9

 Year 9 – Loan to be repaid to the bank = 96M

Cash available = Balance from year 8 + amount from project earning = 2.36 + 21.84=24.2M

12M paid to bank from 24.2M leaves balance of 12.2M and bank loan of 96 – 12 = 84M for settlement of which loan of 84M is taken for 1 year against counter-loan of 12M for 7 years. Thus cash balance of 0.2M is carried forward & loan of 84M for settlement in year 10

 Year 10 – Loan to be repaid to the bank = 84M

Cash available = Balance from year 9 + amount from project earning = 0.2 + 20.72=20.92M

12M paid to bank from 20.92M leaves balance of 8.92M and bank loan of 84 – 12 = 72M for settlement of which loan of 72M is taken for 1 year against counter-loan of 8M for 9 years. Thus cash balance of .92M is carried forward & loan of 72M for settlement in year 11

 Year 11 – Loan to be repaid to the bank = 72M

Cash available = Balance from year 10 + amount from project earning=0.92 + 19.6=20.52M

12M paid to bank from 20.52M leaves balance of 8.52M and bank loan of 72 – 12 = 60M for settlement of which loan of 60M is taken for 1 year against counter-loan of 6M for 10 years. Thus cash balance of 2.52M is carried forward & loan of 60M for settlement in year 12

 Year 12 – Loan to be repaid to the bank = 60M

Cash available = Balance from year 11 + amount from project earning = 2.52 + 18.48 =21M

10M paid to bank from 21M leaves balance of 11M and bank loan of 60 – 10 = 50M for settlement of which loan of 50M is taken for 1 year against counter-loan of 10M for 5 years. Thus cash balance of 1M is carried forward & loan of 50M for settlement in year 13

 Year 13 - Loan to be repaid to the bank = 50M

Cash available = Balance from year 12 + amount from project earning = 1 + 17.36 = 18.36M

10M paid to bank from 18.36M leaves balance of 8.36M and bank loan of 50 – 10 = 40M for settlement of which loan of 40M is taken for 1 year against counter-loan of 8M for 5 years. Thus cash balance of .36M is carried forward & loan of 40M for settlement in year 14

 Year 14 - Loan to be repaid to the bank = 40M

Cash available = Balance from year 13 + amount from project earning =0.36 + 16.24=16.6M

8M paid to bank from 16.6M leaves balance of 8.6M and bank loan of 40 – 8 = 32M for settlement of which loan of 32M is taken for 1 year against counter-loan of 8M for 4 years. Thus cash balance of .6M is carried forward & loan of 32M for settlement in year 15

 Year 15 – Loan to be repaid to the bank = 32M

Cash available = Balance from year 14 + amount from project earning = 0.6 + 15.12=15.72M

8M paid to bank from 15.72M leaves balance of 7.72M and bank loan of 32 – 8 = 24M for settlement of which loan of 24M is taken for 1 year against counter-loan of 6M for 4 years. Thus cash balance of 1.72M is carried forward & loan of 24M for settlement in year16

Year 16 - Loan to be repaid to the bank = 24M

Cash available = Balance from year 15 + amounts of counter loans given in years 6, 7 and 9 receivable from bank  = 1.72 + 12 + 12 +12 = 37.72M After repaying the bank loan of 24M cash balance left will be = 37.72 – 24 = 13.72M

  Year 17 - Loan to be repaid to the bank = Nil

Cash available = balance from year 16 + amount of counter-loan given in year 12 receivable from bank  = 13.72 + 10 = 23.72M

 Year 18 

Cash available = Balance from year 17 + amounts of counter-loans given in years 8, 13 and 14 receivable from bank = 23.72 + 9.6 + 8 + 8 = 49.32M

 Year 19 

Cash available = Balance from year 18 + amounts of counter-loans given in years 2, 10 and 15 receivable from bank = 49.32 + 15.6 + 8 + 6 = 78.92M

 Year 21 

Cash available = Balance from year 19 + amounts of counter-loans given in years 1 and 11 receivable from bank = 78.92 + 16.7 + 6 = 101.62M. This is the amount of interest which the industrial unit has to pay to the bank in the interest-based system.

The above narration shows that the industrial unit if financed under TMCL system would have cost 101.62M less. Large saving of interest expense and no profit-sharing with finance provider will definitely reflect in prices of project products which would be available at much lower prices to the advantage of common man and society as a whole. Thus TMCL-based financing of even large projects is far superior to financing through interest-based loan and through profit-sharing.

Dr. M. Umer Chapra in his another book  ‘ISLAM AND ECONOMIC DEVELOPMENT’ proclaimed immense benefit of ban on interest in the following words: -

“since borrowing does not obviate, but rather only postpones, the ultimate need for sacrifice, the ban on interest should prove to be a blessing by removing the long-run heavy debt-servicing burden it normally entails. The constraint it will impose on government spending in the short-run may tend to be more than offset by the healthy discipline it will impose on the governments, the sustained, steadier growth it will generate in the economy, the greater cooperation it will bring about between the governments and the private sector, and the much smaller debt-servicing burden it will create in both the domestic and external sectors of the economy”.

However ignoring or neglecting the potentiality of TMCL as an effective replacement of interest in one stroke, Dr. Chapra immediately after the above proclamation in his book negated the proclamation by stating:-

“To avoid an excessive squeeze in the initial stage, the governments may apply the prohibition gradually and not in one stroke”.

It is not understood why Dr. Chapra prefers to continue an act of war against Allah and His Rasool saws over a mere excessive squeeze. He did not define the mechanics of the process of gradual prohibition of interest and also where to start.

The Blue Print Of Islamic Financial System Including Strategy For Elimination Of Riba published by International Institute Of Islamic Economics, International Islamic University, Islamabad includes short comment on TMCL: “One may argue that TMCL instrument offers an ingenious solution to the problems of Riba, gharar and having two mutually exclusive conditions in one contract. But its viability is questionable for several reasons. Some of these are as follows. Counter loans would be liability of the banks. Therefore, while the sum generated might be used to meet their operating expenses it would not be distributable as profits among their share holders or depositors who provide funds on partnership basis. This will compel the banks to turn to trading, leasing and other profitable options. It is also possible that clients may use loans from banks, whether directly or indirectly, to give, the counter-loans. This, in turn, casts further doubts on the usefulness of the TMCL option. Last but not the least, a recourse to TMCL is not advisable because the ensuing credit expansion is likely to fuel inflation.”

 Obviously the above cursory remarks on TMCL have been made without taking into account the following important points. The sum generated by counter-loans will be invested in long-term profitable business. The profits earned by the banks will be shared with the depositors in investment accounts. There is no harm in the banks turning to Shariah-compliant trading modes as is done by all Islamic banks. Every loan will be advanced against collateral and will have to be returned on due date. There is no reason why any sensible person will use the loan from bank to give counter-loans for further loans instead of utilizing it in meeting his business requirements. Credit expansion will be controlled by raising or lowering the time-multiple ratio in TMCL just as it is controlled in the present system by raising or lowering interest rate.

 In the chapter on strategy for elimination of Riba the Blue Print states “The move towards Riba-free banking system may start in earnest with the establishment of one model Islamic branch each by all existing banks. This experience may be replicated by them and applied to their other branches such that all branches of a bank and, thereby, the entire banking system gets converted into the Islamic mode in approximately one and a half years.”, “The terms of reference of the above Coordination Committee should be: i. to chalk out the blue print and documents for the model branches. ii. To recommend necessary action to the concerned quarters, such as the State Bank and the Ministry of Finance.”

 Strangely enough the authors of the blue print reject a definite one step action plan of replacing interest instantly by TMCL and recommend a plan blue print of which still remains to be chalked out and implementation of which would tentatively take one and a half years and no body knows how many more years it may take to eliminate interest completely from the banking system.

 It would be appropriate to prove, by definite example, conspicuous superiority of TMCL-based financing over the proposition made in IIIE’s blueprint which states:-

“13.4.1 Asset Ijarah Securities involving a financial intermediary (AIS-IFI).

Suppose the Ministry of Defence needs a training field spread over a 10-acre piece of land in central location… .

13.4.2      The Ministry may contact an Islamic bank to prepare an issue of asset Ijarah securities that allows the Ministry to acquire the needed land.

13.4.3      The line of action on the bank’s side can be as follows:

i.              It may initially buy the lot for, say, Rs. 10 M in its own name.

ii.             It may rent the lot to the Ministry for, say, Rs. 900,000 per year.

iii.            The Ijarah contract with the Ministry may have a period of, say, 10 years after which it may        be renewed for 10 years at a time.

iv.           The bank may issue, for example, 1,000 asset Ijarah securities with each security representing       1,000^th of the lot and a claim to Rs. 900 a year (=1,000^th of Rs. 900,000) as rent.

v.            The bank may claim an issuance commission of, say, 5%as a premium above the purchase       price of land and, hence, sell the securities at Rs. 10,500 each”.

 In the above mode of financing the government will never own the defense facility and will have to continue to incur recurring expense of Rs. 0.9M as annual rent. In the first 12 years the government will have paid Rs. 10.8M which exceeds the actual cost of the facility by 0.8M. Under TMCL system of financing government will obtain a loan of Rs. 10.8M for 1 year against counter loan of Rs. 0.9M advanced to the bank for 12 years. From this loan the government will spend Rs. 10.0M to acquire the facility as state property. Calculations in ANNEX 2 show that under TMCL system government will clear the bank loan within 20 years and apart from having a surplus balance of Rs. 2.0M will have receivable counter-loan amounts from the bank Rs. 0.7 + 0.5 + 0.7 + 0.5 + 0.4 + 0.5 + 0.5 + 0.5 + 0.5 + 0.4 + 0.4 + 0.4 = 6.0M. As the government will own the facility it will permanently save Rs. 0.9M annually. If the project is financed under Asset Ijarah securities system as recommended in IIIE’s blueprint the government will remain a tenant permanently incurring annual expense of Rs. 0.9M as rent of the facility. Is it not sadly astonishing that the blueprint rejects TMCL and prefers Asset Ijarah securities system?

 Tragic result of the persistent bias against TMCL is that about 200 Islamic banks have mobilized Muslim Ummah’s financial resources of billions of Dollars and are running profitably but they are unable to ward off interest which is the foremost fundamental requirement of Islamic financial system. Nothing can be so tragic and ridiculous as Islamic banks indulging in interest-based transactions. Against Pakistan’s urgent requirement of funds in 1998 Islamic Development Bank Jeddah together with the large Islamic banking community could do no better than offering a loan on interest and that too at 5% above LIBOR!

 Hon. Justice Muhammad Taqi Usmani is chairman/member Shariah Supervisory Boards of a dozen Islamic banks. In his recent book ‘INTRODUCTION TO ISLAMIC FINANCE’ he writes “The case of Islamic banking cannot be advanced unless a strong system of inter-bank transactions based on Islamic principles is developed. The lack of such a system forces the Islamic banks to turn to the conventional banks for their short-term needs of liquidity which the conventional banks do not provide without either an open or camouflaged interest”.

 In the seminar proceedings no.39 on ‘Islamic Financial Instruments’ published by IDB Islamic Research and Training Institute is stated “But what if the government needs cash (to pay salaries or buy services) and needs it now. The options available, so far, is borrowing from the public or the banking sector at interest. It is no accident that while great advances had been taking place in the Islamization of the private financial transactions in many Muslim countries, very little has been done in the public sector. Almost all Islamic governments borrow on interest”. In another IDB IRTI publication ‘CHALLENGES FACING ISLAMIC BANKING’ is stated “While Islamic banks and investment funds have so far mobilized huge financial resources, a large part of these resources have found its way into western financial markets”.

Adoption of TMCL as loaning instrument by Islamic banks will bring the following benefits to Islamic banks and the Muslim ummah;

1. It will facilitate inter-bank interest-free loan transactions.

2. It will facilitate setting up of a Central Depository for mobilizing surplus funds of Islamic banks and governments on TMCL basis and advancing to them in times of need TMCL-based interest-free loans.

3. It will facilitate utilization of the financial resources of the Muslim ummah in developing Muslim countries through the Central Depository, instead of being diverted to western financial markets.

Upshot of the above discussion is that Islamic economists and bankers with profound sense of urgency and dedication should strive for inception of TMCL as loaning instrument to replace interest in the banking system. It is indeed the entire Muslim Ummah’s crucial need of the hour.

SOLUTIONS OF PROBLEMS RAISED IN GOVERNMENT’S PETITION OF

13-2-99 TO FEDERAL SHARIAT COURT

&nbssp;

Following are the relevant extracts from the writer’s book ‘METHOD FOR STARTING INTEREST-FREE BANKING’ printed in Feb’99

This booklet contains a fully satisfactory reply to the Government’s petition of 13-2-99 to Federal Shariat Court on the question of interest about which the same court gave on 14-11-91 a fully documented, thoroughly argued, unanimous and authoritative decision after intensive hearings on petitions against interest, defended by the Government through legal talent of highest calibre available in the country.

It is not likely that the Federal Shariat Court will agree to hear arguments and open a debate all over again on an issue already thoroughly examined and comprehensively adjudicated upon and it is inconceivable that the court will make any amendment in its authoritative decision on which no objection has ever been raised by any Islamic scholar or modern economist and which remained unimplemented only because the Government never ordered the banking organizations to eliminate interest from the banking system.

Courts’ normal function is to interpret laws and pass judgments on validity of laws and decide disputes and not to make laws or design systems and as such the request in the petition for proposing a model for economic system is an exercise in futility. However, this request reveals Government’s concern about the harmful effects of interest on the society and economy and the urgent need for starting interest-free banking system in the country. Fortunately, this booklet is now available which demonstrates a practicable method for starting interest-free banking system immediately. Hence, there is no necessity to wait for a decision on the petition as there is a risk of long drawn proceedings to ensue which will unnecessarily delay our submitting to the Will of Allah and consequent result of fruitful gains therefrom.

For ready reference of the Prime Minister and those Government decision makers who are genuinely interested in starting the process of alleviating financial miseries of the people and taking the country out of debt-trap without any further delay, gist of each issue raised in the above petition is reproduced hereunder in italics with corresponding reply underneath.

2.1 Conflicting judgments, contrary view in earlier judgment of Sindh High Court (PLD 1989 Karachi 304)

For the first time in Pakistan history the question of interest came up for thorough examination and adjudication before the Federal Shariat Court in early 1990, and after the authoritative decision of 14-11-91 not a single differing opinion has so far come to light what to say of conflicting judgment. Sindh High Court’s judgment of 1989 came up before Federal Shariat Court during the proceedings of 1990-1991. The court after detailed examination of the Sindh High Court’s judgment dissented with it to the extent of allowing an additional amount on loan based on indexation on account of inflation.

3.1 The Government being cognizant of its responsibilities for ensuring a smooth and seamless transition to an economy based on Islamic principles is desirous of taking effective and immediate steps.

This nobly worded desire needs translation into action which is to order immediate elimination of interest which the banking organizations can execute without much ado by replacing interest with TMCL (Time Multiple Counter Loan) as explained in the chapter on “Operation Of Interest-Free Banking System” of this booklet. If the Government decision makers have any substantial objection or difficulty in implementing the proposal the writer shall travel at any time at short notice to meet the Prime Minister or any of his appointees anywhere for a discussion at his own expense. The writer also volunteers his services to the Government, without any status or remuneration, for any work required to be done for eliminating interest from the banking system.

4.1 It is the will of the people of Pakistan to establish an order wherein Muslims shall be enabled to order their lives in individual and collective spheres in accordance with the teachings and requirements of Islam as set out in the Holy Quraan and Sunnah.

The first and foremost requirement for fulfilling this objective is for the Government to finish the on-going war with Allah and His Rasool saws by eliminating interest.

5.1 This Honourable court may be pleased to lay down an overarching schema with clearly delineated features providing for a comprehensive solution to the problem of creating an economy based on the elimination of Riba.

It is not the function of Federal Shariat Court to lay down schema which, as shown below, is unnecessary and even harmful.

It is well-known what is forbidden in Islam and whatever is not specifically forbidden can be practiced. Beyond certain “do’s” and “don’ts” there are no constraints in Islam and it grants complete freedom of action and encourages competition which is necessary for progress and development and as such it will be harmful for the economy and unfair to individuals and enterprises to specify any particular scheme for all business houses and banks. Upon elimination of interest insatiable lust for worldly riches created by it will die down and economic system will begin to take Islamic shape automatically. Solution of the economic problems lies in elimination of interest for which this booklet provides sufficient guidance.

5.1.2 No sustained research or systematic application of mind.

It is the duty of the Government to take action in this connection.

5.1.3 Impact of inflation on the rights of borrowers and lenders.

According to the Holy Quraan and Sunnah any amount charged by the lender over and above the principal amount of loan on any account is riba. Interest is the main cause of inflation and in interest-free system there will be no significant impact of inflation. Islamic principles are simple to put into practice and are dispute-averse. Therefore, the simple and clear Islamic Law is that whatever amount is borrowed same amount has to be returned and there is no mention of the value of loan and also no provision for making any change on any account whatsoever. There is no exact unit of measure for calculating the value of money at different times. Therefore the simple way to avoid any dispute is to receive back only whatever is given in loan.

This issue was brought up in defense of interest by its advocates before the Federal Shariat Court during 1990-91. It was thoroughly examined argued and settled. It is not understood why this issue is again being raised. Apparently the authors of the petition have not cared to study the contents of the momentous judgment of the Federal Shariat Court given in November 1991.

5.1.4 Right of banks to levy service charges.

There will be no service charge on loans in TMCL-based interest-free banking system.

5.1.5 Returns to banks in profit sharing, unsatisfactory experience of profit sharing agreements, false and inaccurate books of accounts by companies showing loss in profit-sharing transactions, injustice to small depositors.

In TMCL-based banking system banks will issue loans on the basis of TMCL against collateral and they will not be under any compulsion to provide finance on profit-sharing basis. However, the banks will be free to enter into profit-sharing agreements with companies of their choice. In their own interest and in the interest of their depositors the banks themselves will take care to enter into profit-sharing agreements with only reputable organizations who maintain transparent accounts.

As regards profit-sharing ratio, it will be left to the market forces and competition. Market economy does not encourage unnecessary constraints and encourages open competition. In TMCL-based interest-free banking system there will be two types of deposits i.e. demand deposits and investment deposits. On demand deposits bank will not give any profit but return of full amount as and when demanded will be guaranteed. On investment deposits banks will give a portion of profit earned by them to the account holders. If the bank incurs loss on investment then the depositors will also share the loss. In the interest of their business and in view of competition from other banks the banks will give a fair share to the investment deposit account holders from the profits earned by the bank. Otherwise the bank will run the risk of deposits being shifted to other banks.

 As regards maintenance of false accounts by companies, the Government can and must take stern administrative measures and punish the culprits irrespective of their political affiliation so as to stop leakage of taxes and loss of revenue. Federal Shariat Court can provide no help to the Government as it is a matter of good governance which the Government itself must provide.

 5.1.6 (e) Laws to prevent money-lenders charging usurious rates of interest from persons in weak bargaining position, were intended to prevent exploitation.

 5.1.6 (f) Lenders are now middle class individuals who deposit their savings for their future needs, whereas bulk of borrowing from banks is done by corporate or business entities some of which are very large or very wealthy.

These fallacious contentions in favour of banking interest put forward by advocates of interest have been repelled time and again by eminent Muslim scholars and economists. Allamah Iqbal made a specific reference to modern banks in one of his famous verses condemning interest. According to Quraan and Sunnah any amount (big or small) in excess of the original amount of loan (advanced for any purpose - consumption, trade, industry or agriculture) charged from any one (rich or poor) is riba and strictly prohibited. Raising of such settled issues does not behove a government seeking ways and means to eliminate interest from the economy in abidance of precepts of Quraan and Sunnah.

 5.1.6 (g) Traditional Islamic methods of financing such as Mudaraba or Musharaka arrangements may simply lead to deprivation of the savings of the depositors. Large and wealthy companies will receive interest-free loans which they may or may not repay.

In TMCL-based interest-free banking system banks will advance loans on TMCL basis against collateral and they will not be under any compulsion to enter into profit-sharing agreements as already explained under item 5.1.5. As regards the problem of non-payment of loans, it is not specifically related to interest-free banking. In the present interest-based banking system also billions of Rupees have not been repaid. Solution of this problem is the duty of the Government and can be achieved only through good governance. Federal Shariat Court cannot help the Government in this politically originated problem solution of which requires stern administrative measures by the Government. However, upon elimination of interest insatiable lust for worldly riches created by interest will die down and instances of non-repayment of loans in TMCL interest-free banking system, hopefully, will be rare.

 5.1.6 (h) Productive utilization of deposits, discovery of profitable avenues of investment, risky investments to be eschewed, lending of banks to be biased in favour of conservatism, lending entails risks, compensation for the risks incurred by banks.

Not only banking but all businesses involve risks and it is their exclusive concern to manage their businesses prudently. Where fraud or other misconduct comes into play it becomes the duty of the Government to take stern administrative measures and punish the culprits. It is by no means the function of Federal Shariat Court to devise ways and means to avoid risks and losses in banking business. Moreover these problems exist in the present system also and it is not understood why these are raised in respect of interest-free system specifically.

 5.1.7 Borrowers should not be saddled with exorbitant charges imposed by banks.

In TMCL-based interest-free system there will be no service charges on loans imposed by the banks.

 5.1.7 (a) Loan on profit-sharing may end up in paying more to the bank, many companies do not maintain correct books of accounts.

In TMCL-based interest-free system, as opposed to profit-sharing based system, banks will not be under any compulsion to enter into profit-sharing agreements.

 5.1.7 (b) High cost of bank borrowings adversely effects growth of the economy, is likely to lead to Pakistani manufacturers being priced out of foreign markets, internally it leads to price increases and higher rate of inflation and externally it leads to fall in exports and a greater dependence on foreign loans at high rates of interest and consequential transfer of economic sovereignty in favour of foreign countries.

Nothing can be as unpatriotic and disgusting as to be guilty of laxity in discarding interest even after realizing its devastating grievous effects listed above, and continue jeopardizing the country’s economic sovereignty. Any more delay in eliminating interest may make it well nigh impossible to save our economic sovereignty and independence from foreign clutches.

 5.1.7 (c) Via media for recovery of sick industrial units.

Owners of sick industries got away with looting of public money due to their political influence. They are living in luxury and have used share-holders’ money and loans from nationalized banks in building big bank balances and buying property and other valuable assets. The solution of the problem does not lie in pumping more public money into the sick units but it lies in recovering by force the looted wealth from the owners’ personal assets which are no secret and which are often brazenly exhibited in public. Stern action must be taken against all of them irrespective of their political affiliations. Nobody should be permitted to enjoy looted wealth.

 5.2 What is required is a reform of the banking system and not its destruction in the name of interest-free banking system. What is required is a detailed careful and systematic application of mind to restructure it in the light of the injunctions of Islam in such a manner that it leads to an improvement in efficiency and not a devastation of the economy.

The proposal of replacing interest by TMCL put forward in this booklet is so much in line with the above requirements that this booklet can be held to be tailor made for meeting the above requirements fully and effectively. The proposal calls for only giving up interest and injecting TMCL as debt financing instrument in the banking system. No other means is yet known whereby interest-based system can be so smoothly converted into interest-free system and this can take place in no time without much ado. Now there should be no excuse for any body to delay this transformation any longer.

 5.3 No modern economy can function without secure and vibrant banking sector.

The above contention is true and it is also true that with the inception of TMCL as substitute of interest the banking sector will not only become vibrant and secure but will also produce spiritual, ideological, moral, social, economic and financial benefits as depicted in various chapters of this booklet.

 5.4 Banking system is the conduit through which money flows for investment and export and imports. It is not possible in the modern world for any country to subsist as an island of isolation. If the country is to act as one of the flag bearers of an Islamic renascence it cannot afford to lag behind in economic progress and development.

The above contentions are very true but it is also true that the banking system does not have to be interest-based which has led us into debt-trap and brought our credit rating down to an insulting low level which is far worse than living in isolation with self-respect not injured by dictation of lenders. Flag bearer we are, but on the wrong side of the war front. We are not qualified even to enter any Islamic team for which we must discard interest and only then we can aspire to achieve economic independence and prosperity and consequently place of respect in the world.

 Too much time has already been wasted and to avoid further damage it is necessary to implement Federal Shariat Court’s order of 14-11-91 immediately instead of waiting for an outcome of the present petition and letting, in the mean time, the country’s economy to worsen further and become more dependent on foreign loans which increase the debt burden and provide only short breathing space at high price of passing of our profitable strategic national assets like PTCL permanently into foreign hands, and no real assistance for economic recovery.

 Due to non-implementation of Federal Shariat Court’s order we have lagged far behind in economic progress during the past seven years. In order to avoid lagging further behind it is necessary to implement the above order immediately.

 6.1 Subsisting contracts entered into with foreign or domestic entities.

It is not clear what the petition requires from the Federal Shariat Court by raising this point. If the intention is to inquire what should be done about outstanding interest-based loans, then complete satisfactory answer of this question is given in chapters on “domestic debt retirement after inception of interest-free banking system” and “foreign debt retirement after inception of interest-free banking system” of this booklet.

 7.1 Crucial and central role of the banking system not realized. This honourable court should embark on a detailed and exhaustive exercise to authoritatively lay down the salient features of an Islamic economy. A system which conforms to the spirit and letter of Islamic provisions should be spelled out in terms of which the banking system can function efficiently and productively for the benefit of the people of Pakistan. Features which are Islamic must be isolated and separated from those which are un-Islamic.

Ordering to eliminate interest from the banking system does not at all mean non-realization of the crucial and central role of banking system which does not necessarily have to be based on interest.

 After the Federal Shariat Court had given exhaustive judgment of 14-11-91, it was the duty of the Government to embark on detailed and exhaustive exercise to find a method to eliminate interest from the banking system. Now after more than seven years it is not right to say “the honourable court should (?) embark on detailed and exhaustive exercise...” because the function of Federal Shariat Court is to examine and pass judgments on specific laws and disputes and not to design systems. If the quest is for a suitable method to eliminate interest from the banking system, then the requirement is fully met with by this booklet. If the concerned authority has any doubt about the viability of the proposal given in the booklet, the writer will be only too glad to have a meaningful discussion for which he will travel at his own expense.

 Interest-free banking system is the foundation for Islamic economic system and laying of this foundation is the most urgent need of the hour and must be accomplished immediately. However, to work out details of a complete Islamic economic system for the country is a big task and the Government should set up a commission of Islamic scholars and economists of integrity to prepare recommendations on important issues like land reforms, equitable taxation, collection of revenues, proper zakat system (present system is an insult to the Islamic concept of zakat), prudent expenditure of revenues, stoppage of expenditure on luxurious amenities for Government executives and parliamentarians, provision of basic necessities of life for all including employment, housing, education, and health services etc. It may take quite some time in the preparation of these recommendations but elimination of interest from the banking system is not dependent on them and must on no account be delayed any further.

 8.1 Existing system may be destroyed without creating an alternative system. This can only be a recipe for economic and social disaster.

Inception of TMCL as substitute of interest in the existing system will be smoothest possible transition of interest-based un-Islamic system into interest-free Islamic banking system. The existing interest-based banking system has already proved to be a recipe for social and economic disaster and there is no justification at all to let it continue any longer.

9.1 Obligation in excess of US$ 60 billion (foreign debt in excess of US$ 34 billion, domestic debt in excess of RS 1200 billion) debt servicing running into billions of dollars annually. With a decision not to pay interest, the country may become a defaulter with potentially extremely serious implications.

The miserable situation of the economy as depicted is the result of excessive import of luxuries far in excess of the value of exports, excessive budget deficits resulting from spending far in excess of the revenues, and indiscriminate borrowing on interest. The situation can be improved only by adopting the cult of inexpensive simple living within the available honest means of income at individual and national level, the example of which must be set by the ruling elite.

 For taking the country out of the debt trap it is absolutely essential to convert the existing system into TMCL-based interest-free banking system. The two chapters of this booklet on domestic and foreign debt retirement demonstrate with mathematical calculations how we can meet the obligations of repaying our debts in full and proceed on the path of progress and development. Anybody in authority who rejects the writer’s proposal must give a well-defined alternative and explain how the country can be pulled out of the debt-trap. If such an alternative is not available, which certainly is the case, the Government should have no hesitation to order immediate implementation of the writer’s proposal.

 10.1 Importance of honouring contractual stipulation.

As is clear from the answer to the issue 9.1 the contractual stipulations will be fully honoured under the procedures laid down in this booklet for domestic and foreign debt retirement.

 11.1 (a) A smooth and non-disruptive transition to an economy based on the principle of Ehsan and Adl which is free from the taint of Riba.

Adoption of the writer’s proposal to replace interest with TMCL will result in a smooth and non-disruptive transition of interest-based un-Islamic banking system to interest-free Islamic banking system which is a pre-requisite for structuring complete Islamic economic system based on the principles of Ehsan and Adl, on which the writer has already commented in answer to issue 7.1. If and when interest-free banking system is established in the country the writer will offer his humble services to the Government, without any status or remuneration, for any work required to be done in preparation of full Islamic economic system.

 11.1 (b) A workable economic system which will enable Pakistan to flourish and prosper in the light of the principles of Quraan and Sunnah.

As shown in the booklet TMCL-based interest-free banking is workable and will surely bring prosperity in the country.

Prayer (i) Lay down and declare the principles of Islam on the basis of which the existing laws, for and in relation to the question of Riba, are scrutinized and examined and an authoritative verdict given as to the lines along which the existing system can be remodeled so as to bring it in conformity with the requirements of Islam.

The authoritative verdict of 14-11-91 was given by the Federal Shariat Court after the existing laws, for and in relation to interest, which were defended on behalf of the Government by best available legal talent, were thoroughly examined and scrutinized on the basis of the principles of Islam adequately explained and documented in the exhaustive judgment. Any further laying down of principles in this connection is absolutely un-necessary.

 As regards remodeling of the existing banking system so as to bring it in conformity with the requirements of Islam it was the duty of the Government to find out a method to accomplish this task. However, a ready answer for enabling the Government to proceed immediately to re-model the existing system is available in this booklet which illustrates workable method for starting interest-free banking system.

 Prayer (ii) Direct that in order to avoid creating a vacuum, the functioning of the existing system may not be disrupted until such time that a modified system has been put in place.

This prayer seeks permission of the Federal Shariat Court for the Government to delay elimination of interest which is so severe a crime in Islam that Allah has given in Quraan warning of war from Allah and His Rasool saws against those who do not give it up. The most extra- ordinary warning of war shows that interest cannot be permitted in any circumstances for any duration and that it can be given up without any difficulty because Allah says “ALLAH INTENDS EVERY FACILITY FOR YOU; HE DOES NOT WANT TO PUT YOU IN DIFFICULTIES” (2:185). It is absolutely wrong and baseless contention that interest cannot be eliminated at once and that it should be done gradually and completely eliminated when an interest-free banking model has been put in place. Syed Abou-al-Aala Maudoodi wrote in his authentic book ‘SOOD’ in Urdu “so long as interest is permitted by law and interest-based contracts are admitted and enforced by courts and money lenders are allowed to collect deposits by giving temptation of earning interest it is not at all possible for an interest-free financial system to come into existence and grow... . Whenever it is to be accomplished interest shall have to be banned by law in one single starting step. Then interest-free financial system will come into being automatically and necessity, which is the mother of invention, will pave the way for it to develop and expand in all fields”. Nothing like a vacuum or disruption will happen in converting the existing system into interest-free banking system in one single step by substituting interest with TMCL.

 In Islam there is no papalism and no body howsoever high in status or learning has the authority to grant permission to any one, in any circumstances and on any account, to violate Allah’s commands. Any one granting such an un-authorized permission will be crossing into Divine Realm. Even in secular systems no body is allowed to rebel or act against law.

 The above discussion leads to the conclusion that the Government of Islamic Republic of Pakistan, as a first vital step towards fulfilment of its declared commitment to establish Islamic order in the country, must at least order immediate elimination of Interest and stop the on-going war against Allah and His Rasool saws, without waiting for the outcome of the petition to the Federal Shariat Court.