New Delhi: Pakistan's top Islamic court on Thursday declared the prevailing interest-based banking system as against the Sharia law and directed the government to replace it with an interest-free system by the end of 2027.


Announcing the verdict in a long-pending case on Riba (interest), the Federal Shariat Court (FSC) directed the government to facilitate all loans under an interest-free system.


The FSC gave its verdict after the Supreme Court had referred the case back to the court in 2002 following the appeals against the decision of the FSC.


A full FSC bench comprising Chief Justice Muhammad Noor Meskanzai, Justice Syed Muhammad Anwar, and Justice Khadim Hussain M Shaikh heard a number of constitutional petitions and reserved a verdict on April 12 after the conclusion of the case.


In its long-awaited verdict, the FSC ruled that the elimination of interest was a religious and legal obligation as parliament had already agreed to make Sharia-compliant laws.


In the written judgment, the bench said the prohibition of Riba is the "cornerstone of the Islamic economic system".


"Therefore, we have decided that every loan which extracts any additional amount upon the principal from the debtor is Riba, hence, any transaction that contains Riba even at the slightest level falls within the category of Riba thus prohibited. Furthermore, all the prevailing forms of interest, either in the banking transactions or in private transactions fall within the definition of Riba, according to the verdict.


The ruling read out by Justice Anwar said the amount received by the banks that exceeded the actual loan fell under the category of interest. "Every kind of interest of banks is called riba," it added.


The ruling said that the Islamic banking system was "risk-free and against exploitation."


"All laws and regulations that facilitate interest are considered illegal," the court said, adding that such laws should be abolished from June 1, 2022.


The court also banned the payment of interest over late payment of bank loans. "The government should immediately remove the word interest' from all laws," the decision said.


The court further directed the government to take internal and external loans under an interest-free system and added that an interest-free system would be more beneficial. However, it acknowledged that the transition towards an Islamic system would take time but the bank's deposit "could be cleared of riba immediately".


However, it said that the government can fully make the economic system free of interest by the end of 2027.


The federal government had argued that the interest-based banking system could not be eradicated as it would damage the already fragile economy and said that it had supported a parallel interest-free banking system already functioning in Pakistan.


It had also urged the court to leave this matter to parliament as it had far-reaching consequences.


However, the court disagreed with the government's argument which had cited the negative impacts of the interest-free banking model and said that interest-free banking was possible all over the world.


Usury or interest is strictly forbidden in Islam. Hence, Muslims in Pakistan and also elsewhere have been facing the dilemma of paying interest or getting interest while being part of the traditional banking system.


The first petition for the abolition of the interest-based banking system in Pakistan was filed in the FSC on June 30, 1990. The then chief justice of the FSC, Dr. Tanzeelur Rehman, had constituted a three-member bench that delivered judgment in the case on November 14, 1991, and sought its implementation by April 30, 1992.


However, the then Pakistan Muslim League-Nawaz (PML-N) government had challenged the decision in the Supreme Court, which years later on December 23, 1999, upheld the decision of the FSC and directed authorities to ensure its implementation by June 30, 2000.


Subsequently, a review appeal was filed in 2002 with the top court, and on June 24, 2002, the decision of the Sharia Court was suspended and the case was referred back to the FSC for interpretation of Riba.


The case has been pending for about two decades while nine chief justices of the FSC completed their terms. It was finally decided.


But it may not be the end of the story as the judgments can be challenged in the Supreme Court.