Pakistan Institute of Development Economics



Strategies to Settle Existing Debts under an Islamised Banking System

In the wake of the Islamisation of the financial system of a country, an essential concern would be to transfer existing interest-bearing debt into mutually agreeable interest-free contracts. Such conversion is possible under an Islamised banking system because every increase, other than interest, over and above the basic debt is not forbidden. This study proposes a set of strategies that can be used as a guide to renegotiate existing interest-bearing contracts into equivalent interest-free contracts. The Federal Shariah Court in Pakistan ordered the Government of Pakistan to change all such laws that contain provision for interest by 30 June 1992. ,The government has appealed against the decision in the Supreme Court of Pakistan. Interestingly, the court’s decision also notes that: “There have been made prayers invariably in the petitions that the interest be wiped off, or the interest paid already be counted towards payment of capital or that directions be issued to the banks and other fmancial institutions restraining them from claiming or recovering from the petitioners the amount of interest due against them on the loans borrowed by them. In this connection, we would like to make it clear that this court has a limited jurisdiction as to declaring a law or provision of law whether or not it is repugnant to the injunctions of Islam. It has no jurisdiction to grant any relief by way of issuing injunctions or staying proceedings pending before a Court of Law. All such prayers are thus misconceived and stand rejected” [PLD (1992), p. 180]. Obviously the judgement does not resolve the problems raised by the petitioners in the Shariah Court. However, it does raise an interesting question. If th~ Supreme Court upholds the decision of the Federal Shariah Court and the financial laws in Pakistan containing provision of interest are amended then what would be the status of the existing debt? The people in Pakistan, particularly the creditors and the debtors, are obviously puzzled as they do not know the fate of their deals. As these are likely to be settled in the framework of the Shariah laws, it is essential to explore possible ways of settling debt under an Islamised banking system.

Muhammad Anwar

Please download the PDF to view it:

Download PDF