Category Archives: Mufti Taqi Usmani

Mufti Taqi Usmani’s critique of contemporary Sukuk issues

The following paper was presented by Mufti Taqi Usmani at the AAOIFI Shariah Council meeting. It has been translated from the original Arabic by Sheikh Yusuf Talal DeLorenzo:

Sukuk and Their Contemporary Applications

Mufti Taqi Usmani: Lecture and Q&A session on Riba

Lecture on Riba:

Q&A session:

Questioning “Shari’ah Conversion Technology”: Yusuf Talal Delorenzo

Questioning “Shari’ah Conversion Technology”: Yusuf Talal Delorenzo

Innovation is a cornerstone of the financial markets. Without the development of securitization, derivatives, and other complex financial instruments it’s safe to argue that it would be impossible to fuel the growth of the global economy. Since the growing Islamic Finance industry exists as a subset of the global financial system there is always a steady stream of new ideas being proposed and tested by Islamic financial institutions. At the center of this process of testing new ideas are the Shari’ah (Islamic law) supervisors who advise Islamic finance institutions on the Shari’ah compliance of their products and investments.

Yusuf Talal DeLorenzo is currently Chief Shari’ah Officer and Board Member at Shari’ah Capital. He is a well-known and respected Shari’ah advisor and Islamic scholar whose career spans more than 30 years. He serves as a Shari’ah advisor to over 20 global financial entities, including index providers, banks, mutual funds, real estate funds, leasing funds, institutional investors, home finance providers, alternative asset managers and others.

Shaikh Yusuf is also author of the three volume “Compendium of Legal Opinions on the Operations of Islamic Banks”, the first English reference on the fatawa (religious ruling) issued by Shari’ah boards. Shaikh Yusuf is also a special consultant, appointed by the Asian Development Bank and the Islamic Development Bank in Jeddah to the International Financial Services Board (“IFSB”) on the subject of Sukuk.

He recently delivered a paper questioning the validity of a proposed structure whose purpose is to “wrap a non-Shari’ah compliant underlying into a Shari’ah compliant structure.” The paper is a bold attempt to correct some of the recent attempts to ostensibly make halal (lawful) what is clearly haram (unlawful) by calling for due consideration for both the letter and the spirit of the Shari’ah.

Following is part of the paper’s introduction that lays out the issue [available for download here]:

Recently, a financial stratagem known as “Shariah Conversion Technology” was developed, the purpose of which is to affect a total returns swap or to “Wrap a non-Shariah compliant underlying into a Shariah compliant structure.”

In other words, the objective of the mechanism is to use non-compliant assets and their performance to bring returns into a so-called Shariah-compliant investment or investment portfolio. This point is key to the entire transaction, and for that reason it needs repeating. What the product proposes to accomplish is to bring to the Islamic investor returns from investments that are not compliant with Shariah principles and precepts.

In June of this year, 2007, a pioneering Islamic bank in the Gulf launched a principal protected note that was the first product using this “Shariah Conversion Technology’ to be offered to the investing public. This was followed by another such product, also offered by a Gulf-based Islamic bank. Prior to this, the stratagem was used in structured products offered by multinational banks to institutional investors and the treasuries of Islamic banks and finance houses. All of these products have been approved and certified by Shariah supervisory boards. Not all of these products, however, bring to the Islamic investor returns from investments that are compliant with Shariah.

The questions that such a product immediately bring to mind are: How can Shariah boards approve such returns? Does the circumstance of direct or indirect delivery to the Islamic investor change the ruling? When the Shariah of Islam is understood to differ from other legal systems because it may be characterized as both positive law and morality, is it possible to ignore the moral aspect of a financial transaction like this?

The means of delivery, a wa’d or promise, is widely seen to comply with Shariah norms. Since it is compliant, at least to the letter of the law, some Shariah scholars have approved products that use a wa’d to deliver returns from non-compliant investments. By doing so, however, they have failed to consider the purpose of the transaction, they have failed to consider the movement of the cash and, most importantly, they have failed to consider the ramifications for the industry as a whole.

At a very fundamental level, the reason for these failings is that they have not discerned the difference between the use of LIBOR as a benchmark for pricing and the use of non-Shariah compliant assets as a determinant for returns.

Dinar Standard recently spoke to Sh. DeLorenzo about total returns swap, its impact on Islamic finance industry, and the role and responsibility of Shari’ah supervisors today.

DS: What is the difference between abiding by the Shari’ah (as in “Shari’ah compliant) and circumventing it?

YTD: The difference is authenticity. Unless a financial product or service can be certified as Shari’ah compliant by a competent Shari’ah supervisory board, that product’s authenticity is dubious. At that point, it will be the responsibility of the individual investor or consumer to determine on his or her own that the product complies with the principles and precepts of the Shari’ah.

In matters as complex as modern finance, there is a reason that international standards (such as those set by AAOIFI, the Auditing and Accounting Organization of Islamic Financial Institutions) insist that such decisions must be made by a Shari’ah supervisory board that includes at least three Shari’ah scholars with specialized knowledge of the Islamic laws for transacting, fiqh al mu`amalat, in addition to knowledge of modern business, finance and economics.

DS: Do you believe some people in the industry see both as being compliant?

YTD: Those who attempt to circumvent compliance may perhaps be confused. Only Allah knows whether or not their intentions are sincere. There can be little doubt, however, that their actions are counterproductive and probably of benefit to no one but themselves.

DS: How serious is the problem – of making something haram halal?

YTD: Making the halal haram or the haram halal is the right of the Almighty and the Almighty alone. So, this is no small matter. However, what we have here is a situation in which qualified jurists have performed ijtihad. In other words, the members of the Shari’ah supervisory boards that have approved these swaps (download the paper to read about the “Total Return Swap”) have given due consideration to the matter and the result of their ijtihad is their approval for the swaps and the products that are based on them.

My view is that they have made a serious mistake. So serious, in fact, that in my paper on the subject I have called their decision the Doomsday Fatwa. Even so, as qualified scholars, they have a right to their own opinions. My own opinion of such scholars (some of whom have been my colleagues for more than twenty five years) is to say that it is likely that those scholars fell into the trap of literalism. In Urdu there is an expression for literalists… lakeer ka faqeer.

Whatever you call it, it seems to me that when jurists lose sight of the big picture, of the maqasid, of the Islamic financial industry and its meaning for the future of the entire Muslim community then it is possible to explain why they might approve such swaps. I am happy to share with you the knowledge that several of the scholars who first approved these swaps have since reversed their opinions. And I am certainly hopeful that the market itself will reject these products. That, perhaps more than anything else, will be the most important step in the process of ridding the industry of this problem and others like it.

DS: Comment on the morality of finance – isn’t the right attitude “business is business”? How does Islam invest business with morality?

YTD: Business, in the Qur’anic sense of “profitable trade” or tijarat’un rabihah is business that brings blessings to those who conduct it. Obviously, profits are important as ends, but the means by which those profits are earned are even more important. Indeed, the reason for the emphasis in the Shari’ah on proper transacting is that Islam accords great importance to the economic welfare of society.

DS: What is your view on how Shari’ah Supervisory Boards function? Is there really any independence if they are retained by financial institutions?

YTD: The concept of collective decision-making, in other words, decisions made by more than one scholar, is especially important. Shari’ah Supervisory Boards (SSBs) function to ensure that decisions are not unilateral, and that difficult issues of finance receive adequate consideration by a number of qualified people. The members of such boards are paid as professionals who, like consultants, offer their opinions to management. Whether those opinions are acceptable to management or not, the consultants will receive their professional fees.

DS: What should be the model for Shari’ah compliance be in the future – uniform/multilateral; uniform/unilateral (government); or heterogeneous/private sector based?

YTD: Personally, I’m a great believer in market forces. Much like the concept of ijma’, I believe that decisions made over time by large majorities of concerned and informed people are good decisions. At the present time, the Islamic financial industry is just beginning. As more professionals join its ranks, the intellectual capital of the industry will grow; and when that happens, I expect that better decisions will be made, better processes will be developed, and the quality of every aspect of the industry will improve. This is what progress is all about.

DS: What has the reaction been to your paper? – By practitioners, other advisors, and the industry as a whole?

YTD: I have had a great deal of positive feed back by colleagues on Shari’ah boards, by lawyers, bankers and by financial professionals all over the world. I will mention Shaikh Taqi Usmani, in particular, who wrote to me to request a copy of the paper and who, after reading it, thanked me for performing what he called “fard kifayah”. Equally as important is that I have heard from investors who feel very strongly about the issue of authenticity; and many are upset that Shari’ah scholars have actually approved such swaps.

DS: In recent weeks we saw reports surface of Mufti Taqi Usmani’s criticism of the sukuk sector. With the sector growing so rapidly within Islamic finance, how has the market reacted to Mufti Taqi’s observations? How did the problem get so bad?

YTD: I must again point to the relative newness of this industry, and of this product, Sukuk, in particular. Sukuk are based on very complex contracts; and nearly every one is different, even if many are based on the same model. For, even when you begin with a single concept on which to base a Sukuk issuance, if the jurisdictions are different, if the size, the tenor, the credit enhancements, in short if all the business and legal aspects are different, then of course the end product is going to be very different.

Then, while AAOIFI has promulgated detailed standards for Sukuk, those standards are applicable at the conceptual level. At the practical level, however, where all the details are, those standards are often subject to interpretation; and that will lead inevitably to differences. So, in a way, it should come as no surprise that there is such divergence. The contribution of Shaikh Taqi is a responsible way of dealing with all of this. In a like manner, I am hopeful that my paper will stimulate further discussion and debate in keeping with the finest traditions of Muslim legal scholarship. Finally, all of us must say: Allah knows best!

Booming Islamic bond market embroiled in debate over religious compliance: Mufti Taqi Usmani’s criticism of contemporary sukuk issues

Booming Islamic bond market embroiled in debate over religious compliance: Mufti Taqi Usmani’s criticism of contemporary sukuk issues

The booming market for financial products that comply with Islamic law was thrown for a loop recently by criticism from a leading scholar, who has set off a debate about whether the industry has sacrificed religious principles for the sake of growth at a time of surging Mideast oil revenue.

Shariah, or Islamic law, prohibits charging or paying interest, so bankers and lawyers have developed a rapidly growing financial market by restructuring conventional products like bonds to make them compliant with Islam. Shariah-compliant products attempt to replicate the concept of interest through cost-plus transactions, leasing arrangements or by linking payments to returns on underlying assets. The process is normally blessed by a board of religious scholars affiliated with a bank.

However, one of the world’s leading Shariah finance scholars recently rattled the market by saying 85 percent of Islamic bonds, or sukuk, are not Shariah-compliant. Sheik Mohammed Taqi Usmani argued that, in essence, they were structured too much like conventional bonds.

Many industry participants say Shariah scholars knew the bonds had structural issues but approved them to jump-start market growth — raising questions about how the gatekeepers of the Islamic banking industry weigh potential profit versus religious principles.

Others downplay the controversy, saying debate was expected given the rapid evolution of the market and the nature of Islamic law, which encourages multiple viewpoints from different scholars.

The influential Shariah board headed by Usmani at the Bahrain-based Accounting and Auditing Organization for Islamic Financial Institutions, one of the leading groups trying to establish standards for the market, is scheduled to meet Jan. 15 with the hope of resolving the dispute and mitigating its impact on the industry.

Some say the race to grow the market has led to questionable religious rulings — a problem that is hard to police because of the lack of standardization across Shariah approval boards and the shortage of Islamic scholars well-versed in finance.

“Increasing the market in volume or numbers with false product that is against Islam is not a big success. It should be according to Shariah, that is the main thing,” said Sheik Saleh Abdullah Kamel, chairman of the Bahrain-based General Council for Islamic Banks and Financial Institutions, one of several organizations attempting to monitor the industry.

Islamic banking assets outside Iran totaled $400 billion to $450 billion in 2006 and are projected to rise to $1 trillion by 2010, according to a recent report by McKinsey & Co. Total assets, including those in Iran, totaled $750 billion in 2006, a small fraction of global financial assets, but one that is growing quickly.

Experts say growth has been driven by booming Persian Gulf oil revenue, Muslims’ growing preference for an expanding range of Shariah-compliant products and increasing acceptance of Islamic banking practices by financial regulators around the world.

The development of the sukuk market has been particularly important because previously there was a scarcity of Islamic products that could provide mid- to long-term investment and potentially be traded in the secondary market.

Sukuk issuance has grown almost 85 percent per year since 2001, with the total value of Islamic bonds issued in 2007 reaching $39 billion as of October, according to McKinsey.

“There has been this perception in the past that Islamic finance doesn’t lend itself to overly complicated structures, but sukuk rebuts that view,” said Nadim Khan, a Dubai-based lawyer who specializes in Islamic banking.

“It’s a real demonstration from the perspective of the Islamic financing industry that it is possible to structure widely acceptable, quite sophisticated Sharia compliance structures,” he added.

Islam prohibits interest based on the belief that money alone should not be used to generate profit and the returns are seen as riskless gain. So most sukuk are structured with a profit-sharing arrangement where returns are based on the value of the assets purchased with the initial investment.

However, many sukuk have been sold with a repurchase agreement, stipulating the borrower will pay back the face value at maturity, mirroring the structure of a conventional bond.

Usmani, the Shariah scholar, estimates 85 percent of sukuk have been sold with these repurchase agreements and believes the promise to pay back the capital runs counter to Islamic law.

“This is against the risk sharing principle of Shariah,” said Usmani.

Sheik Nizam Yaquby, another renowned scholar on the Shariah board chaired by Usmani, agreed that bonds with repurchase agreements should be made more Shariah-compliant.

“We need enhancement, improvement, innovation and we need more risk taking,” said Yaquby. “Many scholars have reluctantly approved such (sukuk) structures to take us away from the conventional bond market, but that stage has ended, so we should start creating more innovative structures.”

Kamel, who monitors the market, criticized this willingness to approve sukuk structures based on the assumption that they could be made more Shariah compliant once the market had grown, saying it was dangerous for the industry.

“The golden rule of Islamic banking is if you want a profit, you should accept the losses,” said Kamel. “If this rule is broken in any of the product, it is not according to Shariah.”

However, Afaq Khan, the head of Saadiq, Standard Chartered Bank’s Islamic banking arm, does not believe sukuk currently in the market can be considered counter to Shariah because they were blessed by their respective approval boards.

“Nobody comes to the sukuk market without a Shariah fatwa (religious ruling), so at least some Shariah scholars approved it,” said Khan.

Nevertheless, Khan said the current debate was productive. “Anytime a new industry evolves, it will try to test the boundaries,” he said.

“It is very healthy for the industry to take a breath, review and then move on,” said Khan. “Hopefully some consensus will evolve and it will be beneficial for the industry.”

Interview with Mufti Taqi Usmani

Interview with Mufti Taqi Usmani

Dharb-I-Mu’min: In our country, no attentions usually paid on Islamic economics and finance. What prompted you to work in this field?

Mufti Taqi ‘Usmani: During the days of my education when I was a student of Dars-I-Nizami, my father Mufti Muhammad Shafi was struggling for enforcement of Islamic law and Islamic mode of living in the country. In this connection, many people would visit him. As a child, I would see all this and felt that there was an acute need to work in that direction. People would put questions to my father and many issues would come to light to light. At that time, I felt that in deeni madaris (religious institute), there was a lack awareness and research required for explaining the ruling of Shari’ah regarding those issues. Since childhood, I believed that we should have a positive program to show to the world before we launch a campaign for implementation of Islamic system. Since the law and system prevailing in the world was every inch man-made, I strongly felt a desire to introduce the Islamic law. The Islamic law is eternal and all-embracing and nobody can change it, but I thought that the manner to introduce it should be people-friendly So that the can easily understand what the Islamic law is. On the other hand, I realized that finance was the biggest problem of the world. It is the basis of all the economic wars, the basis of duel between communism and capitalism and the basis on which the world powers make their plans. So, I felt a desire that I should understand the current financial system and then present Islam’s economic system as a substitute. Therefore, when I started teaching after completing my dars-I-nisami, I made a resolve to learn the modern science of finance and use my capabilities for the service of Islam.

I started work under unfavorable condition with almost no resources available. I would give lessons for five hours and wrote fatwa was for three hours. In the meantime, I was working on Islamic jurisprudence. After the Asr Prayer, I would board a bus to go to the city. In those days, buses were not easily available and I had to change two buses. I would return at about 11 pm. During this period, I would study the sciences related to finance. Besides, I used to spend time in library. At that time, I was also working on a book “From the bible to the Quran” and some of my time was dedicated for it.

As initiated work on finance, I felt that the biggest fault in the prevailing financial system was Riba (interest) as described in the verses of Holy Quran. At the age of 20, I wrote my third book” Commercial Interest”. Prior to that, I had written two books.

By the grace of Allah Almighty, I got opportunities to bring out my research on finance. Meanwhile, some Islamic banks were established and they contacted me to seek my advice. In this way, I made my way in this field.

Dharb-I-Mu’min: When you stepped in this field, no considerable work had been done on this subject especially in the subcontinent. By the grace of Allah, your struggle resulted in the evolution and revival of Islamic finance. What circumstances did you pass through during this period?

Mufti Taqi ‘Usmani: The most complicated phase of my work was to draw from the sources of Shari’ah the rulings about various Problems and issues regarding the modern trade and finance. This was difficult since there were no books or literature available giving precise rulings on those issues, and I was afraid of lopsidedness on my part. But with the help of Allah Almighty and the blessing of our Shari’ah, whenever I tried to research on an issue, I found guidance in the books of our predecessors. Though it was an arduous task, I did get guidance from the predecessors.

I would not arrive at a decision unless I got guidance from the predecessors or at least found a principal that led me to draw the ruling. Allah’s help was there at every stage of the research. I would not feel complacent with my research until I consult other scholars. I would not publish my Work until it was scrutinized by them.

Some of the Ulama in the Committee of Islamic Jurisprudence are of very high caliber in terms of their knowledge and piety. I would take the opportunity to present my research work before them. So, I was satisfied all the way that all my writings were scrutinized and upheld by Ulama.

Dharb-I-Mu’min: Would you please tell us about your prolonged struggle at government level and inside the court?

Mufte Taqi ‘ Usmani: I tell you the story briefly. At first, I got opportunities to work in the field of finance as a member of Islamic Ideological Council (IIC), which Has been formed during the tenure of late President Zia-ul-Haq. We had two foremost tasks:

(1) To reform the law

(2) To reform the financial system.

It was hitherto said that there was no infrastructure for the interest-free finance. We, in the IIC, first tried to present a structure of Islamic finance. For that purpose, a panel of economists was formed and finally a report was prepared. It was the fist time Islamic banking system was introduced in Pakistan. The report on this subject and, by the grace of Allah, I got opportunities to take an active part in its preparation.

The repot was sent to the government. It was the time when the entire environment was dominated by secular-minded government functionaries who favored secular financial system. On the one hand, there was President’s order to implement the report and on the other, there was Finance Minister’s argument that the implementation would create a lot of problems. He tampered with the report in such a way that the interest-based system would continue under the garb of interest-free system, and no actual change would be brought. Therefore, a formal order was issued hat debarred the banks from dealing in interest. But at the same time, the alternate system, promulgated by the government, incorporated only a few provision of our report, and the essence of the report was neglected with the result that the title was “interest-free” but in fact the system was interest-based.

We protested against it. There was public protest too. So, we had meeting with the finance minister and other people in the presence of President Zia. The meetings sometimes resulted in a partial reform and sometimes ended inconclusive. That situation persisted for a long time.

President Zia passed away but we continued our struggle and put our demands to the succeeding government. In the long run, a commission, named Islamization of Economic Commission, was formed to deliberate upon the issue. I was a member of that commission. We compiled a comprehensive report. The report described the rules regulation required by the State Bank for regulating the whole system. When the matter reached the final phase, the government was suddenly ousted. The change of government reversed the whole progress. The commission was abolished and its report fell in a dark chamber. Some time later, voices were raised for the Shari’ah Bill, which was passed during the second term of Nawaz Sharif. The commission was formed again and the work resumed. The previous report was being updated when the government appealed against the Federal Shari’ah Court.

The Federal Shari’ah Court was assigned to hear and decide appeals against laws repugnant to Quran and Sunnah. It was the advantage of Federal Shari’ah Court that its decisions were not just recommendations but final verdicts to be implemented. But the fiscal laws were excluded from the jurisdiction of Federal Shari’ah Court for a period of ten years on the reason that change in the system needed time.

At last, after the expiry of 10 years period, petitions were filed against interest. In 1991, The Federal Shari’ah Court delivered verdict against interest. An appeal against that verdict was received by us at the Shari’ah Appellate Bench of the Supreme Court. It took us 9 years to start the hearing of the appeal. It was because every time the appeal was to be heard, the government filed a petition that it was itself working for elimination of interest and some time should be given to it. Several times, I urged the Chief Justice for settling the pending appeal. When Justice Ajmal Mian became the Chief Justice, he tried to settle the backlogged cases. The appeal was also put for hearing. There was a need for detail arguments form both sides. The bearing continued for 6 months and then the historic verdict against interest was delivered 7 days before the end of year 2000.

We gave one and a half year time to the government to reform the system. We believed that it might take time to change the whole system in the country and a year or so would be required provided the government acted seriously. Last year, the government asked for another 5-year time. There were suspicions that implementation of the verdict might be delayed for an indefinite time. Again, the government was given one-year time and that time is going to expire too.

Dharb-I-Mu’min: It is a Muslim country and its government is Muslim and the majority of people want to feed their children from Halaal income, the substitute for Riba (Interest) is available, the court has given verdict then what is the unseen power, pressure or conspiracy hindering the elimination of this curse?

Mufti Taqi ‘Usmani: Look, the foremost thing required for bringing the change is firm determination. Until the people at the helm of power make a resolve to do this work, there will be evasion even though you crate favorable conditions. There is a lack of resolution in this matter and there are three reasons for this. The first reason is ignorance as there is a propaganda that financial affairs cannot be run without interest. Nobody ever bothered to see if there is any veracity in that propaganda. The second reason is that benefits of many depend on the interest-based system. They fear that if this system were eliminated, their benefit would suffer. That is why, they make propaganda and the masses as well as the government get impressed by it. The third reason is the sense of inferiority.

Personally, I think that external pressure is not responsible nor do the foreign government have any concern with our internal system it their own benefits are not affected. Islamic banking has emerged as a reality and even in the World Bank; research departments are working on it. I mentioned this fact in my verdict.

During the Zia government, it was announced that interest would not be paid. At that time, the International Finance Corporation (IFC), a World Bank subsidiary, sanctioned loan for a mill being established in Sindh. An IFC team came to inspect the mill and said to the Pakistan officials that since the interest-based system was being eliminated in Pakistan, the IFC was considering giving loans according to Islamic mode of finance. Our officials told the IFC team that it did not need to bother. I personally believe that if there is strong faith then there is no hindrance in convincing the foreign countries.
Loans are always subject to some stipulations and restrictions. Just add a condition that they will sell you goods worth the amount of loan. Thus the loan would be asset-backed and that is called Murabaha. There is no difficulty in converting an interest-based loan into Murabaha dealing, but the only thing important is that we make a determination and get rid of our sense of inferiority.

Our government feels shy to say to the Europeans and Americans that it would make all the dealings under Islamic system. As I said earlier, there are three reasons: ignorance, propaganda and sense of inferiority.

Dharb-I-Mu’min: You often undertake foreign visits. In your opinion, is there any Islamic country going to be the first in the world to implement the Islamic system of economy on a government level?

Mufti Taqi ‘Usmani: Under the prevailing conditions there is only one country in the world and that is Sudan, which has implemented the interest-free system. Not only this, all banks and financial institution of Sudan including the central bank, claim that they are operating on interest-free system. They have formed a committee called ‘Heyath al Raqabat al-Shari’ah’ in the central bank. This committee is comprised of ‘Ulama who monitor the functioning of central and all other banks and financial institutions. Iran also claims to be a country that has implemented interest-free system of economy. Although their some procedures are controversial, they have announced that they have done so. In case of Malaysia, they have fifty-fifty, that is, they have 50 per cent interest system and 50 per cent interest –free system of economy. They have a number of Islamic banks while there are two parallel departments in the central bank. This means there are just two-and-half countries in the world, which have implemented interest-free system of economy. Had the efforts, made during the period of General Zia-ul-Haq, taken seriously and in the right direction, Pakistan would have been the first country to have implemented the interest-free system of economy. But regretfully, this could not be done due to conspiracies and the matter remained half-way. Whatever happened in Sudan and Iran began after Pakistan had taken initiative in this direction.

As far as possibilities and opportunities are concerned, there were far better chances in Pakistan and there are two reasons to this effect. Firstly, the research work on the issue, that Pakistan has done, no country has done so far. Secondly, Pakistan has the honor of having economic experts who besides being experts in economy, also have religious thinking and positive approach. Therefore, they have more capabilities than other economic experts in the world. Under these circumstances, if interest-free system is implemented in Pakistan, there are greater prospects of success as compared to other countries. Its example can be taken in this way that wherever non-Islamic banking system is existing, Pakistan experts are capable enough to find a solution to any problem in this regard. The World Bank has a permanent cell that is working on Islamic Banking and most of official in this cell are Pakistanis. Their papers prove that the knowledge and expertise they have acquired in the field are essentials for Islamic banking.

Dharb-I-Mu’min: At a time when the entire universe is shrouded in the clouds of interest-based economic system, does there any bank or non-banking institution exist anywhere in the world that is operating according to Shari’ah?

Mufti Taqi ‘Usamni:
Not too many, but there are many such institutions and most of them are found in the Middle East while two in Pakistan. Let me tell you that whatever number of such institutions are established in the Middle East they were set up under the circumstances that neither their countries or central banks supported them nor their tax system provided them nay room for better functioning. For example: There is a law in all countries of the world where interest-based banking system is prevailing that no bank can enter into trade whereas the Islamic banking system is based on trade. Therefore, the Islamic banks face a lot of difficulties while dealing with such countries. Its example can be taken this way that any interest system bank extends any loan to anyone and takes interest on this loan then the tax is very nominal or none. But if the same bank earns the money and profit through Islamic and Halal system, it is subjected to heavy tax while in some case this tax is double. For this reason Islamic banks or institutions, which are functioning under Islamic system, are forced to work under pressure and so they have to leave their actual track of Shari’ah. Here I don’t say that all Islamic banks and other institutions are well-established and working according to non-Islamic step, they call it a Sadaqa (charity) and if they earn any amount through non-Islamic means (when they are forced to do so) they do not include this income into their profit or overall earning and give it as a Sadaqa (charity). Their monitors also keep an eye on them and they tell them not to include this income into their overall earnings and give this earning as Sadaqa.

Dharb-I-Mu’min: As you just said that there are a few Islamic banks in Sudan and Malaysia. What are your views about the economic system that was implemented in the Islamic Emirate of Afghanistan? Did the Islamic Emirate over approach you to seek an advice about the type of system to be implemented I the country?

Mufti Taqi ‘Usmani: The situation in Afghanistan was different. They had closed all banks. That means no bank was functioning or doing any business. The reason behind shutting down all the banks in Afghanistan was that banks were functioning on interest-based system and there was a plan that as the administration does not find any alternative system they would not reopen these banks. For this purpose they contacted me. In fact I also contacted the Afghan administration. A delegation comprising officials of central bank led by bank’s vice president came here and stayed here for two or three weeks. I apprised them of the principles of Islamic banking system. But nothing fruitful came out because two or three weeks are not enough to bring each and every point under discussion. There was a need that they should have some economic experts in their circle who know the principles of banking. I later offered my services and told them that I can come to Afghanistan with a few economic experts who would initiate and run the banks under Islamic system and will train their men in the field. However, this plan could not materialize and the biggest incident took place.

Dharb-I-Mu’min: There was news about a year back that some Muslim countries or big Muslim investors (including yourself) had established a financial institution, which would promote Islamic banking in Pakistan. What happened to that plan?

Mufti Taqi ‘Usmani: Pakistan has many a time taken such steps. The first attempt was in the shape of Faisal Bank. This bank was launched on the basis of Islamic system of banking. But, gradually it changed its track and started functioning like other banks. Second attempt was made in the shape of Al-Barraka Bank. Third attempt was made when Meezan Bank was launched. This bank is striving to continue with its Islamic principles and has recently obtained license of commercial bank from the State Bank of Pakistan. Moreover, the State Bank has extended some facilities, which were not extended to any Islamic bank in the past. This example is a good omen. If this continues well there is a possibility that it would be a model for other Islamic banks to follow.

Dharb-I-Mu’min: Over the years, many Islamic banks and financial institutions have been established in the county and there are queries from all quarters whether investing in such banks and institutions is legal and under Shari’ah, but none of the Mufti has given any Fatwa on this issue whether the retired people can invest their life-long earning in these banks or not. What is reason that no Fatwa has been given in this regard?

Mufti Taqi ‘Usmani:
Giving Fatwa on this issue and terming the investment in such banks as Islamic and according to Shari’ah is highly sensitive and carries big responsibility. It is a big decision for any Mufti to give Fatwa on this issue. Because after the Fatwa, people would invest in these banks and the ultimate responsibility would be on the Mufti Sahib if the investment is not according to Shari’ah. Therefore, as long as Muftis are not acquainted completely with the Islamic system of banking they would never come out to give Fatwa on this issue. Under these circumstances, it is the responsibility of banks and financial institute that they should approach the Muftis, describe the banking system to them and tell them how banks are working. When they are be satisfied with all points then only they will be in a position to give any Fatwa on this issue.

Dharb-I-Mu’min: Pakistani people are under heavy burden of foreign debt that is based on heavy interest system. Pakistan is not in a position to retire these debts. In your opinion how can Pakistan get rid of the IMF and other interest-based financial institutions?

Mufti Taqi ‘Usmani: This is the biggest problem of our economy and I have many a time discussed this issue at length. This is a big fraud to say that loans obtained from the World Bank or IMF is helpful in the development of any third world country. The reality is that these loans have never been helpful in the uplift of any third world country. Rather such loans have caused big losses. Regret to mention that our country depended on these institutions and pledged the whole nation. Under this situation, in order to get rid of these interest-based financial institutions of the world, there is a need that the nation should opt for simplicity and cut the coat according to cloth. We should minimize our economy according to our resources, control unnecessary expenditures. As long as we don’t do this we cannot get rid of foreign debts. Almighty Allah has blessed Pakistan with unlimited natural resources. We can be well-off provided we utilize these resources in a proper manner. This way we can come out of economic crisis. We should not give up by thinking “Nothing has happened in past 55 years, what would happen now.” We can still do a lot. Our motto should be ‘work hard and leave the result to Almighty Allah.”

Dharb-I-Mu’min: A few back when economic development was in its initial stage, a 15-day course was organized in which two Muftis from each Madrasah from all over the country participated. Don’t you think if this course is conducted again to apprise the Muftis of the latest development in this regard, it would be better and beneficial and also in the larger national interest?

Mufti Taqi ‘Usani: Not one, we organized two courses for ‘Ulama and Muftis. With the blessing of Almighty Allah these courses proved beneficial and on the basis of these courses a book ‘Islam and modern business and economy’ was written. This is, of course, our shortcoming that we could not continue with this programme due to our extra-ordinary preoccupation. However, there are plans that such courses, separately for Ulama and Muftis and economists, would be organized. At the time we organized a conference on Islamic Banking. We planned to initiate the course also but later it was decided that the series of courses would be initiated after the conference. There is a need that top bankers understand what has been done for the Islamic banking. As I am not a part of federal government, I cannot say whether this would be included in the syllabi or not. But our religious institutes have many a time given this suggestion to the government. We are optimistic that it would be implemented soon. Insha Allah.