LAHORE, Dec 23: The Supreme Court on Thursday outlawed 'interest' in every form and called by whatever name and laid down elaborate guidelines for a completely interest-free economy by June 2001, after dismissing government and bank appeals against a 1992 Federal Shariat Court judgment.

The transactions declared un-Islamic and, therefore, unconstitutional include mark-up, murabaha, bai' muajjal (deferred sale) and any so-called interest-free modes insofar as elements of Riba (usury and interest) 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 Quran, a Shariat appellate Bench of the Supreme Court comprising Justices Khalilur Rehman Khan, Munir A. Sheikh, Wajihuddin Ahmed and Maulana Muhammad Taqi Usmani (member) held unanimously.

Justice Ahmed, however, expressed his reservations in a separate 98-page note about some of the findings and conclusions of the 716-page majority judgment authored by Justice Khan and concurred with by Justices Sheikh and Usmani (who also wrote a 277- page elaborative note). The order of the court is spread over 106 pages.

The domestic inter-government borrowings as well as the borrowings of the federal government from the State Bank shall be interest free. By January 24, 2000, the federal finance ministry will form a task force to find out ways to convert the domestic borrowings into project-related financing and to establish a mutual fund that may finance the government on that basis.

The units of the mutual fund may be purchased by the public and they will be tradable in the secondary market on the basis of net asset value. The certificates of the existing bonds and savings schemes shall be converted into the units of the proposed mutual fund.

As for foreign borrowings, serious efforts shall be made by the government to relieve the nation of the burden of foreign debt as soon as possible and to renegotiate the existing loans. Foreign financial assistance, if necessary, should henceforth be sought and accepted on the basis of Islamic modes of financing.

The judgment contains several measures for developing infrastructure and legal framework for an interest-free economy. It calls for 'strict' austerity to drastically curtail the government expenditure to avoid deficit financing. Enactments to regulate the federal and provincial consolidated funds and public accounts have been recommended. It also calls for laws to ensure transparency in and confidentiality of financial transactions, including freedom of information and privacy acts.

Observing that an under-developed debt market promotes Riba, the court said that if the concept of Islamic debt through musharaka certificates was adopted on an urgent basis, a lot of equity/funds could be made available through developed markets and 'in that way reliance on banks can be reduced'.

The judgment stipulates a multi-phased transformation to an interest-free economy. The first step is establishment within a month of a high-level commission in the State Bank to effectively control and supervise the process of transition.

The judgment called for a phased repeal or amendment of the interest-based provisions of the Civil Procedure Code, the Land Acquisition Act, the negotiable Instruments Act, the Co-op Societies Act, the Insurance Act, the State Bank of Pakistan Act, the Banking Companies Ordinance, the Banks Nationalisation Act, the recovery laws and other enactments. The Interest Act and the money lending laws and rules shall, however, cease to have effect on March 31, 2000.

A hurdle in the implementation of the SC verdict on interest is that it requires enactment of vital laws by legislative assemblies.

Even if the assemblies are restored, majority of their members belongs to a party, the Pakistan Muslim League, whose government had challenged the Federal Shariat Court decision against interest in 1992.

The content of this article is intended to provide general information on the subject matter. It is therefore not a substitute for specialist advice.