Prohibition of riba is the basic principle of Islamic economic system. There is no specific definition of riba. But overall riba is considered as the “fixed rate of interest on loans’’. In Arabic language it is literally defined as excess or increase. But in Islamic Jurisprudence it has somewhat different meaning and definition. Hazrat Shah Waliullah Dehlvi defined riba as: “Riba` is a loan with the condition that the borrower will return to the lender more than and better than the quantity borrowed.”
Riba existed in pre-Islamic Arabic society. After the advent of Islam, it was strictly prohibited and it is counted as major sin. The orders of prohibition directly come from Holy Quran & Hadees. Different Jurist also agreed upon the banning of riba. But after the rapid industrialization of western countries, it influenced the banking system of the world. Many Muslim states adopted western economic system based on riba; because they didn’t had any alternative interest free system to compete International demand.
In Pakistan, Federal Shariat Court gave a landmark decision on the prohibition of riba. Case of “Mahmood-ur-Rehman v. Secy., Miny. of Law”, 115 shariat petitions and 3 Suo Motu shariat notices cases are heard by court. Court gave only single judgment on all the petitions that were filed in the court, because the question before the court was same. In order to proceed further, court decided to prepare a detail questionnaire relating to impugned fiscal laws and then court sent it to distinguished ulemas, scholars, economists and bankers. Court requested for their opinion. Some scholars, bankers/economists appeared before court and submitted their opinion, while some just sent back questionnaire along with their opinions. Court gave judgment based on the opinions of these scholars, bankers and economists. So to find out the rationale of the judgment of the court, it is important to know what were the opinions of the distinguished scholars, ulemas, bankers and economists. In the coming parts of this research, these opinions will be briefly discussed as well as the analogy or the arguments of the court will also be discussed.
Most of the bankers, jurists, scholars and petitioners appearing before the court declared riba of every kind, simple or compound, as unlawful (haram). They relied on the injunctions of Quran, Hadees, quotations of Imams and history of riba & its subsequent prohibition. They furthermore said that the current banking system is purely based on riba. Riba based transaction between Muslim and Muslim or Muslim and Non-Muslim on state level or individual level is haram. Any transaction or financial schemes introduced by them also comes under the prohibited riba e.g. prize bonds. The alternative they suggested for interest free banking is Mudarabah & Musharakah, which is based on mutual profit and loss.
Mr.Khalid M. Ishaq Advocate, who appeared before court on behalf of National Bank & State life insurance Corporation, raised the plea that the banks in Pakistan are working under the valid Islamic instrument declared by council of Islamic ideology. He further argued that the there are juristic opinion available that justifies that current banking interest doesn’t fall under prohibited riba. But the material he presented to prove his arguments were insufficient to satisfy of court and according to the court. Nevertheless, the learned counsel himself was unable to prove his point and court rejected his plea.
Now court started off with the literal meaning of riba. In Quran there are several meaning of riba used in literal sense, for example, to grow, to increase, to swell, to rise etc. court concluded from the Quranic illustrations that the literal meaning of riba is to “increase”. In Shariah it means: “an addition, however slight, over and above the principle” which includes usury and interest. Court used many definitions and interpretation of the word riba, in order to reach a precise definition of word riba. Court concluded that the riba is a consideration or compensation for the period of repayment of loan. Court further stated that since “period” is not a valuable property (Mal), its return has been declared as unlawful, whether it is money or any other thing.
Now, after obtaining the precise definition of the riba, court move forward towards the verses in Quran, which prohibited riba. Court quoted many verses; I will quote only one verse. In Quran Allah (swt) says: “O you, who believe, do not practice usury, charging doubled and redoubled (interest): but have fear of Allah: You may well attain your goal.” (Al-Imran 3:130)
In the tafsir (commentary), namely Tafsir fi Zilal al-Quran by Syed Qutub Shaheed of Egypt, commented on the verse of Sura Al-Baqrah, which dealt with the probation of riba, he stated: “interest and Islam cannot remain together in a (Muslim) society”. Court added some extract from this tafsir, in which it is emphasized that riba is not only bad for the humanity, faith and concept of life but also a curse for the pure economic and practical sphere of the life. He further said that riba is against the ethics and no Islamic economic system can work against the ethics and morality. Riba creates fraud, greed and jealousy in the heart of an individual which destroys a society. Lastly he said that on one side Islam prohibits riba and on the other side gives us a better economic model in which we don’t need riba. 
It is quoted from the Jabir, the Holy Prophet (saw) cursed those who receive and pay interest and the scribe of the deed and those who bear witness to it and said they are equal. (Muslim) It is worthy to write down the wordings of Prophet (saw) on the prohibition of riba during his farewell pilgrimage, he said: “Every form of interest (riba) is cancelled; capital indeed is yours which you shall have; wrong not and you shall not be wronged. Allah has given His commandment totally prohibiting interest (riba). I start with the amount of interest which people owe to Abbas and declare it all cancelled.” 
However, there are some modernists, including Yaqoob Shah, Ex-Auditor-General of Pakistan; their view is that Quran prohibited the type of Riba which was prevalent among the Arabs of that time; interest of current system doesn’t include the prohibited type of Riba. They further argued that there was no concept of commercial transaction at the time of revelation of Quran, so how can Quran prohibit commercial transaction? The counter argument of the court was that if that word riba used in Quran only refers to the riba existed in that time then by this principle the word “Khumr” only refers to the liquor used at that time and thus liquor of today is not prohibited. Court at the end of paragraph 97 said that ‘these examples can be multiplied but only an “ignorant” man will say so’.
Now coming to the question that there was no commercial loan for productive purpose in the lifetime of Holy Prophet and thus commercial loan interest which is used for productive purpose nowadays don’t fall in the prohibited riba. Court then referred to the agricultural loans given by the Jews to the people of Medina during the lifetime of Prophet (saw); court said that the Islam even prohibited interest on the agricultural loans even though they were productive in nature. This shows that the interest on loans given for productive purposes falls under the prohibited riba and thus commercial banking transaction of today also comes under that prohibition.
In the later part of the judgment court used strict analogy (Qiyas). Court said that firstly it is accepted principle of the interpretation that if a provision of a statue makes some exception, only that exception is to be taken into consideration while interpreting the main provision of law. In the case of riba, there is no exception made by Quran and Hadees. Secondly, it is also accepted principle that if an exception is made, it is to be made by the same authority who is competent to make law, so proved that except Quran & Hadees no one can make exception in the laws given by the Quran & Hadees. By keeping both principles in view, it is clearly evident that riba is prohibited in absolute terms.
Court also referred to the “Report of the council of Islamic Ideology on the elimination of interest from the Economy”, Islamabad, 1980, to answer the question of the prohibition of riba both for consumption and productive loans. The said report stated that: “The Holy Quran explicitly and emphatically prohibits riba; there is completely unanimity among all schools of thought in Islam that the term riba stands for interest in all its types and forms.”(Page 7). In another paragraph, the report states: “The rationale for prohibition of charging of interest on loans taken for consumptions purposes is obvious. Such loans are usually taken by people of small means to meet urgent personal requirements as they have hardly any cushion of savings with which to meet such requirements. Prohibition of interest in so far as loans of this type are concerned rests in mainly on humane consideration. The main rationale for prohibition of interest in the case of loans for production purposes stems from the concept of justice between man and man which is the cornerstone of concept of the Islamic philosophy of social life. Uncertainty is inherent in a business enterprise irrespective of time and space dimensions. The opening result of the enterprise cannot be foreseen and the occurrence of profit or loss and their magnitudes cannot be fully determined in advance. It is therefore, a sheer injustice if the party providing money capital is guaranteed a fixed and predetermined return while the party providing enterprise is made to bear the uncertainty all alone. On the other hand, a fixed interest rate can also be unjust to the lender of money in case the entrepreneur using this money earns a profit quite out of proportion to what he says by way of interest.” (page 8)
Court referred to the resolution of Islamic fiqh academy of India, in which it was declared that the riba is prohibited in all its form and there is no exception in it. Court also referred to the Islamic Fiqh Academy created by OIC, which also declared in its seminar that riba is absolutely prohibited.
Court discussed all the issue related to the Riba & economic system and tried to find out the solution to bring it in conformity with the Islamic economic system. Court also suggested some points for switching to Islamic system. Court also referred to many scholars, jurists, bankers, economists and thinkers and added their detail view in the judgment, however due to limit of the space; I am unable to discuss all of them. But short summary of all the discussion took place is that first of all riba is completely prohibited, whether you call it usury (extra profit on consumption loans) or interest (extra profit on commercial or productive loans), secondly it is possible to set up interest free economic system or banks, court quoted the example of Iran, Jordan, Egypt, Malaysia and some other countries, where there are banks running on interest free system.
Court suggested bringing system on Profit & loss Islamic system e.g. Mudarabah & Musharakah. Mudarabah is defined as: “Mudarabah is a special kind of partnership where one partner providers the capital (rabb-ul-maal) to the other (mudarib) for investment in a commercial enterprise.”
Musharakah is defined as: “Musharakah literally means sharing. In the Islamic finance literature it refers to a joint enterprise in which all the partners share the profit or loss of the joint venture.”
After listening to all arguments and after a detail research on the prohibition of riba, court decided that the riba is strictly prohibited in Islam and there is no room for riba based system in Pakistan. Court expressly declared riba as Haram. As Pakistan is an Islamic ideological state, so riba based system should be eliminated as soon as possible. First constituent assembly of Pakistan passed Objective Resolution, which is now substantive part of the constitution; in that resolution it was declared that no law shall be made against the injunctions of Islam and court felt that the riba system is repugnant to the injunctions of Islam. Court ordered Federal Government and four provincial governments to bring laws in conformity with Islam. Court specify 30th of June 1992 on which the decision shall take effect. The various provisions discussed in the judgment and held repugnant to Islam will cease to have effect as on and from 1st July 1992.
Tanzil-ur-Rehman CJ, FSC 1992, PLD, 1992, P#31
Tanzil-ur-Rehman CJ, FSC 1992, PLD, 1992, P# 33-35
 Tanzil-ur-Rehman CJ, FSC 1992, PLD, 1992, P# 40-41
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