Of religion and economics

Published : May 26, 2001 00:00 IST

Pakistan's military government becomes increasingly nervous as the deadline a Supreme Court Bench has set to establish an interest-free, Islamic economy approaches.

EVER heard of an interest-free banking and trade system in the world of (electronic) e-banking and e-commerce? Welcome to Pakistan to learn about it all. The country is cash-strapped and neck-deep in debt, but the military regime of Gen. Pervez Musharraf has grand plans to introduce what is known as an economy free of riba (usury or interest) in conformity with what is 'ordained' in the Koran. The transformation, if it takes place, would severely impede the reform process. And yet the government is attempting - or at least making it appear that it is - to Islamise economy.

The military government is required to switch over to the new (actually 1,400-year-old) form of banking and trading according to a December 1999 judgment of the Shariat Appellate Bench of the Pakistan Supreme Court. The court directed the government to adopt an interest-free economic regime by July 1, 2001. The military government faces a dilemma not only on account of the court verdict but also because of growing pressure from the powerful religious lobby that campaigns for the introduction of Islamic laws in all spheres of life. In recent times extremist religious groups have issued threats that they will lay siege to Islamabad, the national capital, if their demand is not accepted. However, the economic ground realities have forced the Army to tread cautiously. Either way, it is a no-win situation.

There have been statements galore from the mandarins of the military regime, particularly Religious Affairs Minister, Mahmood Ahmad, promising implementation of the apex court's judgment within the stipulated period.

The change-over to a riba-free economy would mean virtually a re-writing of the rules of economics. There is nothing to suggest that the military government has even begun the process, leave alone putting in place the innumerable mechanisms needed to take the place of the existing banking and trade system.

The government, according to the court directive, has constituted a number of high-level committees to recommend ways and means to switch over to the new system with the minimum possible adverse impact on the economy. However, reports suggest that the committees have made no progress. The issue is so complex that there is total confusion about the way forward.

That the task before the Musharraf government is daunting is clear from the fact that a 'riba-free economy' does not exist anywhere. Islamic countries such as Saudi Arabia and Kuwait claim to follow the system but scholars have serious doubts if it conforms with what is laid down in Shariat.

Dr. Farrukh Saleem, chief of a leading consultancy in Islamabad and a writer on economic topics in the Pakistani media, told Frontline that "to the best of my knowledge no country has formulated a genuine interest-free institution. Some of the Islamic countries that claim to have introduced a riba-free economy have merely changed the nomenclature." In some of these countries, the word interest is replaced by phraseology such as profit and loss sharing (PLS) or markup. Actually Pakistan experimented with the system in a limited way when the military dictator Zia-ul-Haq was in power. As Zia ordered the banks to stop the interest system, they replaced 'interest' with other terms. It suited all, including the religious zealots patronised by the dictator.

In fact, the predicament of the current military regime over the riba system is a legacy of the Zia regime. After introducing limited changes in the banking laws to appease the religious lobby, Zia established a new Islamic Court called the Federal Shariat Court. The court, the job of which was to bring all laws in conformity with Shariat, was, however, restrained from looking into the issue of interest for a period of 10 years.

The restriction ended in 1991 and, in response to a clutch of petitions filed by religious organisations, the Shariat Court declared in 1992 that accepting interest in any form was un-Islamic. The issue was then taken to Pakistan's highest appellate court, and in 1999 it upheld the Shariat Court's verdict. The court laid down elaborate guidelines for a completely interest-free economy by June 2001. The apex court declared as un-Islamic all transactions that included mark-up, murabaha, bai' muajjal (deferred sale) and the so-called interest-free modes insofar as elements of riba have crept into them. "Any amount, big or small, over and above the principal in a loan or barter transaction, whether obtained for consumption or for commercial or productive activity, is prohibited by the Holy Koran," the Shariat Appellate Bench held unanimously.

The court directed the government to make serious efforts to relieve the nation of the burden of foreign debt as soon as possible and to renegotiate existing loans. Foreign financial assistance, if necessary, should henceforth be sought and accepted on the basis of Islamic modes of financing.

THE judgment sent shock waves across the country. Its implications for Pakistan, whose economy is highly dependent on the rest of the world, are serious. All that the military government could think in terms of a response to the verdict was to constitute a plethora of committees and commissions. However, one of the questions that the judgment raised related to the country's staggering external and internal debt. Moreover, what impact would a riba-free economy leave on the confidence of potential investors, deposit holders and all others who have lent their lives'-savings to the government? The elaborate mechanism suggested by the court for conversion of the loans into bonds only added to the confusion.

According to estimates, the internal debt, of the Pakistan government is 1.7 trillion Pakistani rupees ($28 billion). This is besides the external debt, estimated at $35 billion. The government clarified that riba-free economy would not affect external loans. With the available foreign exchange reserves just enough to finance imports for four to five weeks, the military government had little option but to come clean on this score.

The explanations provided by the finance managers of the Musharraf government about how the verdict will affect domestic debt has only complicated matters. But the truth is that no one is wiser after the plethora of statements. Everyone is still groping in the dark as to what would happen if the government goes ahead and introduces an interest-free economy.

The religious parties promptly welcomed the verdict as yet another step towards Islamisation. However, they did not bother to answer some of the fundamental issues raised by the critics on the pitfalls of the riba-free economy. Dr. Mubashir Hussain, Finance Minister in the Benazir Bhutto government, issued a statement questioning the very rationale of a riba-free economy and warned that it would only usher in economic chaos. He said that the attack on the system of interest was basically an attack on the very foundations of the capitalist order on which the current economy of Pakistan, indeed that of the whole world, was based.

"Surplus money abounds in the hands of people who are not producers of wealth either through agriculture, industry or services. Their money is passed on to entrepreneurs through banks and thus the industrial, agricultural and service sectors make further gains. There is no way of getting out the institution of interest in a capitalist society. Indeed a society that wants to do away with the capitalist mode of production has to be socialist. But that is not the intention of our court," Dr. Hussain said.

There is little doubt that Pakistan will end up paying a heavy price if it opts for a riba-free economy. Owing to various factors the country is facing a serious economic crisis. There has been a drastic fall in foreign direct investment. Immigrant Pakistani workers prefer to send their remittances through what is known as hundi (private channels) rather than the banking system. Despite the best efforts of the government, the balance sheet of imports and exports refuses to tally.

So, as the deadline set forth establishment of a riba-free economy approaches, the military government is becoming increasingly nervous. Perhaps the only hope for the Musharraf regime lies in a petition filed by a government-owned bank before the Supreme Court seeking a review of the verdict.

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