Islamic Court Orders Banks in Pakistan to Drop Interest

Pakistan’s highest religious court has ordered the government to scrap Western-style banking in favor of an Islamic system that would abolish interest on deposits and loans.

Banking officials say doing so would risk financial collapse, jeopardize international financial dealings and thwart attempts to attract much-needed foreign investment.

Last November, the Federal Shariat Court ruled that interest--and by extension, the entire financial system--was un-Islamic and illegal.

It ordered the system changed by June 30, but Prime Minister Nawaz Sharif’s government has nothing to take as a model. Even strict Islamic countries like Iran and Saudi Arabia use the Western system based on interest.

Sharif can appeal to the Supreme Court, which has the power to overrule religious courts, but that would outrage the small religious parties that form an important part of his Islamic Democratic Alliance.

“The clergy has geared up its pressure to restrain the government from appealing the ruling,” said economist Imtiaz Alam. “The government, it seems, has been trapped by a system it nurtured to come to power.”

Religious parties hold fewer than a dozen of the 217 seats in the lawmaking National Assembly, but they are well-organized and enormously influential on the conservative, largely illiterate population.

They have threatened to withdraw from Sharif’s coalition and organize nationwide protests unless the government fulfills its promises to transform Pakistan into an Islamic theocracy.

Pakistan was created as a Muslim homeland in the 1947 partition of the Indian subcontinent, but religious parties were not politically prominent until a decade ago.

Gen. Mohammed Zia ul-Haq, who overthrew the civilian government in 1977 and ruled until his death in 1988, donned the cloak of Islam to establish his legitimacy.

He enacted Islamic laws, including one mandating death by stoning as the punishment for adultery, and established Islamic high courts to review laws deemed repugnant to Islam.

Zia stalled demands for complete Islamization, however, by excluding fiscal, procedural and family matters from the jurisdiction of the Islamic courts until June, 1990.

When the deadline arrived, Benazir Bhutto was prime minister, and too preoccupied with her own political survival to notice.

Sharif’s coalition defeated Bhutto in the October, 1990, election, largely by attacking the religious credentials of her Pakistan People’s Party. But once in office, he too seemed to ignore the Shariat Court, which was established to determine which laws could be Islamized and how.

Its decisions are sent to Parliament, which has the job of making required changes in the laws within the period allowed by the court.

After the exclusion clause expired, the Shariat Court reviewed more than 100 challenges to laws dealing with the economy. It considered testimony from clerics, bankers and economists.

In its November ruling, the court ordered the government to amend 22 laws that included the offending concept of interest on bank deposits, loans, land acquisition, insurance and cooperative societies.

Banking officials and economists were stunned.

“How can a whole system which has been in place for the last 45 years be changed in six months?” asked Hussain Lalwai, head of the Muslim Commercial Bank, which is challenging the verdict.

Finance Minister Sartaj Aziz initially said the government would appeal, but he backed off when the religious parties threatened to bring down the government.

No one in the government, including those at the Law Ministry who must draft the amendments, seems clear on what to do next.

A few options could give Sharif a respite. Among them would be summoning a conference of clergy to find a solution and waiting until the June 30 deadline to file an appeal with the Supreme Court.

He also could confront the religious parties, which some government officials favor.

“It would be unfair if one political party which represents no more than 3% of the electorate of Pakistan should be allowed to impose its way of thinking on an entire country,” said Sardar Asif Ali, the economics minister.