ISLAMABAD, June 13: The federal government on Thursday informed the Supreme Court that transformation of economy into the interest-free mode was impossible and any such attempt would result in anarchy in the country.

Advocate Raza Kazim, representing the federation before the Shariat Appellate Bench of the apex court, stated: “The federal government has found that transformation of entire financial system is not practicable, and if attempted there is high degree of risk and likelihood of a permanent damage to the already fragile economy of the country”.

However, he continued, the government was committed to allowing the Riba-free banking as a parallel banking system in the country and had already allowed setting up of Al Meezan Bank.

He said the government supported the review petition filed by the UBL, seeking reversal of the Riba judgment on the grounds that it was based on erroneous interpretations of Holy Quran. The arguments advanced by the UBL counsel were adopted by the federation.

The Shariat Appellate Bench consisted of Chief Justice Sheikh Riaz Ahmad, Justice Munir A. Sheikh, Justice Qazi Mohammad Farooq, Justice Dr Khalid Mehmood, and Justice Dr Rashid Ahmad Jullundari.

The counsel raised objections about the jurisdiction of the Federal Shariat Court to decide matters of far-reaching implications like the present case.

He said the federal government believed that the Constitution was a document which was the result of Ijmah, and Chapter 3 of the Constitution, providing the establishment of a Federal Shariat Court, could not be permitted to nullify the rest of the provisions of the Constitution.

He said the Constitution, which to him was dominant to Chapter 3 of the Constitution, already provided under Article 38 that Riba would be eliminated from the country “as early as possible”.

Justice Farooq inquired if the counsel was saying that deadline for the implementation of the Riba judgment should not be there.

The counsel said he was not asking for an extension in the deadline for the implementation of the judgment, but was saying that the Federal Shariat Court should not have interfered in the policy matters.

Chief Justice Ahmad inquired about the remedy available to citizens if the policy was not acted upon.

The counsel said that the court should not take upon itself what was not enjoined on itself. The court, he stated, was not the sole authority of the state. The judicature, he added, was only one limb of the state, like legislature and executive.

He stated the Federal Shariat Court judgment, declaring all forms of interest-based banking un-Islamic, had created a crisis.

He said the Shariat Appellate Bench of the Supreme Court which upheld the FSC judgment was not “properly” assisted by the then government. The bench itself had noted that the attorney- general was not willing to appear and it was not given proper assistance, he pointed out.

The counsel was still on his legs when the court rose to assemble again on Friday.

Earlier, UBL lawyer Raja Akram concluded his arguments, saying that Holy Quran which prohibited Riba, permitted Bae in the same verse.

He argued that Bae was not “sale” as interpreted by the FSC, but was “business, trade, investment and bargain”. He claimed that Holy Quran only prohibited charging of double and triple, and did not prohibit charging reasonable interest on the loan. The Holy Quran had prohibited element of exploitation and coercion, he added.

The counsel stated that Holy Quran permitted adjustment to the changing needs of the time, and referred to Allama Iqbal’s essay titled “Reconstruction of Islamic Thought”.

He said that when Holy Quran enjoined on the Muslims to keep their horses ready, it did not mean that Muslims should not use any other means to protect themselves from the enemy except horses. The present-day horses, he stated, were tanks and F-16 aeroplanes.

The counsel referred to Sura-i-Juma, Verse 62, in which God commanded the believers to close their businesses when Azan for Juma prayers was recited. The word “Bae” in Sura Juma clearly established that Allah used it in the meaning of business, he said.

The court, the counsel argued, had wrongly interpreted Bae as “sale”. He said that present day banking was fully protected under the Quranic concept of Bae. The bank, he added, was a company which had shareholders, deposits and it invested the money of the depositors in the business in the form of loans.

He said the whole objection to the present-day banking was that it offered a fixed rate of return. He said that due to expertise and experience it had been made possible that a fixed rate of return was foreseeable.

He said if there was any inconsistency, the banks would look for correction but the institution should not be demolished.

He said the court was not correct in holding that no risk was involved, and added that loans extended to the companies were not returned all the times. At present, he pointed out, Pakistan’s bad debt stood at Rs265bn.

In affidavits, submitted by the government and the SBP, the court was informed that the implementation of the SC judgment was impossible.

The SBP said there were 53 pre-dominantly Muslim countries in the world and added that in all of these countries except Iran and Sudan, law did not prohibit interest-based banking.

The SBP said the system in Iran was conceptually different and was not in accordance with the parameters laid down by the SC.

Under the Iranian interest-free system, (a) Principal amount of all types of deposits in Iran is guaranteed; b) Reward/ bonuses/ prizes can be given to Qard-e-Hasana (Saving and Current) deposit holders; c) Sale and purchase of debt instruments and discounting of bills is allowed; (d) A return paid on lending between interdependent borrower and lender is not considered as Riba.

Under the Iranian system, the SBP said, the government could pay interest on its borrowing. Companies belonging to one group could also charge interest on lending to each other.

The SBP further said that Sudan, being a very small and underdeveloped economy, did not offer an attractive economic model for Pakistan to adopt.

It said that even in Sudan, the banking system was not totally interest free.

The SBP said that the experience of individual Islamic banks over the last three decades did not present a satisfactory or a proven model for transforming the entire system into the lines directed by the Supreme Court.

It said Malaysia had an existence of Islamic banking at a comprehensive level with both conventional and Islamic banking systems working on a parallel basis in a competitive environment. Malaysia introduced Islamic banking in 1983 but it was able to occupy in 2000 only 7pc share in the financial system.

The SBP said that there was no complete and successful banking system model in the world that complied with the parameters prescribed by the SC which Pakistan could emulate.

It said that since 1990 a series of reforms had been introduced in Pakistan’s financial sector with the objective of improving its efficiency so that it could meet the financial service needs of the economy. It said that so far depositors in Pakistan were getting a predetermined rate of return on their money. Under the new system they would be required to be investors, sharing the profit and loss of banks.

About 85pc of deposits were on a return basis. It was difficult to assess how many would be willing to give their consent to the bank to act as their agent or attorney on a real profit and loss sharing basis.

The SBP said there was strong apprehension that this consent may not be given by a large majority of depositors who would not like to risk their principal amount and forgo fixed returns. They might shift their money to other channels such as real estate, gold, and possibly some speculative activities putting their capital to a much higher level of risk, it added. At present small depositors account for over 60pc of total deposits of Rs1,276 billion. “This is a large part of the capital of the country and should not be exposed to undue risk.”