Riba Free Banking or Riba Free Economy: 

Islamic Banking & Finance is making great headway in the world, as well as, in Pakistan with an extraordinary pace. The most recent industry assessments indicate that the global Islamic finance assets have surpassed USD 5.2 Trillion, with a projection to reach USD 6.1 Trillion at the end of 2026. These figures include Pakistan’s numbers as well. In Pakistan, Islamic banking assets have crossed PKR 14.5 Trillion, with Deposits around PKR 11 Trillion and Financing Assets around PKR 5.7 Trillion. It represents 22.9% of the total banking assets in Pakistan, while Islamic banking branch network has reached 42% of the total banking branch network of Pakistan. This is indeed huge progress, while the deadline set by the Riba Judgement and the Constitution of Pakistan to convert the whole banking system into Islamic banking by 31st December, 2027 is also fast approaching, which will change the banking scenario, at least in Pakistan.

All this could be a very good journey of Islamic banking, which will enter into a new phase if the Riba Judgement is implemented by the deadline. If the task is accomplished (since there are a few Court Appeals yet pending hearing in the Shariat Appellate Bench of the Supreme Court, filed against the Riba Judgement), then Pakistan will be the first country of the world, in the present history, which will have single Islamic banking system, contrary to the countries where Islamic & conventional banking is running side by side.

Nevertheless, here comes a question that whether this progress of Islamic Banking & Finance is equivalent to Islamic Economic System; and whether, Islamic Banking will lead to the ultimate outcome i.e. development of Islamic Economic System.

Banking is a sub-set of any financial system or economy of any country. Banking generally operates on a micro-level; whereas, economy is macro role level field. Islamic Financial System or Islamic Economy is also a wider and comprehensive macro-framework, governing inter-alia social welfare of the citizens, ensuring individuals’ property rights, limiting wealth concentration among few, mandating wealth distribution, promoting market ethics and creating trust in the economy. Islam believes in wealth circulation and anti-monopoly of wealth. Islamic Financial System believes in catering the purpose of achieving socio – economic justice, human well-being and balanced prosperity amongst the public, by aligning material resource distribution with moral, ethical and spiritual principles derived from Sharia. Islam’s Economic Blueprint is given by the Almighty Allah in Quran, vide Surah Al-Baqarah (2:275) and Surah Al-Hashr (59:7). The former verse mandates that Allah has permitted trading and forbidden Riba, while the later verse commands that wealth may not merely circulate among rich. In fact, the later verse in a complete form sets three rules, i.e. wealth circulation; anti-monopoly command and social security by channelling the State assets strictly to the vulnerable. If we read these two qur’anic verses in conjunction, we will see that one of the purpose of forbidding “Riba” and promoting trade is to allow circulation of wealth among the economic system so that it can achieve the concept of anti-monopoly towards wealth. Islamic concept of trade if implemented will ensure the individuals to actively create wealth, encourage entrepreneurship, and sustain themselves independently rather than depending on charity. Trade relies on voluntary exchange ensuring that both buyer and seller benefit without coercion or unfair loss. It ensure that the markets are prevented from hoarding of money and help distribute essential goods and services throughout the community. In Islam, while trade is strongly encouraged, it is also ensured that it must operate within clear moral guidelines to prevent societal harm and thus, trade as such becomes the basis of free economy. So, the purpose of forbidding Riba is not restricted only to eliminate and eradicate exploitation but to support free economy thus achieving wealth circulation and decentralization of wealth among the rich people. This eventually will lead the citizens to equality, one of the purpose of the Islamic finance system.

Given the said rules of Islam, the question which I feel is relevant is that whether Riba Free Banking can build a fair and just society by stopping financial unfairness, encouraging risk-sharing and linking money directly to real economic work instead of speculation. I apprehend that it cannot serve the purpose, since it addresses only a sub-set of the economy, i.e. banking sector only; and not a Riba Free Economy, in accordance with the purposes and the principles of Islam. Therefore, the answer to the said question is not in affirmative; and this aspect is perhaps missing here, if we simply look and stress upon the Riba Free Banking System and ignore the actual purpose of Riba elimination, i.e. to develop and promote Islamic economy.

Riba Free Banking at present, especially in Pakistan, is primarily focused on ‘financing’ than on trade. This is the principal issue. Islamic banking, as developed, believes in financing products; not on trading products. These products’ emphasis only on the idea that how financing can be extended, complying the sharia rulings; whereas, Islamic finance system believes in trade as has been explained above. Riba Free Banking may not probably lead to circulation of wealth among the economic system on a micro level and it shall remain limited and restricted to the big industrialists, commercial conglomerates, multinationals, sectors influential set-ups; and thus, wealth will circulate amongst themselves, instead of among the general public. Therefore, there is need of a debate and deliberation on this aspect, which the State and the Sharia Scholars must consider, so that we can lead to an Islamic welfare state, as envisaged by Islam and also by the Quaid-Azam, who stated, while addressing the opening ceremony of the State Bank of Pakistan, that “We must work our destiny in our own way and present to the world an economic system based on true Islamic concept of equality of manhood and social justice.”

(The writer is a Head of Legal at a leading Islamic bank. He is lawyer by profession and has been advising Pakistan’s banking industry as an In-House Legal Counsel for around 31 years)