Federal Shariat Court Judgements on Riba 1999 & 2022 Ignoring Indexation ربا پر وفاقی شرعی عدالت کے فیصلے اور افراط زر کا ظلم حل طلب

Indexation is a system of economic control in which certain variables (such as wages and interest) are tied to a cost-of-living index so that both rise or fall at the same rate and the detrimental effect of inflation is theoretically eliminated.[108] Indexation requires identifying a price index and determining whether linking the value to the price index will accomplish the organization’s goals. Indexation is most commonly used with wages in a high inflation environment. “Indexation” is also known as “Escalating”.[109] 

The indexation of government debt[110] to inflation is related to transferring the inflation risk from depositors to the government in an attempt to reduce inflation. Some governments have ultimately subjected their short-term debt instruments to deindexation so their central bank could regain control of short-term interest rates from a monetary policy standpoint and be in a better position to fight inflation. Another objective of indexation, for certain governments with already low inflation rate, is to reduce their borrowing cost by paying lower interest rates to depositors in exchange for assuming inflation risk. Both the UK and the US have issued inflation indexed government bonds to reduce their borrowing costs. When governments such as the UK and the US issue both inflation indexed bonds and regular nominal bonds, it gives them precise information on inflation expectation by observing the difference in yields between the two types of bonds. Robert Shiller has done extensive research on all mentioned aspects of government bond indexation.

The indexation of currency[111] or exchange rate often refers to a country pegging its currency to the US dollar. In other words, such a country’s central bank would buy or sell dollars so as to maintain a stable exchange rate with the dollar. Such a policy has been adopted by several Asian countries including China.

Various assets and values might be subject to indexation. Some countries might apply indexation on certain types of tax payments at varying periods. For instance, it might be applied to debt mutual funds that have been held for a certain minimum amount of time before being sold. In such a case, the original purchase price is adjusted for inflation when calculating long-term capital gains that will be taxed when those debt funds are sold. This can lead to a discount on taxes after the transaction for the seller of such assets.

Indexation might also be applied to pension funds to reassure participants that their assets will keep pace with inflation. That way, the value of those assets do not erode as time passes.

Application of Indexation of Inflation with savings/ deposits will remove Riba to any party, an Indexation policy and calculator can be prepared by experts.  

Compensation for Inflation

Compensation to the depositor or lenders for the erosion of the value of the funds from inflation and how to provide that compensation, has also been called a problem “vexing” Islamic scholars,[112] since finance for businesses will not be forthcoming if a lender loses money by lending. Volume 1 of Investment Laws in Muslim Countries Handbook, states “an interest rate that did not exceed the rate of inflation was not riba according to classical Islamic jurists.[113] Suggestions to solve the problem include indexing loans or denominating loans “in terms of a commodity” such as gold, and doing further research to find an answer.[114] 

Different options were discussed in FSC [Federal Shariat Court] proceedings 1999, like linking currency with gold, Dollar etc and then the issue was left to Islamic Ideology Council and further studies, it is not known whether such studies were carried out or not. The FSC In 28 April 2022 judgment totally bypassed this issue considering it to be beyond its jurisdiction.  

However, contemporary jurists have different opinions on the justification of debt indexation. A section of scholars including Rafiq al-Masri, Sultan Abu Ali, MA Manan, Ziauddin Ahmad, Umar Zubair and Gul Muhammad consider indexation to be permissible. They do not see anything in it that contradicts the Shariah laws, rather, they declare it to be in accordance with the principles of justice described in the Qur’an and Sunnah.

Shariat Appellate Bench of Pakistan 1999 Judgment (Related with Indexation)

The Shariat Appellate Bench[115],[116] of Pakistan’s judgment in 1999 case declined[117] to accept indexation of currency[118] because (according to them) it is a normal part of any economic system, however in case of HyperInflation [defined as 50% or more per month[119]], the Court accepted the right of creditor for compensation of heavy loss.

[Comments: Ignoring lesser loss i.e less than 50% pm i.e 49% , 40, 30 , 20 , 10% per month is not loss? Riba/ interest, small or compound is forbidden, Haram, then loss to Principal amount of creditor small or big is also forbidden, is Haraam. If inflation is part of any financial system it must be addressed as Un-Islamic.]

Extract from The Text of the Historic Judgment on Interest Given by the Supreme Court of Pakistan 1999

Interest and Indexation

[quote] 180, Some appellants have tried to justify the interest charged and paid by the banks on the ground that since the value of money is decreasing constantly, the interest should be taken as a compensation for the erosion of the value of money during the period of borrowing. The financier, according to them, should have a right to claim at least the same amount in real terms as he had advanced to the borrower, but if his principal is repaid to him in the same numerical terms, he will not receive the same purchasing power as he had advanced to his debtor, because the inflation would have eroded a substantial part of the real value of money. Therefore, they argue, the interest is paid to compensate the loss the financier has suffered through inflation.

181. This argument is without force because the rates of interest are though a major cause of inflation among other factors, they are not based on the rate of inflation. Had it been compensation for inflation, the rate of interest should have always matched the rate of inflation, and obviously this is not the case. The rates of interest are determined by the demand and supply of money and not by the rate of inflation at the time of the contract. If at any given time both rates match each other, it may be by chance and not as a matter of principle. Therefore, the interest cannot be held as a compensation for the loss of purchasing power.

182. Some other quarters have taken the aspect of inflation from another angle. They do not claim that interest, as in vogue, is a compensation for the loss caused by inflation. However, they suggest that indexation of loans can be a suitable substitute for the present interest bearing loans. They argue that the financier should be compensated for the erosion of the value of money he had advanced to the borrower and therefore he can claim an additional amount matching the rate of inflation. Thus, according to them, indexation may be introduced into the banking system as an alternative for interest.

183. But without going into the question whether indexation of loans are or are not in conformity with Shar’iah, this suggestion is not practical so far as the banking transactions are concerned. The reason is obvious. The concept of indexation of loans is to give the real value of the principal to the financier based on the rate of inflation, and therefore, there is no difference between depositors and borrowers in this respect. It means that the bank will receive from its borrowers the same rate as it will have to pay to its depositors, both being based on the same measure i.e. the rate of inflation. Thus nothing will be left for the banks themselves, and no bank can be run without a profit. Mr. Khalid M. Ishaq, advocate, who seemed to be inclined towards indexation, was asked by the bench how the banking system can be established on the basis of indexation alone. He frankly admitted that he had no ready answer, but the suggestion should be considered in depth. Some bankers who appeared to assist the court, especially Mr. Abdul Jabbar Khan, the former President of the National Bank of Pakistan, gave his absolute opinion that the suggestion of taking indexation as a substitute of interest is not practicable from banking point of view.

184. It is clear from this discussion that neither the present interest rates can be justified on the basis of inflation, nor can indexation be used as a substitute for interest in the present banking system.

185. However, the question of erosion of the value of money is certainly relevant to the individual loans and unpaid debts. There are many cases where the creditors really face hardships, especially where the value of the currency fell to an unimaginable extent, as happened in Turkey, Syria, Lebanon and in the States of the former Soviet Union. In our country too, the value of the rupee today is much less than it was before 1970. The question is whether a person who has advanced a sum of Rs.1000/-before 1970 and the debtor did not pay the principal till today is entitled to get the same Rs.1000/-, while this amount has remained not more than Rs.100/- in real terms? This question is more severe where the debtor did not pay despite his being able to pay.

186. In order to solve this problem, many suggestions have been proposed by different quarters, some of which are the following:

a) That the loans should be indexed, meaning thereby, that the debtor must pay an additional amount equal to the increase in the rate of inflation during the period of borrowing.

b) That the loans should be tied up with gold, and it should be presumed that the one who has loaned Rs.1000/- has actually loaned as much gold as could be purchased on that date for Rs.1000/- and must repay as much rupees as are sufficient to purchase that much of gold.

c) That the loans should be tied up by a hard currency like dollar.

d) That the loss of the value of money should be shared by both creditor and lender in equal proportion. If the value of money has declined at a ratio of 5%, 2.5% should be paid by the debtor and the rest should be borne by the creditor, because the inflation is a phenomenon beyond the control of either of them. Being a common suffering, both should share it.

187. But we feel that this question needs a more thorough research which before its final decision in this Court should first be initiated by different study circles of the country, especially, by the Council of Islamic Ideology and the Commission for the Islamization of Economy. Many international seminars have been held to deliberate on this issue. The papers and resolutions of these seminars should be analyzed in depth.

188. On the other hand, having held that this question does neither justify interest nor provides a substitute for it in the banking transactions, we do not have to resolve this issue in this case, nor does the decision about the laws under challenge depend on it. We, therefore, leave the question open for further study and research. [End quote see full judgement]

Comments : This judgment is against Quran[120], because,  Quran says:

  1. .. for you is the original sum of your wealth [Principal]. Neither you shall commit injustice, nor injustice would be done to you (Quran;2:279)[121]
  2. “Therefore, establish Balance in the society in absolute justice. And never belittle the Scale of Justice in the community and in all your transactions with your own ‘Self’ and with others” (Quran;55:9)
  3. Full measure and weight in a[122]ll fairnessDo not defraud.”(Qur’an;11:85).
  4. “.. So give just weight and measure and diminish not to men their things ‘ and make no mischief on the earth after it has been set in good order. That is to your own good, if you truly believe. (Quran 7:85)
  5. Consuming of the people’s wealth unjustly is forbidden. (4:161)
  6. Don’t take money illicitly.  [Quran 2:188][123]

Injustice cannot be categorized on less or more amounts, it’s unfair and deprives the creditor of its principal wealth deposited with banks or state institutions. This is violation of Quran 2:279, doing injustice with the creditor by reducing his principal in value, jus like mixing water in milk, in paper currency water cant be mixed but its value will diluted, decreased with more currency notes printed.

Instead of leaving the question open, the FSC may order to use the term ‘Indexation’ or ‘Compensation’ (for Inflation) instead of Riba, till they find some other solution. It will at least save the innocent Muslims from perpetual guilt of perceived sin which they are not committing but harassed. Quran Commands in verses 2:27918:272855:9,11:852:188);45:7-838:292:15949:662:5, 8:22, & 2:18, 16:76 cannot be undermined due to inability to find the solutions.[130]

Federal Shariat Court Judgement  – 28 April 2022


Judgment on Riba ( Shariat Petition No.30-L of 1991 & All other 81 connected matters relating to Riba/Interest)[131] In this 385 page document. [http://bit.ly/3EPLdmf][132] The words ‘Inflation’ and ‘Indexation’ has been mentioned just 7 times each, the issue has been discussed in 3 pages and brushed aside by declaration: “This is outside the scope of the jurisdiction of this Court at the moment”.

Page 65a

  1. In which manner the inflation and indexation is to be tackled in the country, (Reference para 15 of the Remand Order);

Page 81 ix)

ix) Whether mechanism of indexation and inflation should be adopted by the banking sector in Pakistan to balance the inherent imbalance in the economic transactions.

Page 222 to 224

Determination Point-IX

Whether mechanism of indexation and inflation should be adopted by the banking sector in Pakistan to balance the inherent imbalance in the economic transactions.

110. Paragraph-15 of the Remand Order is related to the fiscal question relating to inflation and indexation, which were discussed before the Shariat Appellate Bench and the Shariat Appellate Bench made certain observation upon them, which are present at page-734 of the judgment and same are reproduced by the Hon‘ble Shariat Appellate Bench of the Supreme Court in para-15 of the review order.

a) Whether a loan should be indexed or not or the debtor must pay an additional amount equal to the increase in the rate of inflation during the period of borrowing.

b) Similarly, whether the loan should be tied up with gold or with any other hard currency like dollars, etc.

These questions and many other similar questions are discussed academically whenever the question of inflation or indexation comes under discussion.

111. Hence, we are of the considered view that at the moment these questions do not come under the precinct of jurisdiction of this Court because presently there does not exist any law which contains this issue therefore discussing this issue is irrelevant and outside the scope of this court. It is a matter to be decided by the relevant authorities like the regulator of the banking sector, i.e., Sate Bank of Pakistan or the Government or the Parliament. So far as our jurisdiction is concerned, it is subject to Article 203-D of the Constitution to review and decide the repugnancy of any law in relation to injunctions of Islam as contained in Quran and Sunnah. At present, there does not exist any law, regulation or SRO of State Bank, etc., which deals with the question of indexation; therefore, we consciously refrain to answer the question of indexation and all the related questions in this regard, which are connected to the effect of inflation of money over the borrowed amount during the period of borrowing. This is outside the scope of the jurisdiction of this Court at the moment.

As mentioned above the jurisdiction of FSC is subject to Article 203-D of the Constitution to review and decide the repugnancy of any law in relation to injunctions of Islam as contained in Quran and Sunnah. It is clear from the following that Commands of Allah given in Quran are being violated by not providing justice to the creditor by not securing his principal capital from inflation through indexation hence it is very much within the jurisdictions of the honorable Federal Shariat Court to order appropriate measures against Zulm [see Quran verses 2:279, 18:27, 28, 55:9][133]

Quran Commands Ignored

Even if Inflation Indexation law does not exist, the FSC Court could have recommended the formulation of such law, procedure so that the Commandments of Allah as stipulated in Quran verses 2:279, 18:27, 28, 55:9 should be implemented and  not disregarded. This judgment remains incomplete by not addressing the main issue.

فَإِن لَّمْ تَفْعَلُوا فَأْذَنُوا بِحَرْبٍ مِّنَ اللَّهِ وَرَسُولِهِ ۖ وَإِن تُبْتُمْ فَلَكُمْ رُءُوسُ أَمْوَالِكُمْ لَا تَظْلِمُونَ وَلَا تُظْلَمُونَ ‎﴿٢٧٩﴾

  1. ”And if you do not (give it up), then take notice of war from Allah and His Messenger. And if you agree to desist then for you is the Original sum of your wealth[134]. Neither you shall commit injustice (zulm), nor injustice (zulm) would be done to you (Quran;2:279)[135],
  2. No one can change  His words, and you shall not find any other source beside it.(Quran;18:27)[136] 
  3. Nor shall you obey one whose heart we rendered oblivious to our message; one who pursues his own desires, and whose priorities are confused.(Quran;18:28)[137]
  4. Therefore, establish Balance in the society in absolute justice. And never belittle the Scale of Justice in the community and in all your transactions with your own ‘Self’ and with others (Quran;55:9)

Quran Commands remain supreme, no one can change it, it is evident from this:

Umar bin Al-Khattab stood up on the Minbar of the Messenger of Allah ﷺ and said, ‘O people! Why do you exaggerate concerning the dowry given to women? The Messenger of Allah ﷺ and his Companions used to pay up to four hundred Dirhams for a dowry, or less than that. Had paying more for a dowry been a part of Taqwa or an honor, you would not have led them in this practice. Therefore, I do not want to hear about a man who pays more than four hundred Dirhams for a dowry.’ He then went down the Minbar, but a woman from Quraysh said to him, ‘O Leader of the Faithful! You prohibited people from paying more than four hundred Dirhams in a dowry for women?’ He said, ‘Yes.’ She said, ‘Have you not heard what Allah sent down in the Qur’an?’ He said, ‘Which part of it?’ She said, ‘Have you not heard Allah’s statement: (وآتيتم إحداهن قنطارا) And you have given one of them a Qintar (whole treasure for dower) [Quran 4:20][138] He said, ‘O Allah! Forgive me…’ He then went back and stood up on the Minbar saying, ‘I had prohibited you from paying more than four hundred Dirhams in a dowry for women. So, let everyone pay what he likes from his money.’

The Honourable FSC, State Bank of Pakistan and the Parliament should resolve this matter, as best within their jurisdiction amicably rather than shifting responsibility.

What Is Real Saving /Capital

Real Saving [Real Capital] is how much money an individual or entity possesses after accounting for inflation and is sometimes called real saving / capital when referring to an individual’s savings/ capital. Individuals often closely track their nominal vs. real saving /capital  to have the best understanding of their purchasing power. [derived/modified from Real income definition][139]

53 Kafir (infidel) Countries: Riba Free

There are 55 countries with lower inflation & Interest rates, only 2 are Muslims.

The developed countries generally have lower inflation and lower interest rates, some have zero rates. However there are others also.[171] If the Kafirs [infidels] can achieve Riba free economies, within the prevalent financial and banking system why can’t the Muslims?

Countries with Zero Interest Rates:

There are 26 countries with Zero Interest rates[172], in March 2021[173], which include; Austria, Belgium, Bulgaria, Cyprus, Estonia, Euro Area,  Finland, France,  Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Norway, Portugal, Slovakia, Slovenia, Spain, Sweden.

There are 29 countries with less than % interest rate,[174] which include: United States, Australia, Israel, Poland, United Kingdom, Serbia, Hong Kong, Costa Rica, Iceland,  Paraguay, Cambodia, Hungary, Albania, Chile        Jamaica, Macau, Oman, South Korea,  Thailand, Singapore, Canada,  Cape Verde, Czech Republic, Fiji        , New Caledonia, New Zealand, Peru. Only two oil producing Muslim countreis in this list: Bahrain, Saudi Arabia

Negative interest rate

There are many countries that have a negative interest rate. The countries in the eurozone currently have an interest rate of zero. The country with the lowest interest rate after the Eurozone’s 0% rate is the United Kingdom, at 0.1%,11 followed by the U.S. at 0.25%.

The 5 Countries With the Lowest Interest Rates are Switzerland , . Denmark,  Japan ,  Sweden, . Spain[175]. The 20 countries with the lowest inflation rate in 2020[176] Interest rates in the world[177]

Understanding Quranic Concept of Riba
  1. https://bit.ly/QuranOnRiba
  2. https://SalaamOne.com/Riba
  3. eBook: https://bit.ly/QuranOnRiba-pdf
References/ Links

[103] Quran Commands ignored/disregarded by State Bank’s monetary System on Riba: (2:27918:272855:9,11:852:188);45:7-838:292:15949:662:5, 8:22, & 2:18, 16:76)

[113]  International Business Publications, Inc. (2015). Investment Laws in Muslim Countries Handbook Volume 1 Investment Laws … Lulu.com. p. 23. ISBN 978-1-4330-2397-2. Retrieved 20 October 2016.

[120] Quran Commands ignored/disregarded by State Bank’s monetary System on Riba: (2:27918:272855:9,11:852:188);45:7-838:292:15949:662:5, 8:22, & 2:18, 16:76)

[130] Quran Commands ignored/disregarded by State Bank’s monetary System on Riba: (2:27918:272855:9,11:852:188);45:7-838:292:15949:662:5, 8:22, & 2:18, 16:76)

[133] Quran Commands ignored/disregarded by State Bank’s monetary System on Riba: (2:27918:272855:9,11:852:188);45:7-838:292:15949:662:5, 8:22, & 2:18, 16:76)

[134] Original Capital, is the real value, i.e A brick of 1 Kg Gold. 24 Karats, and brick of 1 Kg, 18 Karats Gold,  though equal in weight but are not equal in value. Similarly Rs.100,000 returned after one year as Rs100,000 though equal in number is not equal in value, if there has been let’s say 12% inflation in a year. It will only be equal to principal capital, if 12% loss in capital value due to inflation is added to make it equal.to original principal value.It’s simple not rocket science involved.

[150] https://www.islamawakened.com/quran/2/188/default.htm

Quran Commands ignored/disregarded by State Bank’s monetary System on Riba: (2:27918:272855:9,11:852:188);45:7-838:292:15949:662:5, 8:22, & 2:18, 16:76)

[162] https://www.islamawakened.com/quran/2/188/default.htm / Quran Commands ignored/disregarded by State Bank’s monetary System on Riba: (2:27918:272855:9,11:852:188);45:7-838:292:15949:662:5, 8:22, & 2:18, 16:76)

[166] Quran Commands ignored/disregarded by State Bank’s monetary System on Riba: (2:27918:272855:9,11:852:188);45:7-838:292:15949:662:5, 8:22, & 2:18, 16:76)


Judgement of Federal Shariat Court: Background, Introduction and Recommendations – Institute of Policy Studies

According to Article 38-F of the Constitution of Pakistan, it is the responsibility of the State of Pakistan to make arrangements for the abolition of Riba as soon as possible. When the Federal Shariah Court was constituted by a constitutional order in 1980, economic laws were excluded from its jurisdiction for ten years.