SBP, four banks challenge FST ruling on interest rates in SC

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The SBP building in Karachi. Photo: The News/File

ISLAMABAD- The State Bank of Pakistan (SBP) and four private banks on Saturday challenged the Federal Shariat Court Supreme Court decision declaring the current interest-based banking system to be against Sharia law and ordering the government to move to an interest-free economy.

Salman Akram Raja appealed on behalf of SBP under Article 203F(1) of the Constitution of the Federal Shariat Court’s judgment of April 28, 2022.

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

In its appeal, the State Bank of Pakistan recognized the spirit and intent that led to the substantive provisions of the April 28, 2022 Shariat Court ruling. However, she asked for clarifications as the judgment has certain inconsistencies.

The SBP stated that as the primary custodian and regulator of the financial and monetary framework of the Islamic Republic of Pakistan, it is deeply committed to ensuring compliance with the injunctions of Islam, particularly in relation to Riba, while protecting financial stability and security Sector of the country that functions as part of the global financial system.

The complainant can rightly be proud of the promotion of the Islamic banking sector in Pakistan as a critical and growing part of the financial sector as a whole, SBP argued, adding that these efforts were recognized by the Federal Shariat Court in its judgment of April 28, 2022 in paragraphs 82 to 88.

It further argued that at the beginning of this millennium, a phased approach to transforming the banking system into Sharia-compliant banks was adopted, allowing both Islamic and conventional banks to operate in the country at the same time.

This approach has proven successful and Islamic banks now account for 19.4 percent of the country’s total banking system in terms of assets, while the share in terms of deposits is 20 percent (as of March 31, 2022). Currently, 22 Islamic Banking Institutions (IBIs) (5 fully-fledged Islamic banks and 17 conventional banks with standalone Islamic banking branches) with a branch network of 3,983 branches as well as 1,418 Islamic banking windows (Islamic bank counters in conventional branches) operate in the country, the SBP claimed.

It was further argued that (SBP) has also taken steps to bring the legal and regulatory infrastructure in line with Sharia principles.

She recalled that the SBP is among the few regulators in the world to have established a comprehensive legal, regulatory and Sharia-compliant framework for Islamic banking.

The SBP submitted that in paragraph 132 on page 248 and paragraph 158 on page 287 of the judgment of 28 April 2022, the FSC ordered that future financial obligations, including the drawing of loans and advances, between Pakistan and international financial institutions and others there are bilateral as well as multilateral financiers based on Sharia-compliant forms of financing such as the issuance of sukuk.

SBP argued that issuance of sukuk or other similar instruments in the required volume and frequency is not currently practical, adding that the assets available for structuring sukuk transactions are limited.

The SBP argued that a summary of the Sukuk issues prepared on behalf of the federal government or other federal bodies is hereby attached to the immediate appeal, while respectfully asking the Supreme Court for guidance on the FSC’s austerity guidance will certificates and domestic government debt in general.

The State Bank of Pakistan asked the Supreme Court to kindly amend the April 28, 2022 Federal Shariat Court ruling to respectfully address the issues raised in the immediate appeal.

It is important to note that on April 28, 2022, a three-member federal Sharia court, headed by Chief Justice Muhammad Noor Meskanzai and composed of Justice Dr. Syed Muhammad Anwar and Judge Khadim Hussain M. Sheikh had declared that the prohibition of riba (interest) applies absolutely in all its forms and manifestations as per the injunctions of Islam and in accordance with the Holy Qur’an and the Sunnah. Therefore, it should be removed from the country in five years.

The bank had decided that a period of five years was reasonably sufficient to fully implement the decision, ie transform Pakistan’s economy into an equitable, asset-based, risk-sharing and interest-free economy

“Therefore, we would set December 31, 2027 as the date on which the decision by the complete elimination of Riba from Pakistan should take effect,” the FSC had held.

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