Publications
   

Suit 493-98 (UBL v[1]. Gravure Packaging & ots.)

IN THE HIGH COURT OF SINDH, KARACHI

 

 

 

Suit No.493/1998.

 

 

 

 

 

 

 

J U D G M E N T

 

 

 

 

 

 

 

Date of hearing: 16.05.2001.

 

 

 

 

 

Plaintiff: United Bank Ltd. through Mr. Azizur Rehman, Advocate.

 

Defendants: M/s. Gravure Packaging, Jehangir, Mrs. Noor Jehan,

 

Abdul Kalim Baazka and Rafya through M/s. Saalim Salam Ansari

 

and Abid Sherazi, Advocates.

 

 

 

 

 

ANWAR MANSOOR KHAN, J.- The present suit has been filed by the plaintiff against the defendants for recovery of Rs.33.081 millions as due on 30-12-1994.  The said suit was filed under the Banking Tribunals Ordinance, 1984.  The facts are, that the defendant No.1 was sanctioned by the Plaintiffs’ I.I. Chundrigar Road Branch on 09-07-1987 a sum of Rs.6.0 million as cash finance on mark-up basis wherefore, the defendant No.1 executed an agreement for financing for short-medium-long term on mark-up basis (IB-6) whereby, it was agreed that the customer namely the defendant would sell to the bank the raw materials/finished goods/machinery etc. for a total sum of Rs.6.0 million.  In pursuance to the said agreement, the various goods were bought and the consideration for purchase was paid to the defendant No.1.  The second portion of the said agreement provided for purchase by the customer of the same goods at a marked-up price known as the “purchase price ” being Rs.7.2 million calculated by the bank and agreed by the defendant No.1.  The said amount was repayable in lump sum.  The prompt payment bonus of Rs.0.258 million was also provided in the said agreement.  The repayment of the debt thus credited on account of purchase by the defendant No.1 from the bank for payment in instalments/lump sum that a subsequent future date was secured by a demand promissory note dated 09-07-1987 for Rs.7.200 million.  In addition to the above, the defendants No.2 to 5 secured the said amount by guaranteeing repayment thereof under a letter of guarantee dated 09-07-1987 filed as Annexure-D to the plaint and referred to in the affidavit in evidence as Ex---P/4.  In addition to the above, according to the plaintiff, the defendants had requested the plaintiffs’ branch by an application an agreement to open L/Cs which were opened.  The payment under the Bill of Exchange were to be made by the plaintiff amounting to Rs.3.7 million being deferred payment L/C under U.S. aid, Rs.1.8 million finance against imported merchandise and Rs.1.5 million in N.I.D.F. plus mark-up thereon.  The said amount included the amount of Rs.7.2 million secured by mortgage of the property of the defendant No.1 and confirmed by the defendant No.1 by a memorandum of deposit of title deed as Annexure-H/Ex---P/8 alongwith the affidavit in evidence.  The said mortgage is also registered with the Registrar of Joint Stock Companies by a Certificate of Mortgage dated 22-09-1988 Annexure-I/Ex---P/9.

 

 

 

2.                     The said account was transferred from the I.I. Chundrigar Road Branch to the Corporate Branch of the Plaintiff Company where fresh agreements were entered into which have been filed with the plaint as Annexure-R and S (Ex---P/18 and Ex---P/19).  Under the said agreement the same amount namely Rs.7.20 million was mentioned as re-purchase price with a prompt payment bonus of Rs.0.258 million.  In the second agreement, however, it seems that the said Bills of Exchange were purchased by the bank for Rs.1.5 million and sold to the defendant No.1 for Rs.2 million repayable on or before 31-12-1990.  Another amount being N.I.C.F. was admitted by the defendant by a letter of admission wherein the liability to the extent of Rs.9,893,834.86 was admitted.  The balance confirmation has been filed alongwith the plaint as Annexure-T (Ex---P/20).  The said N.I.C.F. facility was, in 1991.  It is stated that further documents were executed whereby, the said N.I.C.F. facility was increased to Rs.12.453 million being the purchase price on a sale price of Rs.9.893 million with a prompt payment bonus of Rs.0.935 million.  Such agreement is filed as Annexure-V/Ex---P/22.  The said amount under the second agreement of N.I.C.F. facility was guaranteed by a letter of guarantee by the said defendants No.2 to 5 Annexures-X, Y, Z and Z-1 (Ex---P/24 to Ex---P/27).  It is the case that in 1993 the said N.I.C.F. facility was again renewed whereby the amount of Rs.12.223 million which was the purchase price in Ex---P/22 became the sale price and the purchase price was enhanced to Rs.16.074 million with a prompt payment bonus of Rs.1.406 million.  The other three being the N.I.D.F. facilities (forced) after adding together the three various N.I.D.F. facilities into one single N.I.D.F. facility became Rs.13,953,846 which, was admitted by entering into another agreement Annexure-Z-8/Ex---P/34 which was signed by the defendants.  This confirmation only was in regards to the total amount and no additional mark-up or purchase price was mentioned in the said agreement.  On account of the various finances given, the plaintiffs have, therefore, claimed a decree against the defendants in the sum of Rs.39.747 million jointly and/or severally as also a mortgage decree with liquidated damages and future mark-up from 01-01-1995 till realisation as also costs of the suit.

 

 

 

3.                     The written statement has been filed by the defendants in which preliminary objections as to the maintainability of the suit were taken on the ground that in fact the suit is for rendition of account and not a suit for recovery and that the claim of liquidated damages is unlawful.  It was further stated that the agreements are not witnessed and are violative of Article  17(2) of the Qanoon-e-Shahadat Order, 1984 and that the person filing the plaint had no authority to verify the same.  The suit has been filed as a mortgage suit.  The objection has been taken that the mortgage per the Islamic financing and the law prevalent could only be that by possession and, therefore, the memorandum of deposit of title deed and mortgage are invalid and cannot be looked into.  The objection is also taken that the amount includes exaggerated amount of mark-up and the same cannot be allowed.  The execution of the guarantees has also been disputed by the defendants No.2 to 5 as, according to the said defendants, the same are not actual signatures of the defendants.  The same is not decided and cannot be accepted in view of Article 17(2) of the Qanoon-e-Shahadat Order, 1984.  In addition to the denial of guarantee, the defendants have also denied the payments claimed by the plaintiff on account of L/Cs and according to the defendants, the same had been paid off.  However, the plaintiffs have admitted the factum of the payment to the extent of Rs.6,848,855.00 as, according to them, the same has been admitted in Ex---D/11.  The defendants have filed a statement of account which according to them is under the formula given by the State Bank of Pakistan which is as follows:-

 

 

 

“(A) N.I.C.F. ACCOUNT

 

 

 

OUTSTANDING     MARK-UP               MARK-UP                               TOTAL                                   LESS

 

BALANCE               OF                           OF CUSHION                          OUTSTAND-                          ADJUST-

 

AMOUNT/O.D        365 DAY                 PERIOD OF                             ING BEFORE                           MENT

 

ON 30-06-87           210 DAYS                               ADJUSTMNT                          REPAYMENT

 

                                                                                                                                                                UPTO 30-6-94

 

Rs.                           Rs.                           Rs.                                           Rs.                                           Rs.

 

 

 

4006142/-                                878161/-                  505243/-                                  5389546/                                 4083524/-

 

 

 

NET BALANCE AFTER ADJUSTMENT(S)                                                                                           Rs.1306022/-

 

 

 

 

 

(B) N.I.D.F. ACCOUNT

 

 

 

1234325/-                                139726/-                  80390/-                                    1454441/-                                                135000/-

 

 

 

NET BALANCE/OUTSTANDING AFTER

 

ADJUSTMENTS/REPAYMENTS                                                                                            Rs.1319441/-

 

 

 

(C)           U.S. AID L/c Account’s OUTSTANDING                Rs.5768798/-

 

 

 

(D)           O.S. P.A.D. L/c Account’s OUTSTANDING Rs. 580000/-

 

 

 

GRAND OUTSTANDING/BALANCE                                                                                     Rs.8974261/-“

 

 

 

 

 

4.                     The defendants have vehemently contested the addition of mark up on mark up and subsequent agreements, stating that the same is unlawful  and cannot be allowed. Infact what has been claimed is that the subsequent agreements are void, not having been acted upon.  The plaintiffs have also claimed damages on account of breach of agreement.

 

 

 

5.                     The following issues were framed:

 

 

 

1.                   Whether the plaintiff bank has charged mark up on mark up ?  If so, what is its effect?

 

 

 

2.                   Whether the suit is bad for non joinder of necessary party?

 

 

 

3.                   Whether defendants No.2 to 5 are liable as guarantors and if so to what extent?

 

 

 

4.                   Whether the defendants are liable to pay the suit amount?

 

 

 

5.                   What should the decree be?

 

 

 

 

 

6.                     Before all the issues could be argued, I had asked Mr. Aziz as to how Markup on markup could be charged in view of the clear circular of the State Bank of Pakistan. I had also asked Mr. Aziz, as to under what law can he take refuge on the agreements, against which no disbursements had, admittedly been made, and were only for roll over of an existing debt. I had also pointed out, that the agreements do not otherwise disclose that there existed a debt earlier and that the agreements are infact for the purchase by the bank and sale to the borrower. Mr. Aziz was very candid and said that in the event that this court were to apply the principle of the said the State Bank’s Circulars, infact it would be the bank who would have to pay back the amount to the Defendant. It was pointed out that in an order, in the case of  Habib Bank Limited versus Qayyum Spinning Limited & others  SBLR 2001 Karachi 186 it was held that Mark up on Markup could not be charged. It was also held that all agreements which were not acted upon by actual disbursement, and which were meant for the purposes of roll over of an existing debt were void and could not be considered. Infact in the case of Dr. Aslam Khaki vs Syed Mohammad Hashim PLD 2000 SC 225 such has also been held.

 

 

 

7.                     Mr. Aziz stated that notwithstanding the said decisions, he would wish to reiterate his contentions that he had made in the case of Qayyum Spinning and in the unreported case, being Habib Bank Ltd. V Hafiz Textile Mills Ltd.  Suit No. B-153 of 2000.

 

 

 

8.                     Mr. Aziz stated that, with regard to SBP Circular Nos.13 and 32 dated 20·June 1984 and 26·11·1 984 respectively. He stated that the two Circulars are among many which SBP has been issuing from time to time and the two Circulars in actual fact have to be examined. The first Circular No. 13 according to him will not be attracted where renewal of loan is made subsequently, since "renewal" amounts are merely extension and continuation of the earlier agreement between the parties. Circular No.32 merely pertains to different items of Bank charges and therefore cannot be made basis for striking down the contract between the parties. In other words Circular No.32 does not have the effect that it over rides Circular No.13. In the case of UBL Vs. Central Cotton Mills Ltd. reported as 2001 MLD 78 (S.B.) deals with the said two Circulars. The learned Single Judge of the High Court of Sindh Karachi came to the conclusion that Circular No.13 is not overridden by Circular No.32. He said that in SBP Circular No. BID(Gen)2470/601 ·Q4·90 of 17·06·1990 which was addressed to all Banks with regard to the treatment to be given to rescheduled loans and capitalisation of mark up/interest and the guidelines were given. In Clause 2.1 of the said Circular, the "restructured" loan has been defined as one whose terms and conditions have been modified principally because of deterioration in the borrowers financial condition, in order to provide reduction in interest rate or principal or a capitalisation of interest accrued. Clause 2.2 refers to a "rescheduled" loan and defines it as one in which effective interest rate terms remain unchanged from original terms but principal repayment terms have been extended because of project delays and such loan has been defined as not a restructured loan. According to him, clause 7.1 provided for capitalised mark up/interest on loans and defined the words as ‘uncollected interest’ which is added to ‘unpaid principal’ in accordance with contractual loan agreement.

 

 

 

9.                     It is his case that in the said Circular and the guidelines attached to the same, the word “interest” has really been utilized to mean interest and/or markup as is evident from line 5 of the Circular itself. He said that on the date of Circular i.e. 17·06·1990 five years had elapsed from the date on which the system of markup had been introduced. Guidelines, according to him were issued by HBL to its various officers in order to deal with rescheduling, restructuring and writing off which was contained in the aforesaid Circular of SBP dated 17·06·1990. He said that the guidelines issued by SBP were attached. Circular No.4 of 17·02·2000 was also issued by SBP under the heading "Rescheduling/restructuring of non·performing loans". The Banks as per Para (i) were required to continue to provide for rescheduled/restructured loans/advances for a period of one year (excluding grace period). Also while reporting to CIB, it was made incumbent that such loans/advances should be shown to SBP as “rescheduled/restructured” instead of; ‘defaults’. In other words when Banks finalise rescheduling/restructuring arrangements with the borrowers/customers, SBP does not treat the borrowers/customers as having committed defaults. In actual fact in some cases if rescheduling/restructuring is not carried out, it would create lot more problems for borrowers/customers who actually stand to gain from the new agreements. Additionally he stated that an unreported judgment dated 08·01·1999 was passed by a Division Bench of this Court in Spl. HCA No. 187198 (M/s. Hardware manufacturing Corporation (Pvt) Ltd. and 5 others vs. UBL). It was held that by executing a Finance Agreement, the Appellants' liability, the original contract/agreement stood extinguished and the earlier agreement was substituted by a later Finance Agreement/contract. A reference was made in this connection by the Division Bench to two reported cases i.e. PLD 1962 Karachi 334 and AIR 1943 P.C. 147. He said that the said Order of the Division Bench is binding on this court, and therefore, what is decided has to be acted, and no judgment otherwise can be passed.

 

 

 

10.                    Mr. Aziz argued the position of Novation of Contract and stated that in the unreported judgment of the Division Bench of the High Court of Sindh dated 08·01·1999, the decision which was reached was in line with a number of cases which had mentioned, being 1994 CLC 2272 (Karachi) D.B. and 2000 CLC 1602(Karachi) S.B.  He said that it was held by the Division Bench of the High Court of Sindh Karachi that, where a fresh agreement was entered into and the Defendant acknowledged that a certain sum was due from him which formed consideration under the new agreement, the liability of the Defendant under the original contract was completely extinguished and there was a fresh contract substituting the old contract and which was in the nature of novation of a contract within the meaning of Section 52 of the Contract Act, 1872. The Division Bench has placed reliance for purposes of interpretation of Section 62 of the Contract Act on PLD 1964 S.C. 337. Likewise he said that in the second reported the conclusion of the learned single Judge was that Section 62 of the Contract Act clearly provides that if parties to a Contract agree to substitute a new contract for the old one or to rescind or alter it, the original contract between the parties need not be performed and that, there is nothing in the Contract Act or in any other law which prohibits the parties from altering terms of the original contract or executing a new contract to substitute the old one. It was further held that the subsequent agreement amounted to novation of the old contract, the consideration of which was the agreement of the Bank to extend time for payment of the outstanding liabilities of Defendant No.1.

 

 

 

11.        On of the point of actual disbursement it was argued by Mr. Aziz stating that there need not be any actual disbursements when a Bank allows rescheduling or restructuring of an existing debt. Therefore in rescheduling, the liability to pay to the Bank is amended or recast giving further time for repayment to the Bank. He said that, in this connection the definition of the word "debt" would also be relevant and for the meaning of the word, he has relied on PLD 1983 Karachi 176 (D.B.) where it was held that a debt in the hand of a debtor does not belong to him but it belongs to the person to whom it is payable. A debt is something that is owed by one person to another. It is an obligation and liability to pay or return something. He states that similarly in the above referred case reported in 2000 CLC 1502 (Karachi) S.B., the learned Single Judge utilized the words “outstanding liabilities of Defendant No.1” which was treated as consideration for the new contract. Thus the outstanding liabilities constituted the debt payable to the Bank. Since the acknowledgement of liability contained in the fresh agreement is available, fresh disbursements obviously was not required, as otherwise there would be duplication, and the Bank will be out of pocket by actually disbursing the outstanding amount again to its borrower/customer.

 

 

 

12.        Mr Aziz said that the judgment reported in PLD 2000 S.C. 225 is actually the one passed by Shariat Appellate Bench of the Supreme Court consisting of 5 Judges. The Supreme Court has given directions and in any case until 30·06·2001 the present laws will continue to be valid. Therefore the contents of the judgment have not come into force so far. A large number of steps have to be taken by the Federal Government and other agencies including Banks for different phases of transformation which is still to be effected. He had also referred during the arguments to the various Articles of the Constitution of Pakistan, inter alia Article 203·H(1)  which provides that all pending proceedings in any Court or Tribunal shall continue and the points in issue therein shall be decided in accordance with the law for the time being in force. He referred to a judgment of a learned Single Judge of the High Court of Sindh, Karachi, in Suit 1700/99 where it was held that the said judgment of the Shariat Appellate Bench of the Supreme Court and injunctions of Islam cannot be pressed into service to avoid payment of outstanding liabilities since verse 2:280 does not create a right in favour of a debtor for payment of what is acknowledged as due.

 

 

 

13.        Mr. Aziz said that Industrialists and Traders make lot of money by borrowing from Banks, etc. and the money really comes from even small depositors who put their money into the hands of the Banks. The interest or mark up paid by these Industrialists and Traders is included in their accounts and they get benefit of increased prices for their produced/manufactured items and they are allowed to reap benefits by showing interest/mark up as costs of production which interest/mark up is allowable expenditure in income tax returns.

 

 

 

14.        Mr. Aziz said that therefore rescheduling, restructuring and entering into fresh agreement to renew the facility by adding markup is valid. It shall only be effective after the judgment of the Shariat Appellate Bench of the Supreme Court becomes applicable. Mr. Aziz adopted the arguments made by Mr Ejaz advocate in the Qayuum Spinning case and argued that notwithstanding the fact that the said judgment is not applicable, it is necessary to dilate upon the history as to how and what was the actual perspective that the bankers had understood in respect of the said system. He has referred to the judgment in the case of Dr. M. Aslam Khaki (supra). He stated that the said judgment also notices the manner in which the system was to work and referred to a note that has been mentioned in the judgment of Mr. Junejo.  He has stated that the State Bank of Pakistan considered that the entire transaction of purchase and repurchase as a notional transaction, and that, because it was considered as a notional transaction where, the mark up was not serviced, rescheduling was allowed by addition of markup on the un-serviced markup. Such rescheduling / restructuring was the only way that the banks could save their money, and earn thereon. He stated therefore, renewal by way of entering into a fresh agreement was considered appropriate. He stated that the circulars namely BCD Circular No.13 and BCD Circular No.32 did not give any idea how the transaction were to take place and it was therefore a belief that such transactions could be entered into or done. He said that it was common knowledge that notional sale and such like transactions were valid transaction. He stated that disbursement for purchase in such notional transaction was not necessary and that the amount of debt on a particular date could be deemed to be proper and appropriate disbursement. Mr. Aziz stated that if a view is taken by this court that subsequent agreements are invalid agreements it will cause an irreparable injury and harm to the banks whereby, the banks may in fact collapse. In the judgment of Dr. M. Aslam Khaki (supra) a discussion on the concept of Negotiable Instrument Act, 1881 has been referred to. Sections 79 and 80 of the said Act have also been cited. Reference has been made to a booklet on markup system by Mr. Justice Moulana Muhammad Taqi Usmani in which a detailed discussion has been held as to the mark up system as is in vogue and has been in practice in the banks. It has been pointed out that the practice adopted under the garb of mark up is authoritative of the conditionalities attaching to Bai Moajjal as the permissibility of such a transaction is dependent on fulfillment of the various conditions as enshrined in the Quaranic injunctions in the order of the court.  It has been stated by Mr. Aziz that in BCD Circulars Nos.13 and 32, the concept of Bai Moajjal or Murabaha, has not been stated and what was categorically said in the notifications of the State Bank of Pakistan, was that mark up could be charged on a transaction, but mark up on mark up could not be charged, in that there was nothing to stop the banks from entering into such fresh agreements for renewal, restructuring or rescheduling. His emphasis lay on the fact that, upon mark up having been charged under the agreement the same became a debt and such debt became due and payable within the stipulated period. He said that in the books of accounts such was a credit payable by the debtor, therefore, the debtor was in fact using the money of the creditor, namely the bank. According to him, subsequent agreements were nothing but agreements for sale and purchase where, the commodity being sold was notional and that in fact, the debt payable under the first agreement became the notional sale of notional goods at a purchase price of such goods, and markup was added to arrive at a notional repurchase price and so forth. He said that it has now been explained as to how the bank should finance and what is the meaning of ‘Riba’ or mark up on mark up. He stated that no doubt, now under the new definition that has been given by the case of Dr. M. Aslam Khaki, subsequent agreements would be deemed to be invalid agreements on the account of the fact that the Supreme Court has held that purchase if any, has to be actual purchase and not a notional transaction. Mr. Aziz Advocate further submitted that the question of increase on money was also not understood by the banks, in fact State Bank of Pakistan had also not understood the concept of money which has now been stated in the said judgment of the Supreme Court. He stated that it could not have been even thought of or understood that money could not earn money by way of additional mark up on a debt.  According to him, it is this judgment which has cleared the concept of money and that in doing so it is stated that the money is not a ‘commodity’ and therefore cannot be traded like a trade of a commodity. He stated that it has been held, therefore, that only commodities could be traded which were in accordance with the principle that “Allah has allowed trade and prohibited Riba”.  According to him, therefore, in view of the above the Honourable Shariat Appellate Bench of the Supreme Court had given a regulatory timetable whereby, a date of implementation has been given. He stated that under the measures to be taken for the purposes of creating an infrastructure and a legal framework a summary has been given in the order passed by the court. It was stated that the solution to the economic revival has to be taken into account and that the Federal government shall cause a board to be created for arranging exchange of information of financial institutions about feasibility of project etc. and all technical assistance with regard to the anomalies emerging in the practical operation of financial institutions or difficulty arising out of the operation of financial practice etc. and that all this was to be done by the 30th June, 2001, whereafter  the laws and provisions of laws to the extent that those declared to be repugnant of injunctions of Islam shall cease to have effect from 30th June, 2001.

 

           

 

The question is whether the amount of purchase price (which has been    stated to be the debt of the customer) can be increased? And if so in what circumstances?

 

 

 

The answer to this question depends on the meaning ascribed to the word “increase” and accordingly the increases in the amount of purchase price are classified as follows:

 

 

 

(a)                Increase which are not permissible

 

 

 

(A)              Mark-up on any overdue installment, where the finance facility is payable in installments and the amounts and due dates of installments are specified in the Agreement.

 

 

 

(B)              Mark-up on overdue amounts in cases of lump sum payment agreements.

 

 

 

(b)               Increases which are permissible

 

 

 

(A)              Where the amount of mark-up is to be booked by the Banks on accrual basis in each quarter on the basis of outstanding balance and such outstanding balance also includes the mark-up for the previous quarters.

 

 

 

In these cases, the banks can be allowed to charge mark-up on the outstanding balance (inclusive of previous mark-up debits) as the bank under its general lien and right to set-off is allowed to apply the credit balance of the Customer to offset the liabilities of the Customer. Accordingly any mark-up recovered by the Bank by debiting the account of the Customer should be recognized as a withdrawal by the Customer.

 

 

 

(B)              At the time of fresh sanction [renewal] of the working capital facilities, some times the amount of the facility is enhanced. The amount of the fresh finance facility is used to adjust the outstanding liabilities of the Customer in respect of he previous facility. Naturally the outstanding amount of the facility also includes mark-up. It is sometimes argued that the amount of the second facility amounts to mark-up on mark-up or capitalization of mark-up or roll-over.

 

 

 

Fresh finance facility is granted to the Customer by the Bank. The amount of the facility can be utilized by the Customer for any purpose and the mere fact that the Customer used such amount to pay back its liabilities which included some amount of mark-up would not make the amount of the fresh facility mark-up on mark-up.

 

 

 

The proposition would be further clarified with the converse argument i.e. the Customer could have paid the outstanding liabilities from its own resources or by obtaining a finance facilities of equal amount from a separate institution. In such a case the argument of the later facility being mark-up on mark-up, capitalization of mark-up or roll-over cannot be sustained.

 

 

 

In such cases the enhanced amount of the facility or the such amount of the facility as has been used to settle earlier liabilities on account of mark-up cannot be termed as increase in the purchase price and is therefore permissible.

 

 

 

(C)              It also needs to be clarified that the grant of a fresh finance facility of a similar nature particularly in cases of working capital facilities is not restructuring or rescheduling of the liabilities. Accordingly, any increase in amount of the later facility is not increase the marked-up price of the earlier facility.

 

 

 

(D)              A number of times, the overdue facilities (mostly long term) are restructured or rescheduled. Again restructuring and rescheduling of the over due facilities is structured in the following manner:

 

 

 

 

 

·         by way of grant of fresh facilities

 

·         by way of a new schedule of payment

 

 

 

 

 

15.                    Mr. Aziz ur Rehman advocate further argued that under the Banking Companies Ordinance, 1962 the word loans, advances and credit have been defined to include finances as defined in the Banking Tribunals Ordinance, 1984.  The Ordinance in section 2(e) defines a finance to mean:-

 

 

 

“(e) ‘finance’ includes an accommodation or facility under a system which is not based on interest but provided on the basis of participation in profit and loss, mark-up or mark-down in price, hire-purchase, lease, rent-sharing, licensing, charge of fee of any kind, purchase and sale of any property, including, commodities, patents, designs, trade marks and copyrights, bills of exchange, promissory notes or other instruments with or without buy-back arrangement by a seller, participation term certificate, musharika certificate, modarba certificate, term finance certificate or any other mode other than an accommodation or facility based on interest and also includes guarantees, indemnities and any other obligation, whether fund based or non-fund based, and any accommodation or facility the real beneficiary whereof is a person other than the person to whom or in whose name it was provided; and” (Underlining is mine.)

 

 

 

Mr. Azizur Rehman states that finance includes ”accommodation or facility”.  According to him an accommodation in terms of the Webster’s dictionary means:-

 

 

 

“accommodation ...1. Act of accommodating, or state of being accommodated; specif.: a Act of fitting or adapting, or state of being fitted or adapted; adaptation; adjustment; -- often followed by to. “The organization of the body with accommodation to its functions.”  Sir M. Hale. b Adaptation of conduct in order to comply or conform; obligingness. c Provision of what is needful or desirable for convenience; specif., the giving of pecuniary aid.”

 

 

 

According to him, the mark-up or interest that is accrued on a loan or finance is capitalised and once it is capitalised it becomes a part of the loan and cannot be separated or distinguished.  Mr. Azizur Rehman refers to the meaning of the word capitalise as contained in Webster’s New International Dictionary of the English Language, Second Edition, 1937  which is as under:-

 

 

 

“Capitalise ...1. To convert into capital, or to use as capital; hence, to make use of for the sake of profit; to turn to one’s immediate advantage.”

 

           

 

Mr. Azizur Rehman has also  referred to the case of HASHWANI HOTELS LIMITED. v. FEDERATION OF PAKISTAN and others (PLD 1997 S.C. 315) in which it has been held:-

 

 

 

“...One view can be that each amount of disbursement will constitute an accommodation or loan agreement, the other view can be that he disbursements of the various amounts made by the banks were in performance of the above three loan agreements already executed.  If we were to prefer the above first view, it will affect the vested right of the banks to recover interest at the rate of 14% under the loans agreement and, therefore, the construction which does not affect the vested right of a party is to be preferred.”

 

 

 

It has further been held:-

 

 

 

“A perusal of the above quoted definition indicates that it includes loan of money and, therefore, it can be held that the word “accommodation” used in the above Circular of 15.02.1981 refers to loan agreement...”

 

 

 

Thus, according to Mr. Azizur Rehman, the agreement entered into between the plaintiff and the defendant is one of accommodation where the loans have been restructured and upon restructuring of loan the banks have accommodated the defendant and, therefore, it is obligatory upon the defendant to pay back the entire amount agreed upon.  According to Mr. Azizur Rehman the word obligation has been defined in the Oxford dictionary to mean:-

 

 

 

“Obligation ...1. The act of obligating, or binding , oneself to a course of action; a putting under a promise, vow, or oath, as in initiation into an organization (see OBLIGATE, v.,5)

 

2. The agreement, promise, contract, oath, or the like, by which one is obligated or bound.

 

3. That which a person is bound to do or forbear; any duty imposed by law, promise, or contract, by the relations of society, or by courtesy, kindness, etc.

 

4. That which obligates or constrains; the binding power of a promise, contract, oath or vow, or of law; as, the obligation of conscience, of affection, or of ideals.

 

5. State of being bound ‘legally or morally’.  “Bound in filial obligation.

 

6. State of being indebted for an act of favor or kindness; also the act itself; as, to place others under obligations.

 

7. Obs. a Binding tie. b Liability. c Civility.

 

8. Law. A bond with a condition annexed, and a penalty or non-fulfilment.  In a larger sense, it is a formal and binding agreement or acknowledgement of a liability to pay a certain sum or do a certain thing.”

 

  

 

He states that as there was an accommodation it was the obligation of the defendant to have abided by the contract and promise made as, the obligation is in fact a state of being indebted for an act done by the plaintiff for him. 

 

 

 

16.                    Mr. Azizur Rehman further states that under section 25 of the Banking Companies Ordinance, 1962, the State Bank has exceeded its authority to issue such directions.  According to him under section 25 of the said Ordinance, the State Bank of Pakistan could have issued such a direction as legislation in respect of Islamic modes of financing could only be done by legislation.  He refers to section 21 of the Enforcement of Shariat Act, 1991 and states that under the said provision all laws are to be enacted exclusively by Majlis-e-Shoora (Parliament) and the Provincial Assembly as the case may be and no law shall be deemed to have been made unless it is made in the manner laid down in the Constitution.  Mr. Azizur Rehman states that this is a deeming provision and in view of the definition given of the word “deem” in the case of SIRAJUDDIN v. SARDAR KHAN (1993 SCMR 745) a fiction of law has been created and that any law that is promulgated or devised through a mode other than by an Act of the Parliament or the Provincial Assembly shall be void and not liable to be acted upon.  According to him, therefore, the State Bank Circulars are invalid and void thus incapable of being acted upon.

 

 

 

17.                    Mr. Aziz thus concluded the arguments saying that in holding that the banks have unlawfully rescheduled/restructured/renewed by entering into fresh agreement adding markup, the banks shall collapse.

 

 

 

18.                    The Defendants  have argued and have filed their Written Arguments in which, they have reiterated the contents of the Written Statement. It is stated that the plaintiff has claimed that (1) NICF (2) NIDF (3) PAD Finance Facilities were allowed / granted to defendant Company. The Defendants have summarized the claim as follows :-

 

 

 

                                                                        In Million

 

                        1).        NICF                           

 

 

 

                        a).        Principal 9.857  }          This liability is claimed

 

                        b).        Mark-up1.874               }          on the basis of Finance

 

                        c).        Misc:Charges 0.088 }    Agreement  i.e. 09th May

 

                                    Total:   11.819   }          1993.Annexure:Z-5 and

 

                                                                        Z-34 of the Suit i.e. A/C

 

                                                                        No:01-670-2164-6

 

 

 

                        2).        NIDF I

 

 

 

                                    a).        Principal Amount

 

                                                            13.837  }          Claimed on the basis of

 

                                                                        }          Agreement dated 13-05-1993

 

                                    b).        Mark-up  3.691             }          Annexure Z-8 & Bank  

 

                                    c).        Misc.Charges    }          Statement A/C No:

 

                                                and Exp.0.141   }          741-0256-8 Annexure:

 

                                                                        }          Z-35.

 

                                    Total:    17.668

 

 

 

           

 

                        3).        NIDF. II

 

 

 

                                    Principal           0.116    }          Annexure: Z-35

 

                                                                        }          Account No: 741-0237-2

 

 

 

                        4).        PAD                           

 

                                   

 

                                    a)Amount Disbursed 0.581}       Annexure:         Z-36

 

                                    b).Mark-up       0.158    }          Account No: 775-0035-9

 

                                                Total     0.739    }          Annexure:

 

 

 

 

 

19.                    The Defendants claim that, the plaintiff claimed these outstanding liability on the basis of above documents and prayed for the recovery of the finance by Sale of mortgaged property, by defendant No:1,  with Mark up, relying upon the Judgment of Honourable Lahore High Court reported as 2001 CLC 158 (Lahore) Muhammad Ramzan Versus  Citibank N.A.

 

                       

 

20.                    It is stated that, the claim could only have been granted in light of Finance Agreements, Annexure: ‘V’ to the plaint, dated 01-01-1991 (NICF Accounts) where the purchase price is shown at Rs. 9.893 (M) and Buy-back at Rs. 12.453(M) and the (Agreement dated 09-05-1993 Annexure: Z-5 where purchase price is Rs.12.453 & buy back price Rs. 16.074 (m).  It is submitted that the amount was never disbursed to defendant No:1 under the said agreement.  It is further stated, that the plaint also does not disclose this fact.

 

 

 

21.                    It was further stated that, in the NIDF A/c i.e. Agreement dated 13.05.1993 Annexure:Z-8, no disbursement is shown, but only execution of agreement is mentioned. The Plaintiff witness has not said at any place in his evidence that there was  any actual disbursement. In fact, he has admitted that “—Nothing was disbursed in cash to the Defendant No. 1 excepting the amount of Rs.7.500 million. No explanation has been advanced for the other agreements and the claim.

 

 

 

22.                    The assertion of the Defendants is that they had in their Written Statement, denied the quantum of amount as claimed by Bank. The defendant’s witness in his evidence Exb: No:6, has submitted the explanation regarding the Loan facility. It is stated by Mr. Abid, that, in the cross examination, the plaintiff admitted that “the date of execution of Ex: “C” is earlier than the date of purchase of stamp on which letter has been written”. It is also argued that the defendant has received the copy of debit note from the Plaintiff bank which is for Rs.59,83,045, in excess and never deleted after.

 

 

 

23.                    It was argued that the plaintiff was entitled to recover Rs. 1.2 million, being the difference of selling and buy back price but Defendant has charged the mark-up amounting to Rs.1,930,451/- on NICF & Rs.354,638/- on U.S. Aid L.C totaling to Rs.2,285,089/- on the following dates  Annexure: Z-34 (Ex 6/24).

 

 

 

 

 

                        DATE                                                  AMOUNT

 

 

 

                        01-04-1989                    ….                   Rs.       5,97,840/-  }

 

                        03-05-1989                    ….                   Rs.       2,15,297/-  }

 

            A.        31-07-1989                    ….                   Rs.       0,74,215/-  }NICF

 

                        15-08-1989                    ….                   Rs.       4,62,653/-  }

 

                        30-12-1989                    ….                   Rs.       5,80,446/-  }

 

 

 

            Amount debited by the bank to this NICF A/c. on the following dates.

 

 

 

                        07-03-1989                                :           Rs.       45,895/-}          

 

                        29-05-1989                                :           Rs.       46,362/-}  Ex: 6/24

 

26-06-1989                                :           Rs.       82,969/-} R/w Annex:

 

B.         07-09-1989                                :           Rs.       45,985/-}   Z-34

 

                        29-11-1989                                :           Rs.       48,362/-}

 

                        26-12-1989                                :           Rs.       82,696/-}                                                                                                                       _____________

 

                                                            Total of A+B    Rs.       22,85,089/-

 

                       

 

24.                    It is stated that since the buy back agreements contained the amount of prompt payment bonus, and that the bonus was nothing but penalty, the same could not be claimed. The plaintiff bank, therefore ought to have given the relief  for Rs. 0.258 being the payment Bonus  as per Clause-3 of Annex: R to the Suit, but instead of allowing the relief, (I) excess mark up amounting to Rs.7,30,451/-  plus Rs. 2,58,000/- (being payment, Bonus) , making total of Rs.9,88,451/- has been charged from defendant, by debiting it to Account for the period  01-01-1989 to 31-12-1989. It was due to the excessive charge and compounding mark up, that the Plaintiff claimed that there was a default in the huge amount that is being claimed. The entire amount is thus liable to be deleted.

 

 

 

25.                    It was further argued that the second Agreement i.e. Annexure” R, no fresh agreement was executed for the year 1990 i.e. 01-01-1990 to 31-12-1990 and A/c remained in operation upto 28-11-1990 when last cheque bearing No:00297915 was withdrawn for Rs. 2,50,000/- and thereafter A/c was never allowed to operate, the cheques issued by Defendant were also dishonored no loan facility or withdrawals allowed after that date. 

 

 

 

 

 

26.                                It was argued that during the period  01-01-1990 to 31-12-1990, the plaintiff bank charged a mark up, amounting to Rs. 16,63,308/- on the following dates:

 

 

 

 

 

                        01-04-1990                                :           Rs.       86,979/-

 

                        09-06-1990                                :           Rs.       46,971/-

 

                        30-06-1990                                :           Rs.    6,55,841/-

 

                        01-11-1990                                :           Rs.       85,561/-

 

                        30-12-1990                                :           Rs.    7,87,956/-

 

 

 

                                                                        Total     Rs.  16,63,308/-

 

 

 

                       

 

27.                    It was alleged that, on the contrary the amount deposited by the defendant during this period i.e. 01-01-1989 to 31-12-1990 is Rs. 1,90,09,483/- against the withdrawal of Rs.1,81,79,791, net positive deposits balance was Rs.8,29,692/-.  This, was stated to be the period, when the plaintiff bank started to debit the amount unauthorisedly without issuing any debit voucher to defendant.

 

 

 

 

 

28.                    As to the NICF agreement dated 01-01-1991, it was shown that no transaction was ever allowed by the plaintiff  bank to be made and no disbursement were been made nor shown. Annexure:Z-34 which is the Bank Statement filed by the plaintiff  in  Opening Balance is  shown at Rs. 98,93,834/- and thereafter, for the entire period debits were created by the bank, however no physical or actual disbursements have been shown. It was further argued that even during the period from 01-01-1989 to 31-12-1990 the plaintiff bank continued to charge excessive mark up which was also compounded. This was done despite the fact that the marked up price was agreed to in the agreement.  For the  period 01-01-1991 to 30-06-1991 the Plaintiffs charged Mark up unauthorisedly in the Account. The details of such are contained in Ex.6/24 to 6/26 showing the unauthorized entries in NICF A/c. These unauthorised amount were again charged by Bank in its NIDF & PAD accounts thereby raising the liability from 65,66,401/- to the suit amount in three years compounding the mark up and also debited account with no explanation no debit voucher is issued by bank to defendant company. The defendant approached the plaintiff bank vide Ex: 6/29 to 6/42 and asked the plaintiff bank to explain/ reconcile the amount debited by them in the Account  but the plaintiff bank failed to reconcile the same. Vide Ex 6/29 the defendant demanded the bifurcation of mark up and Principal amount but there was no response as to such request. Vide Ex: 6/30 the defendant complained to the plaintiff that they were charging excessive mark, but again there was no reply. Vide  Ex: 6/31, the defendant pointed out the discrepancy in the account and submitted the calculation to the Bank by calculating the mark up, but again of no avail. Vide letter dated 24th  November, 1993  Ex: 6/32 the defendant informed, that the re-scheduling intended to be made is incorrect, and denied to accept the liability. Vide letter 08th February,1994 Ex: 6/33 the defendant requested the plaintiff regarding the reconciliation of the amount vide letters dated 16th  February,1994 , 28th July,1994 the defendant again requested and shown their view regarding the quantum of excessive liability continuously shown by the bank.

 

29.                    It is argued that, finally on 4th July,1994, the defendant again submitted the complete working of  NIDF  and NICF  A/c  to the plaintiff bank. In this Statement the defendant worked out the calculation of mark up on Daily Product Basis . But the plaintiff bank once again failed to delete or reconcile the entries unauthorizedly / illegally debited to the account. Thereafter the defendant vide their letters Ex: 6/38 to 6/43 reminded the plaintiff bank for the settlement of the Account but to no avail. The plaintiff’s claim  execution of the agreements only. On the contrary no disbursements were made as per the agreements discussed above, hence the Agreements were without consideration and void.  Reliance has been placed on the case of UBL V/s. Chaudhary Ghulam Hussain  reported as 1999 PTCLR 162 (Lahore) wherein it was held that: “Agreement without consideration would be treated as Void: 

 

 

 

“9.       The appellant bank, has also placed reliance on two financing agreements:

 

 

 

(i)                 agreement dated 2.7.1986 (page 461) executed by the parties whereunder respondents Nos.1 and 2 were to be allowed financial facility of Rs.80,80,434/-  for a period ending on 30.6.1987 and in terms thereof respondents Nos.1 and 2 were required to pay back Rs.9,697 Millions.

 

 

 

(ii)               Agreement dated 22.9.1987 (page 465) according to which respondents Nos.1 and 2 were to avail of facility of Rs.98,35,660/-.  This facility was to come to an end on 21.9.1998 and in terms thereof  respondents Nos.1 and 2 were required to pay the buy back price of Rs.11,803 Millions on or before 21.9.1988.

 

 

 

            It is claimed that though respondents Nos.1 and 2 had availed of the above-noted two financial facilities as well, but they have defaulted to clear their dues, arising thereunder.

 

 

 

10.       From the perusal of the record, it transpires that there is no sanction advice available for creation of these financial facilities.  Significantly, the statement of account filed by the appellant does not show any disbursement, whatsoever, under these two agreements which have to be treated as void, being without consideration.  The supporting material of these agreements i.e. D.P.C. Notes etc. (pages 483, 485, 487 and 489) also suffer from the same fatal defect and cannot be looked into for holding that respondents Nos.1 and 2 had incurred any financial liability thereunder.  We hold accordingly.”(Emphasis is mine).

 

 

 

 

 

30.                    As for the Agreement dated 09-05-1993 Annexure: Z-5, it has been argued that the Selling Price was Rs.12.223 (M) and its buy back price was Rs.16.074 (M). The expiry whereof was 31-05-1994. There was no disbursement against this agreement and also remained unimplemented. The defendant in his evidence has clearly stated at Page No:4 of his Examination-in-chief “ the defendant has not owed any further amount after 28-11-1990”.  Even in cross-examination, it is clearly stated on oath, that no Loan was sanctioned or disbursed to the defendant. The plaintiff has nowhere given details of the disbursement of amount. The entire emphasize has been placed on the fact that the agreements had been signed, as such are liable to be acted upon.

 

 

 

31.                    My attention has been drawn to Exhibit 3/18, wherein at Page No:2 it is stated that, “at our request the bank  has rescheduled the limit by way of “Renewal and Enhancement” and we, in consideration where of have further agreed to increase the hypothecation charges over Goods and Stocks described in the Schedule.”   Similarly as per Annex: Z-19 and Z-20 of the Suit, while signing agreement for creating floating charges and supplementary Memorandum Deposit of Title, it was specifically mentioned that “the rescheduling of the limit by way of renewal and conversion and enhancement of facilities is made valid to the agreement signed between the plaintiff and defendant.” Since the agreement dated 09th of May,1993 and 13of May,1993 were executed for the enhancement of the facilities which have not been allowed by the plaintiff and remained unimplemented. The plaintiff bank has miserably failed to produce any sanction advice to this effect, which shows that the amount thus agreed to be enhanced was neither sanctioned by the bank nor ever disbursed.

 

 

 

32.                    It was thus argued that, under the circumstances the NICF liabilities the defendant is liable to make the payment is only upto 31-12-1990 only where the amount was admitted in the following manners :-

 

 

 

            NICF.

 

 

 

            1).        Amount disbursed into Account No: 2164-6

 

                        from I.I.Chundrigar Road Branch to

 

                        Corporate Branch on 21-01-1989  Ex: 6/19          …        Rs.59,83,054/-

 

 

 

            2).        Deposits made by the defendant during the         …        Rs.1,90,09,483/

 

                        period  24-01-1989 to 28-11-1990

 

                         

 

 

 

            3).        Withdrawal during the period  21-01-1989 to       …        Rs.1,81,79,791/-

 

 

 

                        31-11-1990                                                                                                                                                                               

 

 

 

            4).        Excess deposit over withdrawal                          …        Rs. 8,29,692/-

 

 

 

                        Mark up @ 43 Paisas per 1000 per day from

 

                        01-01-1989 to 31-12-1990 when the operation

 

                        of the account was frozen as per working given

 

by defendant to plaintiff.                                    …        Rs. 15,72,896/-

 

  

 

            5).        Balance of outstanding NICF A/c. as on

 

                        31-12-190 after appropriating the mark up

 

                        and adjustment of excess amount shown

 

                        by the defendant the total comes to                     …        Rs. 67,26,258/-

 

 

 

 

 

                       

 

33.                    It has been argued by Mr. Abid that, in the NIDF account The amount has been claimed by the plaintiff on the strength of Annexure: Z-8  i.e. agreement dated 13.05.1993.

 

                       

 

34.                    It is stated that since this agreement was never implemented and nothing was disbursed to the defendant, and no transaction was ever made, therefore the plaintiff Bank is not entitled to claim any of the amount under this agreement. For this Account the plaintiff has produced the Statement bearing Current Account No:7410256-8  wherein the Opening Entries has been shown at Rs.77,88,123/- but no cheque numbers have been mentioned to show how the figure has been arrived at by the plaintiff.  Nothing has been  explained by the plaintiff bank, nor any evidence has been led.

 

 

 

35.                    It is further stated that the plaintiff bank has also shown certain other debit entries which have also not explained as to how they have been included and no evidence has been led to prove their case. When in the agreement no disbursement has been made, there would be no question of the Principal amount, Mark up and Central Excise Duty at all.  In fact it has been submitted that there was only one NIDF A/c which was transferred from I.I.Chundrigar Road Branch to Corporate Branch i.e. Account No: 741-237-2 wherein the amount transferred is shown at Rs.10,99,325/- as per Ex: 6/20 and after including mark up this comes to Rs.13,14,622/-. Except this amount the plaintiff has not disbursed any amount to the defendant. The defendant admitted the liabilities of NIDF as follows :-

 

 

 

1).        Sanctioned amount                                Rs. 1.5 Million

 

            (Exb: P/18 (Annexure:S)

 

2).        Amount disbursed/availed

 

            as per Ex: 6/20                          Rs. 10,99,325/-

 

 

 

3).        Mark up                                                Rs.  2,15,297/-

 

 

 

4).        Total Liabilities                          Rs. 13,14,622/-

 

 

 

 

 

Per agreement for NIDF i.e. Annexure: ‘S’ to the Suit dated 25th January, 1989 the total sanctioned amount was Rs.1.500 million and its buy back price was Rs.2 million and the expiry whereof was 31-12-1990. The plaintiff is entitled to recover the amount of Rs.15,55,220.36 on the basis of the sanctioned advice which provides a mark up @ 0.31/1000 /day which comes to Rs.2,40,598/- upto  31-12-1990.

 

 

 

PAD/OUTSTANDING L.Cs INCLUSIVE US AID L.C.

 

 

 

1.         L.C.Amount(Annexuure “F” of the Suit)                         Rs.35,40,000/-

 

           

 

 

 

a).        10% Cash Margin Paid                                                  Rs.03,55,000/-

 

            Vide Cheque No. 070706 dated

 

                        16-05-1988 drawn at BCCI                                                                                                                               

 

 

 

            b).        03-04-1990        Rs.9,19,705/-} Debited in NICF A/c. Annexure:Z-34.

 

            c).        09-06-1990        Rs.9,67,248/-}

 

d).        Subsequent payments Rs.9,84,334/- (which is shown in Annexure: Z-34,                           when all the facilities were frozen.

 

 

 

            2.         Total                                                                             Rs.32,26,287/-

 

 

 

            Principal Balance outstanding for PAD comes to                         Rs.03,13,713/-

 

 

 

            MARK UP ON P.A.D.

 

 

 

            1).        1ST Shipment @ 11% for 18 months i.e. 08-09-1988

 

                        to 07-03-1990                                                                Rs. 92,915.29

 

 

 

            2).        2nd shipment @ 11% for 18 months i.e. 18-11-1989

 

                        to 17-05-1990                                                                Rs.1,59,152.42

 

 

 

            3).        3rd shipment @ 11% for 18 months i.e. 30-11-1988

 

                        to 29-05-1990                                                                Rs.2,73,039.51

 

 

 

            4).        Subsequent interest @ 16.425 % from

 

                        30-05-1990 to 31-12-1990                                              Rs. 1,87,862.41

 

 

 

            5).        Total Mark up                                                               Rs. 7,12,993.00

 

 

 

            6).        Total of the principal and mark up                                    Rs.10,26,646.63

 

 

 

 

 

 

 

36.                    The total liability for which the defendant is liable to pay comes to Rs. 6,56,640/- being the principal amount due upto 31-12-90 with  mark up for the period, to arrive at the Repurchase Price is detailed below.

 

 

 

                                                PRINCIPAL    MARK UP       TOTAL

 

 

 

            NICF    A/C                  51,53,363.24      15,72,896.20      67,26,259.44

 

 

 

            NIDF   A/C                  10,99,325.45      4,55,895.36        15,55,220.81

 

 

 

            P.A.D.                           3,13,713.00      7,12,933.63        10,26,646.63

 

 

 

            TOTAL                        65,66,401.69      27,41,725.19      93,08,125.88

 

 

 

           

 

37.                    It had been stated, that, as regard to the execution of Promissory Note the plaintiff bank got blank documents signed as a pre-requisite for the purposes of sanction of the loan amount. It was therefore argued, that when the amount was not disbursed, the negotiable instruments under section 9 can not be held valid and such documents are also liable to be avoided.

 

           

 

38.                    Mr. Abid Hussain Shirazi Advocate for the Defendants summed up as follows:

 

 

 

1)         Annexure:  A, B, C & D of the suit are forged documents filled in, unauthorisedly, as on the dates shown in these documents the present Management who are defendant No:2 to 5  were neither the Directors or Shareholders of defendant No:1. This according to him is further proved from the evidence of plaintiff, wherein he has admitted as regard to Annexure:”  C”,  that the date shown is earlier then the date of Purchase of Stamps.

 

 

 

2)         As regards to Annexure: “E” of the Suit, itself will show, which is evident from the original document in court, that original entries have been removed by Blanco and refilled in by Bank without any signature on the mutilated figures.

 

 

 

3)         Annexure: F & G   Z-9  to Z-17  certain amount of these  U.S. Aid L.C. has been debited by plaintiff in NICF A/c in the year 1989 & 1990 as mentioned at Page No:4 & 5 above (Last Para) of their Written Argument. For the balance the explanation is given at Page No:11 under the Head PAD/outstanding L.C.

 

 

 

4)         Annexure: H to T  of the suit is admitted. This is the period where the plaintiff bank has charged excessive mark up on various dates as submitted at Pages No: 4 & 5 herein above and also charged the compound mark up.

 

 

 

5).        Annexure: U to Z-1  of the Suit: No loan was disbursed under these documents. The account was stuck up /closed on 28-11-1990 when the last cheque  was allowed by plaintiff bank to be withdrawn.

 

 

 

6).        Stock Report :  as per Annexure Z-2 and Z-3 were submitted .

 

 

 

7).        Annexure Z-4 to Z-8 i.e. the Finance Agreement pro-notes are without consideration. Z-6 is a proposal made by defendant for fresh loan.

 

 

 

8).        Annexure Z-18 to Z-23 : These documents were signed by defendant for the purposes of renewal  & ENHANCEMENT, but No enhancement/renewal was made. No amount was disbursed to defendant company.

 

 

 

Therefore the same can not constitute Finance Agreement  in the light of Judgment reported as  NLR-1988  TD  403 .

 

 

 

9).        Z-24 TO Z-29: There are the letters written by the defendant for enhancement of Loan Facility and nowhere acknowledged the claim of  Bank.

 

 

 

10).      Z-29 to Z-36: There are the documents prepared by the plaintiff bank at their own. For the Bank Statements filed by the plaintiff after 28.11.1990 when no amount was allowed to utilize, therefore all the amount after 31.12.1991 is the compound mark up charged by the bank beyond the transaction period.

 

 

 

11).      Liquidated damages cannot be claimed in the light of       Judgment reported as PLD 1998 Kar.191.

 

 

 

 

 

39.                    The Defendants have relied on the  Judgment of this Court reported as PLD-1998  Karachi  199  UBL  V/s. M/S. Novelty Enterprises  1993 MLD 1571 Habib Bank   versus Farooq Compost Fertilizer  Corporation Limited

 

 

 

40.                    It is thus argued that the plaintiff is not entitled for relief as claimed.

 

 

 

                       

 

41.                    The Defendants have, in addition to the order in Qayoom Spinning (supra) relied on various judgments and have submitted that, on the facts and circumstances it is a Suit for accounts to be determined, as the plaintiff has admitted in his cross examination disbursement of amount Rs.7.500 million which is the figure of two sanction advices, which are agreements dated 25-01-1998  Anneuxre: R & S of the suit  i.e.

 

 

 

1).        NIFC                                        SELLING PRICE         BY BANK

 

 

 

                        6.00  Million                              7.200 Million

 

 

 

            2).        N.I.D.F.

 

 

 

                        1.5 00 Million                            2.00   Million

 

 

 

 

 

                        TOTAL                                    7.500 Million     as on 31-12-1989

 

 

 

42.                    I have perused the pleadings, the evidence and have heard the arguments. I have no hesitation in agreeing with the arguments of the Defendants for the reasons hereafter given.

 

 

 

43.                    The arguments that were advanced by Mr Aziz ur Rehman have been  dealt with in all details in the said case of Qayuum Textiles (supra). It was held:

 

“With utmost respect to the learned counsel I disagree with the proposition in the first instance that the said judgment of Dr. Aslam Khaki shall be operative from the date mentioned in it as regards the banking transition.  The laws by which the Banking Business was to be conducted was set moving from 1962, and a concrete law was enforced from 1.1.1985. BCD Circular No.13 categorically states that a transitional period is given to the banks for the purposes of transition from the old system of the banking into the Islamic system of banking. There are two things that are enshrined in the judgement of Dr. M. Aslam Khaki. First being the economy of the country and the other being the financing system of the banks.  The Shariat Board was to arrange for exchange of information for the evaluation of the practice and for providing guidance of successfully managing the Islamic economy.  Islamic economy is, in its totality the economy of the country and laws in respect of, not only the banking, but other aspects which includes interest being charged by other institutions, payment to various banks and other such like transformation. The period of transformation has been given in the said order which reads as under:-

 

 

 

“Keeping all these aspects in view, we have decided to appoint different dates for different phases of the transformation. We, therefore, direct that:--

 

(1)               The Federal Government shall, within one moth from the announcement of this judgment, constitute in the State Bank of Pakistan a high level Commission fully empowered to carry out, control and supervise the process of transformation of the existing financial system to the one conforming to Shariah. It shall comprise Shariah scholars, committed economics, bankers and chartered accountants.

 

(2)               Within two months from the date of its constitution, the Commission shall chalk out the strategy to evaluate, scrutinize and implement the reports of the Commission for Islamization of the Economy as well as the report of Raja Zafarul Haq Commission after circulating it among the leading banks, religious scholars, economists and the State Bank and Finance Division, inviting their comments and further suggestions. The strategic plan so finalized shall be sent to the Ministries of law, Finance and Commerce, all the banks and financial institutions to take steps to implement it.

 

(3)               Within one month from the announcement of this judgment, the Ministry of Law and Parliamentary Affairs shall form a task-force, comprising its officials and two Shariah scholars from the Council of Islamic Ideology or from the Commission of the Islamization of Economy, to:

 

(a)               Draft a new law for the prohibition of Riba and other laws as proposed in the guidelines above.

 

(b)               To review the existing financial and other laws to bring them into conformity with the requirements of the new financial system.

 

(c)                To draft new laws to give legal cover to the new financial instruments.

 

 

 

The recommendations of the task force shall be vetted and finalized by the “Commission for Transformation” proposed to be set up in the SBP, after which the Federal Government shall promulgate the recommended laws.”

 

 

 

 

 

18.       The said direction has to be read carefully. The requirement is that of the Federal government to constitute in the State Bank of Pakistan a commission for transforming the existing “financial system” to one conforming to the Shariah and thereafter a strategy was to be chalked out to evaluate, scrutinize and implement the report of the commission for Islamising the economy. In addition, it was the banks who were to take steps to implement it. Laws on Riba were required to be introduced and reviewed and existing financial laws and other laws were to be made out for the purposes of bringing into conformity the requirements of the new financial system. It was, therefore, be seen that there was a distinction between the financial system and system of the government financial institutions.  No doubt the financial system includes within it the system of banking which is why a separate period has been given in the said order in respect of preparation of model agreement etc. which reads as under:

 

 

 

            “(4)      Within six months from the announcement of this judgment, all the banks and financial institutions shall prepare their model agreements and documents for all their major operations and shall present them to the Commission for transformation in the SBP for its approval after examining them.

 

                                                            (underlining is mine)

 

 

 

            (5)        All the joint stock companies, mutual funds and the firms asking in aggregate finance above Rs.5 million a year shall be required by law to subject themselves to independent rating by neutral rating agencies.

 

 

 

            (6)        All the Banks and financial institutions shall, therefore, arrange for training programmes and seminars to educate the staff and the clients about the new arrangements of financing, their necessary requirements and their effects.

 

 

 

            (7)        The Ministry of Finance shall, within one month from the announcement of this judgment, form a task force of its experts to find out means to convert the domestic borrowings into project related financing and to establish a mutual fund that may finance the Government on that basis. The units of the mutual fund may be purchased by the public and they will be tradable in the secondary market on the basis of net asset value. The certificates of the existing bonds of the existing Government savings schemes based on interest shall be converted into the units of the proposed mutual fund.”

 

 

 

 

 

19.       The financial system also includes intra-government borrowing as well as borrowing from the State Bank of Pakistan by the Federal government and foreign debt. Such has been separately dealt with in paras 8 & 9 which reads as under:-

 

 

 

“(8)      The domestic inter-Government borrowings as well as the borrowings of the Federal Government from State Bank of Pakistan shall be designed on interest-free basis.

 

 

 

(9)        Serious efforts shall be started by the Federal Government to relieve the nation from the burden of foreign debts as soon as possible, and to renegotiate the existing loans. Serious efforts shall also be made to structure the future borrowings, if necessary, on the basis of Islamic modes of financing.”

 

 

 

 

 

20.       From the above, it will be seen that various aspects of law for transformation has been given and it is for this, that the Honourable Supreme Court has given a specific time. Certain laws in the judgment have been declared to be repugnant to the injunctions of Islam and ceased to have effect from 31st March, 2000, however, other laws or provisions of laws to the extent that those have been declared to be repugnant to the injunction of Islam would cease to have effect from 30th June, 2001. It will be noted that BCD Circulars Nos.13 and 32 have not been declared to be un-Islamic, the said circulars do not cease to have effect from 30th June, 2001. They were in force since 1.1.1985 and are valid legislation and continue to remain in force. The concept of BCD Circular No.13 is that it was for the purposes of Islamisation of banks which was a part of the global change in Pakistan for Islamising the economy in generality. Banks were first to be placed in line for their transformation. It is in line of this, that BCD Circular No.13 came into existence.

 

 

 

21.       For the purposes of looking into the concept as given by BCD Circular No.13 we may have to look into the history as to why and how such laws were required to be enforced or made. It will not be out of place to mention that Pakistan itself was created to be a religious Islamic state. Quaid-e-Azam had expressed the desire to institute an Islamic Financial System in his speech (July, 1948) at the inaugural ceremony of the State Bank of Pakistan.  From the Constitution of 1956 to the Constitution of 1973 an express desire has been shown to get rid of Riba. In the Article 38(f) of the Constitution of 1973 it has been categorically stated that the State shall eliminate Riba as early as possible. Article 2 of the Constitution categorically states that “Islam shall be the state religion of Pakistan”.  Article 2-A was inserted to become a substantive part of the Constitution by Presidential Order No.XIV of 1985 with effect from 2nd March, 1985. All these put together categorically showed and it was in the knowledge of all, that primarily Islam was the guiding factor. The Islamic Advisory Council created in 1962 in its various opinions till 1969 has time and over again stated that the Riba must be finished in its every form and a system that would work under the Islamic principles to be enforced. It seems that initially such was not enforced. The Council of Islamic Ideology was therefore created with the assignment to formulate an interest free system for banking. The Council in cooperation with its various financial and banking experts initially presented its interim report in November, 1978 and completed their report in June, 1980. It is in the light of this report that the government took the first practical step to purge three financial institutions of interest system on 1st of July, 1979. From 1980 onward other reforms were introduced till 1984 but such could not be properly handled.

 

 

 

22.       The Constitution of Islamic Republic of Pakistan in Article 227 clearly provides that all existing laws are to be brought in conformity with the injunctions of Islam as laid down in the Quaran and the Sunnah. The important aspect therefore is that there are only two modes in which the laws have to be brought in conformity with, namely, the Holy Quaran and Sunnah. Under Article 228 it had become mandatory upon the Government to constitute a Council of Islamic Ideology which was constituted in 1974, thus it was a clear intention of the legislature and the maker of the Constitution that all laws that are made shall be in the line of and exactly what the Quaran and Sunnah states. In fact, in the case of Commissioner Income Tax Peshawar Zone v. Simen AG reported in PLD 1991 SC 368 it has been held that so long as the existing statutes were not brought in conformity with the injunctions of Islam, their interpretation, application and enforcement where discretionary judicial elements are involved, only that course would be adopted which was in accord with the Islamic philosophy, its common law and jurisprudence. In another case of Kaneez Fatima v. Wali Muhammad reported in PLD 1993 SC 901, it was held that the principles of law and injunctions of Islam have to be kept in view while interpreting the statute and more so in the case where administrative decisions affecting individual’s rights and liberties have been challenged. In the case of Maple Leaf Cement Factory Ltd. v. Collector of Excise and Sales Tax reported in 1993 MLD 1645 it was held that the provisions of Articles 2-A and 227 of the Constitution postulate that the existing laws must be interpreted, as far as possible keeping in view the Islamic principles of interpretation, especially in fiscal statutes Courts are bound to apply Islamic rules of interpretation unless excluded otherwise in preference to the contrary accepted rules of interpretation under other jurisprudential concept and fiscal laws are not exception in that behalf.  The functions of Council of Islamic Ideology have also been detailed in Article 230 of the Constitution. One of which is “to make recommendations as to measures for bringing existing laws into conformity with the injunctions of Islam and the stages by which such measures should be brought into effect”. The introduction, therefore of the aforesaid BCD Circulars Nos.13 and 32 were in fact upon recommendations of the Council of Islamic Ideology. In the case of Pakistan v. Public At Large reported in PLD 1986 SC 240, there is a detailed discussion on the meaning of term ‘injunctions of Islam’. It has been held that the scope of expression ‘injunctions of Islam’ has not been left to the discretion of the courts and notions of the individuals but it has been clearly spelt out that, as only those injunctions which have been laid down by the holy Quaran and the Sunnah of the Prophet (PBUH). In this celebrated judgment of the Shariat Appellate Bench of the Supreme Court it was held that:

 

 

 

            “We do feel that while expounding the Injunctions of Islam a possibility of some marginal so called divergences might be visualised.  It is a very difficult and perilous exercise.  I can lead to proper and improper consequences.  Be that as it may, no such expounding of the Injunctions of Islam will be permissible which does not pay attention to the statement of the text of the Holy Qur’an and Sunnah and to its interpretation together with its Khamir and Zamir.  Within this framework while “expounding” the Injunctions the Court will remain under a duty in case of need during a new approach or to meet a new situation to keep in view the following essentials, of course, amongst others:-

 

 

 

(i)                 Whether instead of attempting a relaxation of an Islamic rule, the relaxation may not be made in the required need for which the relaxation is intended to be made.  A very simple exercise preliminary though, will be of great advantage-to ask oneself: Cannot the society exist or progress without the relaxation and where the answer is negative to ask the further question: cannot it be done with a temporary and mildest one?

 

 

 

(ii)               It is often said that modernism (even when used in good sense of: achievement, progress and high attainment for the Ummah), Ijtihad is essential.  There can be no cavil with the proposition, but before doing the same within accepted spheres and under well-recognised rules it should also be asked: whether the same objects cannot be achieved without doing it; and, whether purpose would not be served by doing the similar Ijtihad or making a deviation in the demands of modernism; in other words, cannot the society change to word Islam?

 

 

 

(iii)             Whether a relaxation is approvable on the accepted rules and principles of Ijtihad and Ijmah, old or new; Zaroorat or Zarar; Tawil or Takhsis; Urf and other recognised methods like Qiyas, Ihsan, Istehsan, Masalah-Mursalah etc.?

 

 

 

(iv)              Whether in a case a new principle like the foregoing, is visualised there is support for the same in the Holy Qur’an and the Sunnah?

 

 

 

(v)                Whether there has been a need similar to the one in issue earlier-if so, whether attempts were made by those who were qualified to do the exercise and with what result; the same would apply to attempts made in all other lands?

 

 

 

(vi)              Whether there are precedents for guidance in the well-known authentic works—if so, what are the reasons for not following them.  It is pertinent to note here that the Pakistan Courts when interpreting and applying laws do follow the precedents if they are by law, binding.  And even when not so binding, help is always sought from good precedents.  Not only this but also it is well-known, the judgments and opinions of foreign judges and jurists are accepted as legitimate guide or support for resolution of controversies.  If that is treated as permissible, (rather indispensible by some at least for the time being) there should be no hesitation in examining the judgments and precedents from our own masters including  Sahaba, Aimma and Ulema, old and new

 

.

 

(vii)            When examining, views and opinions of the old, special place is to be given to the Khulafa-e-Rashideen and Companions and Tabaeens in accordance with the Holy Qur’an and Sunnah.  It is high time, we reduce the dangers of sectarianism and make masterly combination of both (old and new) with gradual elimination of uncalled for criticism and Taboos against the so-called Taqleed and so-called Tajdid, when looking for and following the precedents.

 

 

 

(viii)          It would also be necessary when rendering an answer for a new situation to see whether the interests of Islam and Muslim Ummah are advanced in Islamic way.  The collective conscience of the Islamic Ummah, past and present, is also to be kept in view in making the answer.

 

 

 

(ix)              Whether after doing the necessary exercise and after going through the above stages and others which might be spelt out later, the question when asked from the spiritual and mental faculties of oneself through Nafs Baseera, Nafs Lawwamah and Nafs Mutmainnah and not the Nafs Ammarah (14) 75—( ) (53) 12 ( ) (27) 89 (                            )                         (2)75    (    ) the answer comes in the clear affirmative for the intended attempt or step.  (See Foot-notes Nos. 5810 and 5819 of Text Translation and Commentary on the Holy Qur’an by Abdullah Yusuf Ali (Vols. II,III).  If not, it must be given upon.  If it is in doubt even then it must be given up.  In other words, it must be beyond all doubts of reason, intellect and spirit. 

 

 

 

(x)                In unoccupied field, the precedent of Hzr. Moaz Bin Jabbal (r.) should be applied with full consciousness of its limitations which can in the present day context, be spelt out from the foregoing points.”

 

 

 

 

 

It will therefore be seen that no such act of violating the injunctions of Islam will be permissible which does not pay attention to the text of the Holy Quran and Sunnah and its interpretation together with its ‘khamir’ and ‘zamir’.

 

 

 

23.       In the present case the Council of Islamic Ideology has given the report which enumerates in details as to which financing has to be entered into under the Islamic system which had to be acted upon by the banks on the instructions of State Bank of Pakistan given under its authority under the Banking Companies Ordinance, 1961. The said report is based on the Quaran and Sunnah and for the purposes of interpreting the said existing laws its ‘Khamir’ and ‘Zamir’ has to be looked into and cannot be deviated from. The Honourable Supreme Court of Pakistan in the case of Pakistan v. Public At Large (supra) has held that while expounding the injunctions of Islam the court will remain under the duty in case of need, during a new approach or to meet a new situation to keep in view a number of essentials, which essentials have been narrated above. It is clear that this court will also have to look into whether, when there was a proper Ijtehad for the purposes of arriving at a certain principle of law under the Islamic system, could this court take a view different with the Ijtehad that has already been taken place. The Ijtehad was by way of consultation, finalized and published as a report of the Council of Islamic Ideology and thereafter when the judgment was announced by the Federal Shariat Court being PLD 1992 FSC 1. There can be no cavil with the proposition that the position that has been detailed and accepted by the Council of Islamic Ideology acted upon by the Federal Government and State Bank of Pakistan giving direction to the banks to finance under the modes prescribed and thereafter confirmed by the Federal Shariat Court and eventually by the Shariat Appellate Bench of the Supreme Court in the case of Dr. M.Aslam Khaki.

 

 

 

24.       It is in pursuance to the long standing act in attempting to change the old banking system into a system of banking, to operate and run on the lines as provided by Quaran and the Sunnah. The banks, State Bank of Pakistan and all other were duly connected and were party in the transformation of the banks by the introduction of the Islamic Financing to be governed by BCD Circular No.13. The ‘Modes of Transaction’ were categorically mentioned wherefore the whole system commenced.

 

 

 

25.       It will therefore be seen that a lot of work had been put in for the purposes of the system to be transformed from the usual interest bearing system and un-Islamic modes, into financial system based on the Injunctions of Islam, the Islamic Banking System. As I have already stated, the government felt it proper that the entire system could not be transformed in one go, but chose to break it up into different sectors and the banking being the first of them.

 

 

 

26.       Various Islamic councils that have been formed including the Council of Islamic Ideology, were always of the unanimous on the opinion that Riba in its every form was forbidden and the increase or decrease of the rate of the interest did not effect it being otherwise. It is well known that the committee of bankers that worked under the chairmanship of the Governor State Bank of Pakistan in their report in 1980 also took the similar stand. Scholars of the country, economic expert and bankers were agreed with the same. This was all taken into account in the case of Dr. Mehmoodur Rehman Faisal and others v. The Secretary, Ministry of Law, Justice and Parliamentary Affairs, Govt. of Pakistan and others reported as (PLD 1992 FS 1).

 

When the concept of Islamic banking with its ethical values was propagated, financial circles the world over treated it as a utopian dream. Having lived for centuries under the valueless capitalist economic system, they asked what ethics had to do with finance?

 

27.       Attitudes are changing gradually and in the last few years value neutral conventional banking has begun to trouble the conscious of an increasing number of people. There is a reluctance to hand over the funds to banks and financial institutions that invest in companies engaged in unethical and socially harmful activities. The emerging Islamic banking scene has succeeded in achieving general acceptance. Today, Islamic banking is estimated to be managing funds to the tune of US$100 billion. Its clientele are not confined to Muslim countries but are spread over Europe, United State and the Far East. Islamic banking continues to grow at a rapid pace because of its value-orientated ethos that enables it to draw finances from both Muslims and non-Muslims alike. Islamic bankers, keeping pace with sophisticated techniques and latest developments have evolved investment instruments that are not only profitable but are also ethically motivated. Today, more than one hundred and fifty Islamic financial institutions are operating world-wide.

 

The basic principle of Islamic banking is the prohibition of Riba- (Usury - or interest):

 

"While a basic tenant of Islamic banking - the outlawing of riba, a term that encompasses not only the concept of usury, but also that of interest - has seldom been recognised as applicable beyond the Islamic world, many of its guiding principles have. The majority of these principles are based on simple morality and common sense, which form the basis of many religions, including Islam.

 

The universal nature of these principles is immediately apparent even at a cursory glance of non-Muslim literature. Usury was prohibited in both the Old and New Testaments of the Bible, while Shakespeare and many other writers, particularly those writing in the 19th century, have attacked the barbarity of the practice. Much of the morality championed by Victorian writers such as Dickens - ranging from the equitable distribution of wealth through to man's fundamental right to work - is clearly present in modern Islamic society.

 

Although the western media frequently suggest that Islamic banking in its present form is a recent phenomenon, in fact, the basic practices and principles date back to the early part of the seventh century." (Islamic Finance: A Euromoney Publication, 1997).”

 

 

 

28.       It is evident that Islamic finance was practiced predominantly in the Muslim world throughout the Middle Ages, fostering trade and business activities. In Spain and the Mediterranean and Baltic States, Islamic merchants became indispensable middlemen for trading activities. It is claimed that many concepts, techniques, and instruments of Islamic finance were later adopted by European financiers and businessmen.

 

The revival of Islamic banking coincided with the world-wide celebration of the advent of the 15th Century of Islamic calendar (Hijra) in 1976. At the same time financial resources of Muslims particularly those of the oil producing countries, received a boost due to rationalization of the oil prices, which had hitherto been under the control of foreign oil Corporations. These events led Muslims' to strive to model their lives in accordance with the ethics and philosophy of Islam.

 

Disenchantment with the value neutral capitalist and socialist financial systems led not only Muslims but also others to look for ethical values in their financial dealings and in the West some financial organisations have opted for ethical operations.

 

Islam not only prohibits dealing in interest but also in liquor, pork, gambling, pornography and anything else, which the Shariah (Islamic Law) deems Haram (unlawful). Islamic banking is an instrument for the development of an Islamic economic order. Some of the salient features of this order may be summed up as:

 

1.      While permitting the individual the right to seek his economic well-being, Islam makes a clear distinction between what is Halal (lawful) and what is haram (forbidden) in pursuit of such economic activity. In broad terms, Islam forbids all forms of economic activity, which are morally or socially injurious.

 

2.      While acknowledging the individual's right to ownership of wealth legitimately acquired, Islam makes it obligatory on the individual to spend his wealth judiciously and not to hoard it, keep it idle or to squander it.

 

3.      While allowing an individual to retain any surplus wealth, Islam seeks to reduce the margin of the surplus for the well-being of the community as a whole, in particular the destitute and deprived sections of society by participation in the process of Zakat.

 

4.      While making allowance for the ways of human nature and yet not yielding to the consequences of its worst propensities, Islam seeks to prevent the accumulation of wealth in a few hands to the detriment of society as a whole, by its laws of inheritance.

 

5.      Viewed as a whole, the economic system envisaged by Islam aims at social justice without inhibiting individual enterprise beyond the point where it becomes not only collectively injurious but also individually self-destructive.

 

29.       The Islamic financial system employs the concept of participation in the enterprise, utilizing the funds at risk on a profit-and- loss-sharing basis. This by no means implies that investments with financial institutions are necessarily speculative. This can be excluded by careful investment policy, diversification of risk and prudent management by Islamic financial institutions.  It is possible, that investment in Islamic financial institutions can provide potential profit in proportion to the risk assumed to satisfy the differing demands of participants in the contemporary environment and within the guidelines of the Shariah. The concept of profit-and-loss sharing, as a basis of financial transactions is a progressive one as it distinguishes good performance from the bad and the mediocre. This concept therefore encourages better resource management. Islamic banks are structured to retain a clearly differentiated status between shareholders' capital and clients' deposits in order to ensure correct profit-sharing according to Islamic Law.

 

30.       Ar-Riba consists of several types of transactions which have been forbidden by Allah.  Dealing in riba is one of the greatest sins a Muslim can commit - The greatest sin according to Imam Malik.

 

All forms of riba fall into two basic categories

 

A.         Riba An-Nasee'a. 

 

This is the most pervasive and well-known.  It includes several kinds of transactions. 

 

The "classic" one which was described by the Companions of the Prophet (sas) was where someone owes another money for whatever reason (purchase, loan, etc.) which is due at a  certain time.  When the time comes, the creditor would say to the debtor:  "a taqdhee am turbee?" (Will you pay up, or accept an increase?).  It seems that there was no fixed rate set at the beginning of the transaction, rather it was set by "custom" and expectations and what the creditor felt he could demand from the creditor who was unable to pay.  In this way, the original debt could easily expand to many times its original size.  Allah said:

 

{Ya ayyuhaa alladhina aamanoo la ta'kuloo ar-riba adh'aafan mudhaa'afatan wa ittaqoo Allaha la'allakum tuflihoon.}

 

{O you who believe do not consume interest doubling and multiplying and beware of Allah that perhaps you may succeed.}  Aal-'Imraan: 130

 

The question of Exchange of currency for currency or food for food with one side being delayed is explained by the following hadith which explains this and several other issues:

 

"Gold for gold either ore or pure, silver for silver either ore or pure, wheat for wheat measure for measure, barley for barley mearsure for measure, dates for dates measure for measure, salt for salt measure for measure whoever increases or seeks an increase has committed riba.  There is nothing wrong with selling gold for silver and the silver is more as long as it is hand to hand as for deferred payment, no.  And there is nothing wrong with selling wheat for barley and the barley is more as long as it is hand to hand, as for deferred payment, no."  In another version, he (sas) said: " When the items are different in these categories, then sell however you wish as long as it is hand to hand."  Abu Daud and both narrations are sahih.

 

Two sales in a sale.  The Prophet (sas) forbid a transaction which was "two sales in a sale".  This means that at the time of the sale, the two parties agree to different prices corresponding to different times of payment.   For example:  90 days like cash but after that, the price goes up by 1% for every month of delay.  This transaction is illegal and if a Muslim has engaged in such a transaction before knowing, they only have a right to the least of the prices.

 

"Whoever transacted two sales in a sale has a right only to the lesser of the two or he commits riba."

 

A loan which benefits the lender.  As we saw in the first point, money cannot be exchanged for money with a delay no matter what the values.  There is no "business" transaction where money is given and returned later.  A "loan" is NOT a business transaction, but is a form of "sadaqa" or charitable transaction and the money returned must be the same as the money given.

 

"The Prophet (sas) forbid "kulla qardhin yajurru manfa'atan" - any loan which returns a benefit (i.e., to the lender).

 

B.         Riba Al-Fadhl. 

 

It is forbidden in Islam to exchange currency for currency unless it is done real time - i.e., no currency "futures" market.  It is also forbidden to exchange food items for the same kind of food unless is both real time and in equal measure.  It is forbidden to exchange food items for other food items unless it is real time.  Obviously measures do not have to be the same.  Exchange of items in different categories, e.g., food for money, money for goods, etc. can be done in any quantities per the rule of supply and demand and with or without delay of one of the two sides of the transaction.  This category of riba is explained in the sahih hadith from Abi Daud above.

 

We should note that Islam forbid ihtikaar (monopoly) in foodstuffs and all necessities.  In this case, the ruler has the right to interfere with the normal functioning of the "market" (supply and demand) in order to protect the peoples' necessities of life.  A monopoly in other necessities say for example diamonds is of no consequence and the ruler is not allowed to interfere with the market.

 

No dealing in these interest transactions of any kind is allowed.   The Prophet (sas) has invoked Allah's "la'na" upon five individuals for a single transaction:  the payer of interest, the receiver of interest, the scribe (probably computer programmer in our day) who records it and the two witnesses.  The word "la'na", usually translated as "curse" is much more than that.  It means distance, i.e., that Allah will put you at great distance from Him on Qiyama.  Similarly, Allah said about those who consume people's property with falsehood that He will neither look at them, speak to them nor cleanse them on that day.   This is the most severe punishment from Allah and those subjected to it will wish they could be punished by Allah in His fire rather than to be ignored and put away from Him.  Also, as Allah said in Sura Taha:

 

{And whoever turns away from my reminder will surely have a miserable life and we will resurrect him blind.  He will say:  Lord! Why have you resurrected me blind though I used to see?  He said:  Likewise my signs came to me and you neglected them and in the same way you, on this day, are neglected.}

 

Riba may appear to be in increase and a benefit, but it will never bring any benefit and will only bring those who deal in it the wrath of Allah, a declaration of war from Him and His punishment in the hereafter.  Allah said:

 

{And whatever interest transactions you have made that they may grow in other people's wealth will not grow with Allah.  And whatever zakat you have given desiring only Allah's countenance, these surely are the ones whose returns are multiplied.}  Ar-Rum:39

 

Riba is one of the seven mubiqaat (sources of ruination) which the Prophet (sas) told us about in the hadith:

 

"Stay far away from the seven destroyers."  They said:   O Allah's Messenger, what are they?  He said:  "Associating partners with Allah, sorcery, killing the one protected by Allah except by right, consuming riba, consuming the wealth of orphans, fleeing from battle and slandering chaste and innocent believing women."  Muslim & Bukhari and others.

 

And never forget the "la'na" of Allah invoked by the Prophet (sas) on the five parties involved in any riba transaction.

 

"The Prophet (sas) invoked la'na on the receiver of interest, the payer of interest, the scribe and the two witnesses.  And he said:  "They are the same."  Muslim

 

Some people are under the misconception that only high rates of interest are prohibited, and that low rates are permissible. This delusion comes from misunderstanding the verse of the Qur'an, (translated), "O you who believe! Do not consume riba, increased manifold." [Qur'an, 3:130] This verse, however, does not mean that if the increase is small it is permissible; it is merely describing the common or usual state of affairs. Interest, as a rule, will be increased and compounded several times, as the debtor repeatedly fails to pay up. This is similar to the statements, "Do not sell My signs for a small price," meaning at any price, for any price is too small to sell the signs of Allah for; and "Do not kill your children out of fear of poverty," which clearly cannot be taken to mean that it is permissible to kill them for any reason besides fear of poverty. Further confirmation that all interest is prohibited is in another verse of the Qur'an. "But, if you repent [from riba] then for you is your principal." [Qur'an, 2:279] So, those who repent may keep only their principal (i.e. the initial amount loaned), and not even one penny or 1% more. Aside from all of this, "little" and "much" are subjective. What one person regards as "a little" interest may be considered "a lot" by someone else. So, the truth of the matter is that a small amount of interest is prohibited just as is a large amount.

 

Similarly, the hadith literature confirms this understanding: "If a man extends a loan to someone, he should not accept a gift." [Bukhari] Abu Burdah ibn Abi Musa said, "I came to Medina and met `Abdullah ibn Salam, who said, 'You now live in a country where riba is rampant. Hence, if anyone owes you something and presents you with a load of hay, or a load of barley, or a rope of straw, do not accept it, for it is riba.'" [Bukhari]

 

The unbelievers made a very similar claim. They said, "Trade is just like riba." However, this is an absurd analogy. It is like saying that there is nothing wrong with prostitution, because it is the use of the body to earn money, just like any other kind of work. Moreover, the claim that it is beneficial is invalid. In reality, it brings only a limited, temporal, material benefit to only a certain category of people. On the larger scale, it harms the debtor, especially in the case of his business running into loss. It restricts the wealth among the wealthy, and impedes its free circulation. It can lead to inflation, and other economic woes. It is selfish and unfair.

 

The Prophet said in the Farewell Pilgrimage, ``Every riba of Jahiliyyah is abolished under these feet of mine, and the first riba I abolish is that of `Abbas.’’ It was around this time that Allah revealed the verse, (translated) ``This day have I perfected for you your religion, completed My favor upon you and chosen Islam for you as your religion.’’ [al-Ma’idah] The religion was completed, and all the regulations (including riba) had been legislated by that time.

 

But, this was not the last revelation. A few days after that, approximately nine days before the Prophet left this world, some further verses were sent down. ``O you who believe! Fear Allah, and GIVE UP WHATEVER REMAINS OF RIBA, IF INDEED YOU ARE BELIEVERS. {my emphasis} And, if you do not do [so], then receive news of a war from Allah and His Messenger. [On the Day of Judgment, the consumer of riba will be given weapons and asked to prepare for war with Allah, and whoever has Allah as an adversary shall surely be overcome.] But, if you repent, then for you is your principal; do not wrong [by taking interest], and you will not be wronged [by deprivation of the principal]. And, if [the debtor] is in dire circumstances, then [give him] reprieve until ease. And, it would be better for you that you [remit the debt as] charity, if only you knew. And, fear a day in which you will be returned to Allah. Then, every soul shall be paid for what it has earned, and they will not be wronged.’’ [Qur’an, 2:278-281] (my emphasis.)

 

This is something for us to ponder over. The last revelation of the Qur’an - at almost the last possible time for revelation- is on riba. This must be to reiterate its severity, and to issue a dire warning to us against it. Not even the dhimmis (non-Muslim citizens) are allowed to deal in riba in the Islamic state. The Prophet wrote to the Christians of Najran,’ The person amongst you who deals in interest is not under our protection.’ [Kanz al-`Ummal]

 

‘’On the night I was transported (i.e. the night of Isra and Mi`raj), I was brought to a people whose stomachs were [large] like houses, with snakes inside them which were visible from outside their bellies. I said, ‘Who are these, O Gabriel?’ He said, ‘Consumers of riba.’ ‘’[Ibn Abi Hatim, Ahmad]

 

(part of a long hadith of a dream: ) ‘’ . . . . then we came to a river, ‘’ I (the narrator) think he said : red like blood, ``and there in the river was a swimming man, and on the bank of the river was a man who had collected a lot of stones by him. The swimmer would try to emerge [from the river], whereupon the one who had gathered the stones would throw a stone into his mouth [forcing him back in]. ‘’ The Prophet conveyed that the swimmer was the consumer of riba. [Bukhari]

 

``Allah has cursed the consumer of riba, the one who gives it for consumption, the two witnesses [to the contract] of [riba], and the scribe thereof. ‘’[Ahmad, Abu Ya`la, Ibn Khuzaymah, Ibn Hibban; Muslim, Nasa’i, Abu Dawud, Tirmidhi, Ibn Majah; Bukhari]

 

``On account of the wrongdoing/oppression of the Jews, We made prohibited for them good/wholesome things which had been lawful for them, and [this was also] for their abundant hindering from the path of Allah, their taking riba although they had been prohibited from it, and their wrongfully consuming the property of people.’’ [Surah al-Nisa’]

 

``The nation amongst whom adultery and interest become common definitely bring the punishment of Allah upon themselves.’’ [Abu Ya`la] According to a narration with Ahmad, interest brings upon drought.

 

``By He in Whose control is my life! Some people of my ummah will spend the night in the state of pride, haughtiness, play and amusement, and in the morning, they will be disfigured as apes and swine, because they made the unlawful lawful, kept (employed) singing girls, drank liquor, consumed interest and wore silk clothes.’’ [`Abdullah ibn Ahmad] (emphasis is mine).

 

``When you trade in al-`eenah [a round-about transaction intended to circumvent riba, but ending in the same result. A man would buy an article from a needy person at a low price, stipulating that he should buy it back at a future date for a higher price], take hold of the ears of cows, become contented with agriculture, and abandon jihad, Allah will impose upon you a humiliation which He will not remove until you return to your religion.’’ [Ahmad]

 

It should be quite clear by now that the interest obtained nowadays from banks and the like is Haram without any doubt. The three councils of jurists that meet regularly to discuss contemporary issues, have all declared, with a unanimity of all of their members, that this interest is prohibited by the texts of the Qur’an and Sunnah (i.e. it is not merely a matter of ijtihad), and that it is the very riba which Allah and His Messenger have prohibited. One of the former shaykhs of al-Azhar (raHimah Allah) observed, `This has become a matter which is necessarily known to be part of the religion, and so it towers above any disagreement.’

 

``So, whoever receives an admonition from his Lord, then for him is what has passed, and his matter is with Allah. But, [as for] whoever returns [to dealing in interest, even after learning of its prohibition, and after hearing the serious and dire warnings against it] - they are the inmates of the Fire; they shall abide therein.’’ ``Say : O My servants who have committed excesses against their own selves! Do not despair of the mercy of Allah! Indeed, Allah forgives all sins. Indeed, He is the Most Forgiving, the Most Merciful.’’

 

If you have been guilty of consuming riba, then you should repent to Allah sincerely. You should feel regret over your sin, cease it immediately, and resolve never to return to it again. The interest which you have from the past must be disposed of. You cannot keep it, for it is Haram money. [Qur’an, 2:279]. You may not destroy it, because the Messenger of Allah (may Allah bless him and grant him peace) forbade the destruction of money [Muwatta’]. Nor should you give it back to the bank, for that would only strengthen it and further the institution of riba. Hence, you should give it away for general projects of good, but with the intention of getting rid of Haram money, not with the intention of charity.

 

 

 

Having discussed the concept of ‘Riba’ existent from the earlier days of Islam distorted by the western banking system, I shall proceed to discuss the various aspects that have been stated and detailed in the said judgment of Dr. Mehmood-ur-Rehman Faisal (supra). It is important to narrate some facts which will show that not only the bankers but the entire country as also the international banks remained involved in the transformation and to say, that today, they have been taken by surprise by the judgment of Dr. M. Aslam Khaki is incorrect. Such a stand is taken for the purposes only that having done an act knowingly that the accrued markup became the banks profit and the same was reflected in the balance sheet. The markup thus charged continually by elapse of time was reflected as income. This deemed income showed the huge profits of banks, which was due to the rescheduling and rollovers, where the markup on markup was charged.

 

 

 

32.       The discussion on charge of interest / mark up that is, in the nature of Riba has been in light all over the world in the various Islamic Fiaqah Conference. In the assembly of the Islami Fiqah of India in its seminar of the top scholars were of the opinion that “Interest whether received on the loans for personal expenditure or on commercial and business loans, is in the eyes of Islamic Shariah, forbidden.”  Additionally, Islamic Fiqah Academy established at the official level by the organization of the Foreign Minister also considered this matter in December, 1985 and arrived at the same conclusion. In the official document of the IMF the position of the Muslim Ummah described it as follows:-

 

 

 

            “It seems appropriate that the beginning of the study of Islamic Banking system should be made from the definition of its basic terminology. Riba is an Islamic legal term which is tantamount to an accepted addition before the use of money. Controversy is found in the past whether Riba means interest or usury but now there is a consensus of opinion among the Muslim scholars that this technical term is applicable to every form of Interest and its corroboration is not merely excessive interest. Therefore in the forthcoming discussions riba  and Interest will be used as synonyms and the Islamic Banking System will mean the system in which the payment or receipt of Interest will be prohibited, whereas an interest giving or conventional bank will mean an institution in which interest is received or given on the use of monetary fund-(International Monetary Fund Staff Papers, Vol xxxiii No. 1 March 1986.  Islamic Interest-free Banking, a Theoretical Analysis by Mohsin S. Khan p-4-5)

 

 

 

The dispassionate analysis of the academic discussions of half a century absolutely lays bare the fact that the questions and doubts raised about Interest (Riba) are unreal and the Quran and Sunnah have prohibited Riba in its every form, be it the ancient banking form or the modern banking, be it related to the consumption loans of the needy or commercial and production loans, may they fall within the sphere of private limits or government, semi-government limits, and whether provided at a lesser or exorbitant rate.  The second great success achieved in the last thirty years covers the principles and rules, way of working, financial Instruments of interest-free banking and the proposal and drafting of the strategy of investment. In this connection investigations have been made with great endeavours and a chart of alternative system has been prepared with deep foresight. At least two dozen research books have been published in which the features of the new system have been explained. Among them some of their authors have received the Islamic Development Bank and the King Faisal Awards.

 

 

 

In Pakistan the report of the Council of Islamic Ideology (1980), which is based on the report of the economic and banking experts, occupies the position of a mile-stone. In this report, a very realistic blue print has been presented to purge Pakistan’s domestic economy of interest. A Committee of the Central Bank also worked on this subject in 1981 under the Chairmanship of the governor of State Bank and the blue print provided by it is also very close to the blue print of the Council of Islamic Ideology.  The report of the Council of Islamic Ideology was discussed in an International Seminar and its recommendations were, on the whole ratified.  Moreover some additional recommendations were made, which were published under the title of “Money and Banking in Islam,” by the International Institute of Islamic Economics (Islamabad) and Institute of Policy Studies (Islamabad). In 1989 the International Institute of Islamic Economics held a workshop on the subject as to how interest can be eliminated from government dealings. The report of this workshop (Elimination of Interest on Govt. Transactions) has also been published. After that in June 1992 the commission for Islamization of Economy submitted its interim report, which has, however, not been published so far. It was even not presented in the Senate and National Assembly as required under the law. The Institute of Policy Studies held a Seminar in 1993 which was attended by about one hundred experts. Two editions of its proceedings have been published in 1994 and 1995 entitled “Elimination of Riba from the Economy.” The whole of this work presents a vivid outline of an alternative system in the light of conditions prevailing in Pakistan. Regarding the foreign loans, clear guidance exists in the above mentioned reports of the Institute of Policy Studies and the Self-Reliance Committee.  Even an outline exists in the Self-Reliance Report (1991) which tells how to execute this job, and on the other hand with the help of a proper economic model a complete program has been given to eliminate Riba from the economy in three years. The difficulty is that those demanding an alternative system neither study these reports nor intend to act upon them.  It seems that because the recommendations made in this whole assignment, are not in accordance with their taste or desire, they therefore refute the existence of these documents and are continuously harping upon, “where is the alternative?” The matter is not limited only to academic exercise and drawing a sketch of the alternative system. No doubt much work has yet to be done and many stages have to be covered, but whatever has been attained by way of implementation is sufficient to bow before the prowess of Islamic banking system.

 

 

 

The work of accumulating the savings and provision of resources has always been carried out at the lowest and public levels C individual and institutional. After the first World War, Dr. Muhammad Hamidullah had carried out research work and had shown how investment to the extent of billions of rupees was being carried out through equity-based venture system. During the last forty years the experiments include the Mit Ghamr Bank of Egypt, which had been working from 1963 to 1967 and after that it adopted a new form in the shape of Nasir Social Bank (1971). These institutions continued to work very successfully for ten to twelve years on which studies were carried out which declared them to be successful preliminary experiments (vide: The Research Report of T. Wholus Scharf: Arab Islamic Banks: New Business Partners for Developing Countries, Paris, OECD, 1993).”

 

 

 

33.       In pursuance to the international discussion of the Muslims all over the world in 1975, Dubai Islamic Bank was formed to perform the work under the Islamic system. Two major Financial Groups namely Darul Mal Islamia (DMI) and Al-Barka Groups were also formed for the purposes of interest free banking. The Islamic Development Bank formed in Jeddah in 1975. All these banks are continuing to work under the system of Islamic Banking.

 

 

 

34.       For the purpose of understanding the law in force for the time being, and for the purpose of understanding the two important judgments, i.e. the cases of Dr. Mehmood-ur-Rehman Faisal (supra) and Dr. M. Aslam Khaki (supra), it will be important to reproduces the two most important circulars that have been continued to be relied upon in this respect. The first being BCD Circular No.13 dated 20th June, 1984 which reads as under:-

 

 

 

“STATE BANK OF PAKISTAN

 

Banking Control Department

 

Central Directorate

 

Karachi.

 

 

 

BCD Circular No.13                                                             20th June, 1984.

 

All Banks,

 

Dear Sirs,

 

Elimination of ‘RIBA’ from the

 

Banking System.

 

 

 

            As has been announced by the Finance Minister, it is the intention of Government that the Banking System should shift over to Islamic modes of financing during the course of the next financial year. These modes of financing have been described in annexure I. This shift will take place according to the following programme.

 

 

 

(i)                 As from the 1st July, 1984, all banking companies will be free to make finance available in any of the modes of financing listed in annexure I. However, as a transitional arrangement, they will also be free to lend on the basis of interest, provided that no accommodation for working capital will be  provided or renewed on interest basis for a period of more than six months.

 

 

 

(ii)               As from the 1st January, 1985, all finances provided by a banking company to the Federal Government, Provincial Governments, public sector corporations and public or private joint stock  companies hall be only in any one of the modes indicated in annexure I.

 

 

 

(iii)             As from the 1st April, 1985, all finances provided by a banking company to all entities, including individuals, shall be on the same basis as mentioned in (ii) above.

 

 

 

(iv)              The appropriate mode of financing to be adopted in any particular case will be settled by agreement between the banking company and the client. Some possible modes of financing for various transactions have been shown in annexure II.

 

 

 

(v)                As from the 1st July, 1985, no banking company shall accept any interest-bearing deposits. As from that date, all deposits accepted by a banking company shall be on the basis of participation in profit and loss of the banking company, except deposits  received in Current Account on which no interest or profit shall be given by the banking company.

 

 

 

2.                     The instructions contained in items (i), (ii) and (iii) above shall, however, not apply to on-lending of foreign loans which will continue to be governed by the terms of the loans. Likewise, the instructions contained in item (v) above shall not apply to foreign currency deposits.

 

 

 

3.         The above instructions are being issued under the Banking Companies Ordinance, 1962. Further instructions, where necessary, will follow.

 

 

 

            Please acknowledge receipt.

 

 

 

                                                                                    Yours faithfully,

 

 

 

           

 

                                                                                    (SIBGHATULLAH)

 

                                                                                                    Director”

 

 

 

annexure – i

 

 

 

Permissible modes of Financing

 

 

 

(A) Financing by lending :-

 

 

 

(i)         Loans not carrying any interest on which the banks may recover a service charge not exceeding the proportionate cost of the operation, excluding the cost of funds and provision for bad and doubtful debts. The maximum service charge permissible to each bank will be determined by the State Bank from time to time.

 

 

 

(ii)        Qard-e-Hasana loans given on compassionate ground free of any interest or service charge and repayable if and when the borrower is able to pay.

 

 

 

(B) Trade-related modes of financing including the following :-

 

 

 

(i)         Purchase of goods by banks and their sale to clients at appropriate mark-up in price on deferred payment basis. In case of default, there should be no mark-up on mark-up.

 

 

 

(ii)        Purchase of trade bills.

 

 

 

(iii)       Purchase of moveable or immoveable property by the banks from their clients with Buy-Back Agreement or otherwise.

 

 

 

(iv)       Leasing.

 

 

 

(v)        Hire-purchase.

 

 

 

(vi)       Financing for development of property on the basis of a development charge.

 

 

 

The maximum and the minimum rates of return to be derived by the banks from these modes of financing will be as may be determined by the State Bank from time to time.

 

 

 

(C) Trade-related modes of financing including the following :-

 

 

 

(i)         Musharika or profit and loss sharing.

 

(ii)        Equity participation and purchase of shares.

 

(iii)       Purchase of participation term certificates and Modaraba Certificates.

 

(iv)       Rent-sharing.

 

 

 

The maximum and minimum rates of profit to be derived by the banks from such transactions will be as may be prescribed by the State Bank from time to time. However, should any losses occur, they will have to be proportionately shared among all the financiers.

 

 

 

 

 

 

 

 

 

 

 

ANNEXURE – II

 

 

 

Permissible modes of Financing for

 

Various Transactions

 

 

 

     Nature of Business                   Basis of Financing

 

 

 

I. Trade and Commerce

 

 

 

Fixed investment

 

 

 

 

 

(a) Commodity operations of the Federal and Provincial Governments and their agencies.

 

 

 

Mark-up in price.

 

 

 

 

 

 

 

 

 

 

 

(b) Export Bills purchased/negotiated under Letters of Credit (Other than those under reserve)

 

 

 

(i) Exchange Rate differential in the

 

     case of foreign currency bills.

 

 

 

(ii) Commission or mark-down in

 

      the case of Rupee bills.

 

 

 

 

 

 

 

 

 

 

 

(c) Documentary Inland Bills drawn against Letters of Credit purchased/discounted.

 

 

 

Mark-down in price.

 

 

 

 

 

 

 

 

 

 

 

(d) Import Bills drawn under Letters of Credit.

 

 

 

Mark-up in price.

 

 

 

 

 

 

 

 

 

 

 

(e) Financing of exports under the State Bank’s Export Finance Scheme and The Scheme for Financing Locally Manufactured Machinery.

 

 

 

Service charge / Concessional

 

Service charge.

 

 

 

 

 

 

 

 

 

 

 

(f) Other items of trade & commerce.

 

 

 

Fixed investment

 

Equity participation, P.T.Cs.,

 

Leasing or hire-purchase.

 

 

 

Working Capital

 

Profit and loss sharing or mark-up.

 

 

 

 

 

 

 

 

 

 

 

II. Industry

 

 

 

Fixed investment

 

Equity participation, P.T.Cs.,

 

Modaraba Certificates, leasing,

 

Hire-purchase or mark-up.

 

 

 

Working Capital

 

Profit & loss sharing or mark-up.

 

 

 

 

 

 

 

 

 

 

 

III. Agriculture and Fisheries

 

 

 

 

 

 

 

 

 

(a) Short-term Finance.

 

 

 

Mark-up. In the case of small farmers and small fishermen who are at present eligible for interest free loans finances for the specified inputs etc, upto the prescribed amount may be on mark-up basis. The mark-up amount may however be waived in the case of those who repay the finance within the stipulated period and payment of the mark-up made by the State Bank to banks by debit to Federal Government Account.

 

 

 

 

 

 

 

 

 

 

 

(b) Medium and long-term Finance.

 

 

 

(i)       Tube wells & other wells.

 

 

 

 

 

 

 

 

 

 

 

 

 

(ii)   Tractors, Trailers and other farm machinery and transport (including fishing boats, solar energy plants etc.)

 

 

 

(iii)   Plough-cattle, Milch Cattle & other live stock.

 

 

 

(iv)    Fairy & Poultry.

 

 

 

(v)  Storage and other farm construction (viz. Sheds for animals, fencing etc.).

 

 

 

(vi)    Land Development.

 

 

 

(vii)   Orchards,    including

 

          nurseries.

 

 

 

(viii)  Forestry.

 

 

 

 

 

(ix)    Water  Course

 

          improvement.

 

 

 

 

 

 

 

Leasing or hire-purchase. In addition to ownership of machinery, banks may create charge on the land in their favour as in the case of other loan to the farmers under the Passbook System.

 

 

 

Hire-purchase or leasing.

 

 

 

 

 

 

 

 

 

 

 

Mark-up

 

 

 

 

 

PLS/mark-up/hire-purchase/leasing.

 

 

 

Leasing or rent sharing basis with flexible weightage to the bank’s funds.

 

 

 

Development charge.

 

 

 

Mark-up, development charge or PLS basis.

 

 

 

Mark-up, development charge or PLS.

 

 

 

Development charge.

 

 

 

 

 

 

 

And the other being BCD Circular No.32 dated 26.11.1984 which reads as under:-

 

 

 

“STATE BANK OF PAKISTAN

 

Banking Control Department

 

Central Directorate

 

Karachi.

 

 

 

BCD Circular No.32                                                    26th November, 1984.

 

All Banks and development finance institutions.

 

Dear Sirs,

 

Elimination of ‘RIBA’ from the Banking

 

System-Bank Charges.

 

 

 

            Please refer to BCD Circular No.13 dated the 20th June, 1984.

 

 

 

2.         Vide BCD Circular No.7 dated the 28th March, 1984 bank charges except charges for home remittances, have been deregulated. The schedules of bank charges received from t he banks show that the following items of bank charges are based on interest:

 

 

 

(i)                 Mark up in the case of import bills under import letters of credit.

 

 

 

(ii)               Mark-down in the case of documentary bills drawn against inland letters of credit.

 

 

 

3.         The schedules also provide for levy of overdue/penal interest in case of non-retirement/non-payment of inland cheques, bills etc., purchased.

 

 

 

4.         In exercise of the powers vested in it under the Banking Companies Ordinance, 1962, the State Bank of Pakistan is pleased to direct that as from the 1st January, 1985, interest, wherever charged by a banking company/development finance institution in any of the items of bank charges, shall be replaced by a non-interest mode considered appropriate by it. Moreover, overdue/penal interest or mark-up on mark-up shall not be charged by a banking company/DFI as from that date. Instead, it may take legal steps for recovery of the overdue finance.

 

 

 

5.         Please acknowledge receipt.

 

                                                            Yours faithfully,

 

 

 

           

 

                                                                                             (SIBGHATULLAH)

 

                                                                                                        Director”

 

 

 

35.       An analysis of the said BCD Circular No.13 is required to be done in the light of the afore-stated discussions that a complete conscience effort was put in by the government which included the bankers to bring about the transformation in the existing system in the banks for shifting to the Islamic modes of financing. The first paragraph of said BCD Circular No.13 states that, it was the government which acted through its Finance Minister, showing the intention of the Federal Government, to transform the banking system into the Islamic mode whereby, the financing done would be in the manner as provided in the Annexures to the said circular. It was not an abrupt transformation. The transformation had actually commenced from 1962 and various committees had been formed. Discussion at the highest level had taken place and naturally upon discussion after numerous position a settled formula came in by way of this circular. No doubt, this circular does not mention the name of the transaction i.e. whether it is Morabaha transaction, a transaction by bai or by Ijarah, Modaraba or any other such means but the annexure to the said notification categorically spelt out, what was to be done and that, these in fact reflected the various transactions that are and continued to be in vogue in other Islamic banks. Though no names were given but it will be seen that these permissible modes were nothing but specified transaction allowed by the Islamic Scholars. BCD Circular No.13 also speaks of “transitional management” and, after the first of January, 1985 as provided in clause 2(i) of the said circular of finances provided by a banking company, Federal government, provincial government, public sector corporation and public or private joint sectors companies could only be done in the modes indicated in the annexure-1 to the said circular. 

 

 

 

36.       It cannot by any stretch of imagination be presumed that the meaning of the words ‘interest’, ‘mark up’ or ‘Riba’ were not understood. When this notification was issued all the transactional aspects had been discussed at the top level by the government which is why the Finance Minister announced the public of transformation. This announcement was also in the line with the Constitutions of the Islamic Republic of Pakistan.

 

 

 

37.       In annexure-I to the said circular namely BCD Circular No.13 there were three basic forms of transaction that were allowed viz. The first being, ‘Financing by Lending’. From the title, it is clear that though, otherwise in the usual parlance ‘financing’ and ‘lending’ would have in fact meant the same, but when ‘financing’ is used with ‘lending’ saying, that there is lending, it would mean that there is a ‘loan’ given to finance some person. The word ‘finance’ will have to be given a separate meaning and is to be treated to be ‘lending’ simplicitor. ‘Lendings’ are loans i.e. the delivery of the money to another person. The money therefore being a ‘debt’ created by way of lending. In such a situation the question that will arise is that, whether such debt created by lending could attract a levy of further sums on elapse of time for repayment, as wound be done under the normal banking system on any money lent which would carry interest. Under this circular there is a categorical stipulation, that, where there is a ‘lending’ the ‘debt’ so created by giving ‘money’ to another person or financing to other person by way of lending, such would not carry any interest or markup. It is, therefore, provided in sub-clause (i) of Clause A to Annexure-I that such ‘loans’ shall not carry interest or markup. The banks were only allowed to recover ‘Service Charges’ which were not to exceed the proportionate costs of operation. The important aspect that needs to be noted in the first permissible mode, is the use of the words  ‘excluding cost of funds and provision of bad and doubtful debts’. This phrase needs to be explained. The Shariat Appellate Bench of the Supreme Court in the case of Dr. M. Aslam Khaki has held, that money is not the commodity and in fact, is only a medium of exchange’. It has also been held, that, in view of it being the medium of exchange and cannot be treated as a commodity wherefore it cannot be traded. It can only used for the purposes it is for, namely the exchange for commodity. The value of the money cannot change, that is, if a currency note is for Rs.100/- it can only be exchanged with a hundred rupees or for various notes of the value of the Rs.100/-, but no addition can be made thereto. Such medium of exchange can get the commodity of the value of Rs.100/- but, the money cannot be traded. It will be important to note that that in the modern world, money is obtained from various sources, which involves cost. If such cost is taken into account, and if that money which is lent, the usual course would have been that the bankers would have charged interest, which would carry his own spread along with the cost of funding and provision of bad and doubtful debt, to arrive at a rate of interest that, till such time the money is repaid, the debtor shall continue to pay an additional sum for utilizing the money. Such has been categorically restricted by the said BCD Circular No.13 in Annexure-I. The said judgment of Dr. M. Aslam Khaki only reaffirms the same and categorically states that nothing can be added for the purposes of utilization of ‘money’. Notwithstanding what has been stated by the Honourable Supreme Court, even if BCD Circular No.13 is therefore seen, it is clear that by inclusion of this particular phrase, the banks are prohibited to charge except for the service charges, any other amount on a debt, to the extent that the cost of obtaining funds by the lending agency, and provision by such lender of his bad debt and charging interest has categorically been done away with. The service charges are only the cost of the actual banks operation, and the maximum of which was to be determined by the State Bank of Pakistan from time to time. This shows the importance that has been attached to the fact that no ‘increase’ or ‘addition’ by elapse of time could be made on a ‘debt’ or ‘loan’, i.e. ‘on money lent’.

 

 

 

38.       The other manner of loans allowed is the ‘finance by the lending’ as ‘Qard-I-Hasana’ which is a loan given on compassionate ground, free from ‘interest’, ‘markup’ or ‘service charges’ and repayable, ‘if’ and ‘when’ the borrower is able to pay, I am not aware whether this has even been acted upon.

 

 

 

39.       The next mode of financing that has been dealt with in Circular No.13 is the ‘Trade Related Modes of Financing’, which type is in fact, the basic earner for banks. Various modes have been provided, one of which is, purchase of goods by banks and their sale to the clients at an appropriate markup in price for deferred payment and which is the most utilized manner of ‘financing’. We need to analysis this aspect also. It is important to first note that the term ‘loan’ or ‘lending’ is missing and it is ‘financing’ that is being used. The absence of the term ‘lending’ has to be given a meaning. As discussed above, there was ‘Financing by Lending’, is a ‘loan’ of money, which may be repayable at a certain time. ‘Financing’ is not ‘lending’. It is a form of a business activity, which has been termed in the title as ‘Trading’. Thus the finance is earned by trading, and cannot be termed as a ‘Loan’ of money.  The permissible mode allows the purchase of ‘goods’ or various commodities by banks. The purchase of goods has to be given a proper meaning. Purchase will never mean purchase of ‘money’. As discussed, this would amount to ‘lending money’, which is not allowed by the said BCD Circular and even if allowed, no addition can be made to it. It is the ‘goods’ or ‘commodity’ that have to be purchased. ‘Money’ is neither ‘goods’ nor ‘commodity’. It is, therefore a categorical stipulation in sub-clause (i) of Clause B of Annexure-I. The banks are allowed to sell goods that are required by their clients. It is the ‘sale price’ of these ‘goods’ that shall be the financing. I have already discussed that there is ‘financing by lending’ and this mode is the other mode i.e. financing by sale or ‘Bai’.   Therefore, money or the ‘sale price’ fixed and agreed between the ‘Seller’ and the ‘Buyer’ is what is payable for the goods purchased. There could be various types of purchase, however the most common being, that the client of the bank sells ‘goods’ to the bank for a value or the ‘purchase price’, which is the amount that is actually paid by the bank to the customer. The customer simultaneously agrees to repurchase the same goods for a ‘marked up price’, which is the agreed ‘sale price’ or the ‘repurchase price’. Thus the purchase and sale is by the same person (though some writers say that this would also amount to ‘Riba’, but the law for the time being in force, permits such sale and purchase), the money i.e. ‘the sale price’ or the ‘repurchase price’ is payable on deferred payment basis. It is categorically provided in the said Circular, that in case of default there shall be no markup on markup. Thus delay in payment will under no circumstances cause any addition of any sums. This is because of the categorical fact that the ‘repurchase price’ becomes a ‘loan’ or ‘debt’ and nothing could be added thereon. We now also analysis this clause keeping in view Judgment in Dr. M. Aslam Khaki’s case. In the order of the court it is observed that ‘the Holy Quaran says: ‘and if he (the debtor) is poor he must be given respite till he is well of’. (2:280). It is further held in the Order, that if the purchase delays the payment despite his ability to pay, he may be subjected to different punishment, but it cannot be taken to be a source of further return to the seller on per cent, per annum basis as contemplated in Section 79 of Negotiable Instrument Act. The permissible mode of financing by sale and purchase therefore could not carry any mark up on mark up and that, such was also not allowed in the event of default. Thus the comparison of the Circular and the judgment of the Supreme Court has the same end result.

 

 

 

40.       The sale price of the goods purchased by the client from the bank will therefore be a determined price namely, a price on which certain profits by way of addition of mark up would also be included. Such price could be arrived at, as also observed by the Supreme Court in the aforestated case, on any sums that may be agreed between the parties, but after the ‘purchase price’ has been agreed to between the ‘bank’ and the ‘customer’ such amount will only become a ‘debt’ and would therefore be nothing but ‘lending’. The transaction of sale and purchase is complete, and the bank becomes an ‘unpaid seller’, i.e. is only liable to be paid the repurchase price or the amount of ‘debt’ created by the sale by the bank to the customer. The payment to be made is at a date in the future. Such will only be a ‘loan’ or ‘debt’ repayable at a future date. If payment is not made on that future date, it is the money due that is recoverable only, and per the said Circular, no markup on markup or addition thereto can be made. After it becomes ‘loan’, such amount will be dealt with in the manner as provided in Clause-A of Annexure-I and would therefore only become loan payable by the purchaser to the bank. Such loan will not carry any interest or markup. Only services charges therefore could be recovered. The usual method being applied by the bank for the purposes of recovery of this interest, is the indirect mode and method. What is being done is, that another ‘agreement’ is entered into under Clause B(i) and the said ‘loan’ or ‘debt’ recoverable is translated into the said agreement as the ‘purchase price’ of the goods and commodity. On this purchase price is added a markup in the agreement which will therefore become the ‘sale price’ or ‘repurchase price’  i.e. sale by the customer to the bank and an addition of further mark up is made to the said existing sale price to arrive at a further marked up price. In the subsequent agreement there is no transaction of sale or purchase of goods but a fictitious act is done, whereby notional goods are transacted and not detailed in the agreement and a sale and purchase price is agreed upon. This is nothing but a fraud on the Constitution, the law and the people of this country.  It is a mockery of Islam, and the Islamic Modes of Transaction approved by law. In the case of Mian Muhammad Nawaz Sharif v The President of Pakistan  (PLD 1993 SC 473), it has been held that, ‘what cannot be done directly cannot be done indirectly’. This is also a very well settled law, that no one can be allowed to circumvent the law, no one can be allowed to act otherwise than what is provided. It is also settled law, that if a thing has to be in a specific manner, it has to be done in that manner alone and none else.  No one can be allowed in the name of their own profitability to cause the existing law to be bypassed, avoided or interpreted, or usage or customs to be developed which are contrary to an existing unequivocal and exact law. BCD Circular No.13 is very categorical. It clearly states that no mark up on mark up shall be charged. There is not ambiguity surrounding this issue. In the garb of the other agreement such will not be allowed to be taken. Mr. Azizur Rehman has referred to the following cases:

 

 

 

i)                    Unreported judgment being Spl. HCA No.187/98, M/s Hardware Manufacturing Corporation (Pvt) Ltd. and 5 others

 

Versus U.B.L.

 

 

 

ii)                  Banque Indosuez Versus Banking Tribunal for Sindh and Baluchistan and others (1994 CLC 2272)

 

 

 

in which according to him, the two division benches of this court have held that ‘roll over’ being a ‘custom’ and ‘old practice’ can be allowed. According to him, and that has been discussed above, that this court shall be bound by the judgment pronounced by the division bench. No doubt, all judgments that are not distinguishable do bind on any other court which may be subordinate to it. I, sitting in the original side as a single judge will be bound by the judgment of divisional bench. I have, therefore, perused the said judgment in some detail. The principle expounded by my brothers is not incorrect. The facts of the said case are however distinguishable from the present case and I say this with all respect and humility at my command. It is apparent that all the facts, details and law were also not discussed by the Honourable judges of the division bench. The case of Mehmoodur Rehman Faisal (supra) was also not considered which was a judgment of Federal Shariat Bench and binding on the court. The Honourable judges of the Federal Shariat Appellate Bench in the aforestated judgment which was the judgment of the full bench held that: ‘in view of the above discussion, the rule of Maslaah cannot be invoked in aid to permissibility of ‘bank interest’. It was also held that :

 

 

 

            “153.For consideration of the other point, whether an increase to offset the depreciation in the value of currency can be justified and considered as an alternate and substitute for interest, in the eye of Shari’ah, we may quote first from the well known works of Economics as to the theory of inflation and indexation, purely from economic point of view, and then we would examine the same on the anvil of the Qur’an and Sunnah.

 

 

 

            154. ‘Inflation is a persistent tendency for the prices of most of the goods and services of rise over time. Inflation has been a world-wide problem throughout, much of the 20th century. Nonetheless, inflation has proved to be extremely difficult for economists to define or to distinguish from related problems.”

 

 

 

 

 

The learned judges after having discussed the various possible reasons for rise in the price, including inflation and keeping in view the indexation have come to the conclusion that all increase in any manner whatsoever is Riba. It was held that:

 

 

 

            “169.   Guided by the hadith the fuqaha have opined that in case dirhams or dinars are lent out by counting, they will be paid back by counting not by weight. Similarly in case these are lent out by weight they will be returned by weight not by counting. In respect of the loan of a commodity it is further provided by the fuqaha that it should be returned in the same kind and quantity irrespective of any change in its price at the time of return of the loan.”

 

 

 

 41.      Once it is held that loan of a commodity has to be returned in the same kind and quantity irrespective of any changes in its price, the concept of ‘roll over’ will also have changed. I am therefore of the view that the concept of ‘roll over’ though, dominant and an easy method of earning money, had actually been done away with, by the introduction of BCD Circular No.13 providing that no mark up on mark shall be charged.  The argument that mark up on mark up would actually mean that no mark up could be charged on the mark up levied on the principal amount in the first instance has been made, it has been argued that the words ‘mark up on mark up’ will only be read as if there shall not be charged any further sum on the mark up that was added to the first agreement for the purposes of arriving at a repurchase price, but it could be charged on the actual purchase price namely, the purchase of the goods from customers. I am afraid, I shall also not subscribe with this view. The position is very clear that the mark up is charged for the purposes of arriving at a repurchase price and as discussed above, the said mark up is merged and becomes a part of the debt. Such amount cannot dealt with separately as, the entire amount will form a debt and it is this debt that shall be payable by the borrower. The practice of keeping mark up in a separate amount and principal on the separate account and charging mark up on the principal and not the mark up is not contemplated by the said notification namely BCD Circular No.13. Once the principal debt is determined as discussed above, the debt becomes a finance by lending and no mark up, by whatever name called, can be charged. If one were to presume that such mark up on the mark up could not be charged, but could be charged on the principal money lent, the outcome would in fact be the same. All payments made would be, (in fact are) adjusted towards markup, and then markup would be charged on the principal. This will be purposively avoiding the law. Interest has been defined as an increase on money by elapse of time i.e. that a sum that is continued to be paid till such time the debt remains in place at a certain rate and for utilization of the monies that may have been given to another person. In the instant case also the arguments therefore that mark up on the principal can be charged also held no ground. The charge of mark up on mark up will mean an addition in the existing marked up price. Mark up is charged only for the purposes of arriving at a price sale of a commodity, and the addition to arrive at a price is the profit in trade, and which is the only amount a bank can gain. There would be no commodity to sell after the agreement of sale has been acted upon. The bank, as aforestated shall only be an unpaid seller. In the subsequent agreement it will only be the money (the debt) that is being resold and which cannot be done. In fact, if the said subsequent agreements are read, it will be clear that the said agreements are in fact sale and purchase of ‘goods’ and not of ‘money’, but there are no ‘goods’, and is a garb to overcome and avoid an existing law.

 

 

 

42.       Great emphasis has been placed on the fact that, in the event an order is passed, that all monies that have been charged under the various financing given by the banks to the customers are stated to be unlawfully done, the banks shall collapse. This may be true but, the question of charging mark up on mark up is not one which is new. I have discussed above, that this was being in light and was / had been taken up and discussed at some length from 1962. Presuming that the bankers did not know of such also and presuming that they had acted bonafide in entering into subsequent agreements and presuming that they were under a bonafide belief that mark up on mark up was only the charge on the mark up and could be added to the principal by subsequent agreement. They will however have to consider that the matter had been taken immediately thereafter and the first judgment of this court that was in place was the case of Bank of Oman Ltd. v. East Trading Company (PLD 1987 Karachi 404). In this case, it was held that the courts in Pakistan are bound by the Constitution and any law repugnant to the Constitution is void. It was further held that the principle and the provisions of the Objective Resolution by virtue of Article 2-A are now a part of the Constitution and justiceable subject however to limitation imposed by Article 203-A, B (c ), 203-D, 203-G and 203-GG of the Constitution whereby special and specific jurisdiction has been conferred on the Federal Shariat Court to declare the law as defined by Article 203-B(C ) read with Article 203-G or any provision thereof as repugnant to the injunctions of Islam laid down in the holy Quaran and Sunnah of the holy prophet (PBUH) and that the said law and any provision thereof so declared by it. In another case of Habib Bank Ltd. v. Muhammad Hussain reported as PLD 1987 Karachi 612 whilst dealing with the provision of the Banking Companies (Recovery of Loans) Ordinance, 1979 i.e. before the issuance of BDC Circulars Nos.13 and 32, it was held that, such interest cannot be awarded but, because of binding view in the case reported as Muhammad Bachal Memon v. Government of Sindh (PLD 1987 Karachi, 296) interest was allowed.

 

 

 

43.       In the case of Aijaz Haroon v. Inam Durrani (PLD 1989 Karachi 304) the entire position was again discussed agreeing with the position of Dr. Justice Tanzil-ur-Rehman, J. in the above referred cases:

 

 

 

“I am of the view that all laws whether they be constitutional or sub-constitutional must yield to the Sovereignty of Allah as reflected in the Holy Quran and Sunnah and if there be a clear commanding that behalf it is that command alone which has to be given effect to and all other legislation applicable in this Islamic  Republic of Pakistan must be construed as subordinated thereto. Sovereignty over the entire universe vesting, as it does, in Almighty  Allah, is the cornerstone of the Constitutional edifice of this Republic and the Injunctions of Islam, meaning thereby Injunctions of Quran and Sunnah, as interpreted by a particular sect in Islam in relation to the personal law of that sect and subject to the status and personal laws of non-Muslims, are enforceable, as such.”

 

 

 

 

 

In this case it was also held that:

 

 

 

 

 

“The law of Allah does not brook injustice of any kind and, therefore, whenever a case for payment, for refund or return of money, comes before a Court of law in Pakistan it has to be the endeavour of that Court to order the payment, refund or return, as the case may be, of so much of current legal tender to the person entitled as is equal, in terms of buying power or other intrinsic value, to the amount initially, loaned out contracted to be paid or deposited.”

 

 

 

 

 

However, Mr. Wajihuddin Ahmed, J. held that as the legal tender had lost value, the amount to be paid would be calculated based on the depreciation of the value of the Rupee as compared with a basket of foreign currencies.

 

It was further observed:

 

 

 

“63.     This brings me to the crucial question as to how equity is to be done between the parties.  For obvious reasons no rule of thumb is available to determine the extent of erosion, which the principal sum due, and earlier decreed in this case, has suffered till the date of payment, if any, or the decree.  Such matter, as a rule involves application of detailed accounting procedures, based on official data on the subject.  Simple decree on the basis of the afore quoted statistics may not do.  The case, therefore, in principle, calls for a Preliminary Decree, if one can be passed under law.  This, however, does not imply that where smaller amounts or periods are involved a given case cannot be disposed of on approximations.

 

 

 

64.       The relevant provision regarding Final and Preliminary Decrees is contained in section 2(2) of the Code of Civil Procedure, 1908, which provision defines such decrees.  It is true that there are specific provisions for Preliminary Decrees in Order XX, Rules 12 to 16 and 18 and in Order XXXIV, Rules 2 to 5 and 7 to 8 C.P.C., but the same, in my view contain only examples in which Preliminary Decrees may be passed and such Decrees can be passed, wherever the requirements of a case so dictate, under section 2(2), C.P.C., which is the basic provision in the Code in that behalf.  I am fortified in this view by the decisions in Dattatraya Purshotam Parnekar and others v. Radhabai Balkrishna AIR 1921 Bom. 220, (Raja) Peary Mohan Mookerjee v. Manohar Mookerjee AIR 1924 Cal. 160 and a Travancore Full Bench decision reported in AIR 1953 T.C. 220.

 

 

 

65.                   I would, therefore, grant in this case to the plaintiff a decree of a Preliminary nature for assessment as to what was the equivalent real worth of the money which was initially borrowed that is to say of the sum of Rs.5,00,000 as payable on 20-5-1984, the amount and date reflected, as they are, in the Promissory Note in suit.  For this purpose and in order to make accurate assessment I would appoint a Commissioner to do the needful and for that purpose the Commissioner would be entitled to seek assistance from the relevant functionaries of the State Bank of Pakistan.  Mr. A.K.M. Idris, Advocate, of this Court is appointed such Commissioner and his fees, tentatively, shall be Rs.5,000/-, which would be included in the Bill of Costs.  The Commission shall be returnable within three months from the date this Preliminary Decree is transmitted to the learned Commissioner.”

 

 

 

 

 

44.       Subsequently, however, a Division Bench of this Court, one of the member of which was Mr. Wajihuddin Ahmed, J. in the case of Habib Bank Ltd. v. M/s Farooq Comport Fertilizer Corporation Ltd. and 4 others (1993 MLD 1571) held that:

 

 

 

“Word ‘finance’, within the meanings of section 2(e) of the Banking Tribunals Ordinance 1984 does not involve any equivalent of interest and by its own force does not carry returns beyond the stipulated period unless emanating in due course of law or expressly covenanted, again within the framework of law. In the relevant agreement, envisaging sale and purchase of goods, no such term (finance) nor perhaps a term to that effect could be improvised, the reason being that such an improvisation may have exposed itself as a degenerative, relegating the transaction to one, carrying interest. Patently, a provision for sale/ and repurchase of the goods within period specified (Bai Muajjal), culminating on repurchase, was calculated to advance the concept of trade and to forestall the extension of interest. Such agreements were to be construed in the light of Islamic Fiqh. The enforcement of Shariah Act, 1991, lends support to such observations because that legislation declares the Qur’an and Sunnah as the Supreme Law of the land and, if more than one interpretations be possible, enjoins upon all Courts to interpret statute-law in a manner consistent with Islamic principles and jurisprudence. Relevant to the present case trade and commerce is to be encouraged and Riba, correspondingly, eliminated. Banking Tribunal thus, acted in accordance with law and within the parameters of the agreed stipulations, when it disallowed any mark up beyond the period of the contract, extending it only for the cushion period of specified days, which covered the period between demand and default as well as period likely to be consumed in the institution and conclusion of proceedings for recovery.”

 

 

 

45.       The next question that has been raised is that BCD Circular No.32 does not strike down BCD Circular No.13. This was never the case of any other person. However, Mr. Azizur Rehman tried to distinguish the two whereby, he states that Circular 32 relates to charges by the bank. He states that the said circular speaks of charges and that therefore there is no nexus between BCD Circular No.13 and BCD Circular 32. He states, that it is stated therein that interest shall not be charged on bank charges. I do not agree with the proposition of Mr. Azizur Rehman. A careful perusal of the said circular shows that it is in addition and furtherance to BCD Circular No.13 dated 20th June, 1984. There is a clear stipulation in the preamble to BCD Circular No.32, that “Please refer to BCD Circular No.13 dated the 20th June, 1984.” The only thing that it changes is in Clause 3 of Circular 13 which gives the date of 1st April, 1985 to be a cut off date for financing to individual whereas such date had been modified to 1st of January, 1985 in para 4 clause-4 of the Circular No.32. The power has been exercised by the State Bank of Pakistan under the Banking Companies Ordinance, 1962 stating that, from the 1st of January, 1985 interest wherever is charged by a banking company / Development Financial Institutions in any of the item of the bank charges would be replaced by non-interest mode considering to be proper.  It is this, ‘bank charges’ that Mr. Azizur Rehman contends is to be ‘other charges’. The entire clause has to be read for the purposes of understanding the provision. The bank charges has been used in conjunction with replacement of an interest free mode, here the bank charges would imply, all amounts charged to the account which also included interest. It is thus, that the subsequent portion of the said notification says, that overdue or penal interest or mark up on mark up shall not be charged by a banking company as from that date instead the bank shall take legal steps to recovery the finance. There are two implications of this notification, first being that of mark up on  mark up and interest in any form charged by a banking company shall cease from the 1st January 1985, the cut off date. Secondly, that no future mark up on mark up would be charged. The effect of this is that, where a default has been made, the bank was required to take legal steps. A co-relation has been developed between not charging mark up and proceeding to recover money instead. Therefore, there was no question of renewal of a debt by addition of mark up. It is important, therefore, to note that the State Bank of Pakistan has taken a categorical view in this regard and which is in fact a correct issue, that the banks in financing, and where debt is created, cannot take any additional amount on such debt. In taking additional amount it shall be deemed to be Riba which is prohibited. It is thus, that the State Bank of Pakistan instructed to the banks to institute proceeding for recovery. If the banks choose to give additional time then, it will do so without charging any amounts. The law when promulgated was very clear. Mr. Azizur Rehman says if this court were to take a view that all mark up on mark up charged from the first day has been unlawfully done, it shall be detrimental to the banks. No doubt, such difficulty may arise, but then once the banks are required to act in accordance with law, specially when the change of law is so great that the entire system has been modified and that, numerous discussions had been taken place which included banks to arrive at the notification issued it will not lie in their mouth to say that they were unaware of the correct prospect of the law. Even if they were not aware from 1987 onwards the court had otherwise held that such transactions to be unlawful. The banks should have been taken cognizance of the judgments. Mr. Azizur Rehman has referred to the SBP Circular No.BID(Gen) 2470/601-04-90 and said that BID Circular No.3 dated 20.2.1989 regarding Prudential Regulations for loan classification etc. was taken into account and that in connection with treatment that was to be given to rescheduled loans and capitalization of mark up, the State Bank had given guidelines. Instead in the guidelines the mark up on mark up, according to him were required to be capitalized and such is provided according to him in Section 6.2.4 of the rescheduling and restructuring debts. Mr. Azizur Rehman has however chosen not to read the first paragraph of the said guidelines. The entire regulation has to be read to understand the import of the regulation. It reads as under:

 

 

 

“6.1

 

Introduction

 

The bank’s borrowers may, at times, face financial distress due to a number of reasons. This, in turn, may lead to a situation where they are unable to service their debt obligations as they fall due. In instances of this manner, the Bank may, at its sole discretion, decide to offer financial reprieve to such customers, with the sole aim of safeguarding its (the Bank’s) own best interests.

 

 

 

 

 

After evaluation of available options, it may be decided to grant reprieve in the form of rescheduling or restructuring of the financial obligations of customers. One of the prime considerations should be that:

 

 

 

‘The discounted expected monetary value (EMV is the amount of cash flow times its estimated probability) of inflows accruing to the Bank, in the event that financial reprieve is granted, significantly exceeds the net (i.e. net of legal and other expenses) present value of cash flow arising from liquidation of available securities.’

 

 

 

The reprieve (or accommodation) referred to, herein above, may involve modification of the terms of the loan by:

 

 

 

Extending/amending the repayment schedule

 

Reducing the rate of mark-up

 

Reduction the amount of accrued mark up and/or principal

 

Extending further credit

 

 

 

And/or settlement of part of debt outstanding by foreclosing on or transferring certain assets to the Bank.

 

 

 

Normally such accommodation/reprieve would be considered (by the Bank), if the borrower and/or sponsors offer additional security, thereby strengthening the Bank’s position.”

 

 

 

46.       It will be seen from these guidelines that the banks were allowed to reschedule or restructure of financial obligations and the method was given i.e. extending or amending the repayment schedule, reducing the rate of mark up reducing the amount of agreed mark up and/or principal and extending the correct facility. Nowhere in the said circular has it been stated that an additional mark up could be charged on a debt for extending the time for payment. It is the mark up that has already been charged for the purposes of arriving at a marked up price which was allowed to be capitalized. Capitalization only brings it in the line of the accounting system. Such was advised to the banks only for their accounting purposes and nothing else. This circular has been issued by the Central Directorate and relates only for the purposes of classification of account else, if it is not allowed to be capitalized a provision will be required to be made by the bank, that may cause further loss to the banks. In the same guidelines, the restructured loan has been defined as under:

 

 

 

“2.1     A “restructured” loan is one whose terms and conditions of loan have been modified, principally because of a deterioration in the borrower’s financial condition, to provide for a reduction in interest rate or principal, or a capitalization of interest accrued.

 

 

 

2.2       A ‘rescheduled” loan in which effective interest rate terms remain unchanged from original terms, but principal repayment terms have been extended because of project delays, is not considered a “restructured’ loan, as loan as interest continues to be serviced on time.”

 

 

 

47.       A careful analysis of this will also show that it provides a reduction in rate or capitalization in the interest accrued. Accrual of interest is in relation to the agreement entered into and nothing can be read beyond such position. A perusal of clause 2.3 will show that a troubled debt restructure has also been defined and various situations have been catered for. In this also, there is no increase in the sums. Reliance therefore by Mr. Azizur Rehman on this aspect will be a farce. Had the State Bank not intended and the Government not wanting to proceed under the Islamic System of Banking, the choice was open. If they had opted to proceed, they cannot be allowed to beat about the bush. Reliance therefore on the said regulation of the State Bank is not only incorrect but seeking an interpretation which otherwise is not available. Mr. Azizur Rehman also refers to  BPRD Circular No.9 dated 27th April, 2000 namely the Prudential Regulations. He has referred to clause 3 of the same stating that the rescheduling / restructuring of non-performing loans shall not change the status of classification of a loan/advance etc. unless the terms and conditions of rescheduling / restructuring are fully met for a period of at least one year (excluding grace period, if any) from the date of such rescheduling or restructuring. This is only in respect of placing a defaulter on the list of CIB and is nothing to do with the increase or decrease modes. Mr. Azizur Rehman has placed reliance on the case of Hardware Manufacturing Corporation (Pvt) Ltd. v. United Bank Ltd. in the Special High Court Appeal No.187/1998 in which it has been held that :

 

“By execution of the finance agreement dated 30.6.1994 original appellant’s liability on the basis of original contract/agreement was extinguished and the same was substituted by another finance agreement / contract through the valid documents wherein the appellants acknowledged the stated sum therefore under the new finance agreement the appellants would be liable under the law of contract. Reference may be made to Abdul Qayoom v. Ziaul Haq and another (PLD 1962 (W.P.) Karachi 334) and Gouri Dutt Ganesh Lall Firm v. Madho Prassd and others (AIR 1943 P.O. 147).”

 

 

 

 

 

48.       This position has been discussed by me above, in which I had said that this judgment is distinguishable from the present case. The facts of the case no doubt relate to a ‘roll over’ of the facility but there is no discussion as to whether the said agreements were in respect of sale and purchase of commodity and if it were whether such subsequent agreements carried a clause of such extension. Mr. Azizur Rehman referred to the discussion in the said judgment stating that where the arguments were that roll over was in practice on interest base banking and prohibited by BCD Circular 13 dated 20.6.1984 issued by the State Bank of Pakistan, the court had held that the parties having agreed or entered into an agreement, the terms of the subsequent agreement will be applicable notwithstanding the fact that it was a roll over and roll over in fact, is an accepted custom.

 

 

 

49.       In another unreported case which has been cited by him is in the Special High Court Appeals Nos.186 and 187/1998, Mr. Azizur Rehman stated that the same position was taken up and the Division Bench of this Court and had decided the matter that the old method of roll over was in practice and therefore allowed. I am otherwise bound by the judgment of the Federal Shariat Court as also the Appellate Bench of the Supreme Court notwithstanding the distinction that I have drawn, and therefore hold otherwise.  In this I may refer to a judgment of a division bench of the Lahore High Court being United Bank Ltd. v. Ch. Ghulam Hussain (1998 CLC 816) where it has been held that:

 

 

 

“Significantly, the statement of account filed by the appellant does not show any disbursement, whatsoever, under these two agreements which have to be treated a void, being without consideration. The supporting material of these agreements i.e., D.P.C. Notes etc. (pages 483, 485, 487 and 489) also suffer from the same fatal defect and cannot be looked into for holding that respondents Nos.1 and 2 had incurred any financial liability there under. We hold accordingly.”

 

 

 

 

 

50.       Mr. Azizur Rehman has referred to a judgment in the case of United Bank Ltd. v. Central Cotton Mills Ltd. (2001 MLD 78) where according to him, the said judgment allowed the interest. Mr. Azizur Rehman probably has not understood the import of the said judgment. The import of the said judgment is that all transactions that were entered into prior to the first day of January, 1985 were required to be converted into Islamic mode of financing as such, the same was allowed. Mr. Azizur Rehman has referred to the discussion on the subject where Mr. Mushtaq Ahmed Memon, J. (as he then was) had stated that the renewal of loans subsequently also cannot attract the applicability of the above referred circular issued by the State Bank of Pakistan since renewal merely amounts to extension and the continuation in force of the earlier agreement. No doubt such could be correct. This does not say ‘increase in the quantum of loan’, but is an extension in the time for payment of the initial agreement. He also places reliance on this judgment to say that BCD Circular No.32 does not strike done BCD Circular No.13. Mr. Azizur Rehman should have read the last portion of that notification where Mr. Mushtaq Ahmed Memon, J. (as he then was) has held that “in the circumstances, the contention to the effect that the fixed loan was granted on mark up basis does not inspire confidence.” Likewise the assertion that the interest based facility could not be continued or renewed after BCD Circular No.13, is equally without force. True, that the interest based facility could be renewed and such is provided in Circular 13 but this judgment does not say that an amount could be added to the said debt that is, due and payable. The contention therefore also does not have any force. In fact the same learned Judge in an Order passed in Suit No.1659 of 1999 observed:

 

 

 

“Having considered the submissions of the learned counsel, I cannot resist expressing doubt about the validity of the fresh agreement between the parties as is asserted by the learned counsel for defendant on the basis of correspondence. Even if the parties had settled fresh terms in novation of agreement dated 23.5.1996, the same appear, tentatively speaking, to be violative of the Quaranic Injunctions restraining a creditor from taking advantage of a debtor to make repayment within the agreed time.”

 

 

 

 

 

51.       Mr. Azizur Rehman has referred to the novation of the contract. The contract stand novated according to him after a new contract has been entered into. There is no cavil to this proposition, but in the present case this is not what is being sought. What actually has been sought is that whether such an agreement could at all be entered into and if so, whether any amount could be added. In my view it is only the extension by addition of mark up by the bank to arrive at a restructured documents. Mr. Azizur Rehman has relied on the judgment of Bank Indosuez v. Banking Tribunal for Sindh and Baluchistan and other reported in 1994 CLC 2272 and states that when there is a novated contract, that contract has to be looked into as a fresh contract to determined whether the same was in conformity with the definition as given under Section 2(c) of the Banking Tribunal Ordinance, 1984. He refers to the following passage of the said judgment:

 

 

 

            “…… A fresh agreement was entered into by a document whereby the defendant acknowledged that a sum of Rs.10,000 was due from him to the said firm which formed the consideration of the agreement entered into between him and the plaintiff. It was held by a Division Bench of this Court that under the new agreement the liability of the defendant under the original contract was completely extinguished and there was a fresh contract substituting the old contract by introducing new busi8ness and it was in the nature of novation of a contract within the meaning of Section 62 of the Contract Act. In S. Sibtain Fazli v. Star Film Distributors (PLD 1964 SC 337) the above principle was re-affirmed by Hamoodur Rehman, J. In the following words:-

 

 

 

                                    “It is an essential element of novation, when new contracting parties are substituted, that the rights and obligations of original contractors shall be extinguished and the right and the liabilities of new contracting parties accepted in its place.”

 

 

 

 

 

He states that the old contract by introducing the new agreement was in the nature of novation of contract within the meaning of Section 62 of the Contract Act. There is no cavil to this well established principle but the question that has to be looked into, is whether any act has been done by the bank whereby, an existing law has been avoided. Where the rights of parties have altered, and a valid contract alters rights of a previous agreement, the arguments would have been valid. This is not the case here. Subsequent agreements do not change the previous agreements. There is no mention or reference of the previous agreements. The only document shown is a Sanction Advice, which is an internal document of the bank. The document could be seen only to what was approved by the bank. The agreement overrides all arrangements. The sanction advice, in the presence of the agreement, viz-a-viz the customer cannot be construed to be adverse disadvantage to the customer. The agreement is the document signed by both, the contents of which have to be seen. The question whether where a law categorically disallows mark up on mark up, can an agreement cause it to be charged, or could any act be done by the parties to the agreement by which mark up is added, or mark up on mark up is included to a marked up price. If not, could this agreement be a valid contract. Mr. Azizur Rehman has referred to the Prudential Regulation in Regulation No.XVI prohibits window dressing which reads as under:

 

 

 

“REGULATION-XVI

 

WINDOW DRESSING

 

 

 

1.         All banks are directed to refrain from adopting any measures or practices whereby they would either artificially or temporarily show an ostensibly improved position of banks accounts as given in their Balance Sheets and Profit and Loss Accounts specially in relation to its deposits and profit. Particular care shall be taken in showing inter-branch and inter bank accounts accurately and strictly according to their true nature.”

 

 

 

 

 

52.       A careful perusal will show that the banks have been restrained from adopting any measures or practice whereby they, either artificially or temporarily show an ostensibly improved position of the bank account. The addition of mark up is added towards the assets of the bank which gives an ostensible improved position of the bank accounts which cannot be allowed. Otherwise also, it is established principle of law that what cannot be done directly cannot be done indirectly. It is also a very established principle of law that any contract which is of such a nature that, if permitted it would defeat the provisions of any law, or which is contrary to public policy is a void agreement.

 

 

 

53.       It will thus have to be seen as to what provisions of law would be defeated if such an agreement is entered into. The law in the notification by way of circulars, being BCD Circulars Nos.13 and 32 issued in 1984. The Circulars have been discussed above. Suffice to mention that the agreement which seeks to add and cause an additional amount to be paid in respect of some previous agreement is nothing but a manner to avoid the restrictions imposed by BCD Circulars Nos.13 and 32. It is clear that no markup on the marked price could be charged on the said agreement entered into initially. If it could be, the banks could have utilized the provisions of Section 79 of the Negotiable Instruments Act. The same has since 1985 never been invoked. The new documents approved and utilized by the bank, utilize the D.P. Note where no rate of markup is mentioned. It is only the repurchase price that is stated. The new subsequent agreement is nothing but to avoid the restriction imposed by law. The other question which needs to be elaborated is the validity of subsequent contracts that have been entered into where the actual sale has not been made. I shall discuss this subsequently herein.

 

 

 

54.       The other question is as to what is the ‘public policy’, and such will have to be looked into. The Constitution of the Islamic Republic of Pakistan is the basic document on the touched stone of which all laws have to be looked into. The preamble of the Constitution WHEREUNDER “the principles of democracy, freedom, equality, tolerance and social justice as enunciated by Islam shall be fully observed.” Article 2 states that Islam shall be State religion of the Pakistan. Article 2-A incorporates Objective Resolution as reproduced in the annex to the Constitution. Article 38 also clearly stipulates that the State shall eliminate Riba a early as possible and Article 227 clearly state that the existing laws have to bring in conformity with the injunction of Islam as laid down in the Quaran and the Sunnah. In view of the provisions of the Constitution in fact, even prior to this, right from the days when this country achieved independence that it was clear that all laws were liable to be promulgated which were and ought to have been in accordance with the Holy Quran and the Sunnah. I have already dilated at length on  this issue and shown the quantum of work that has been carried out for such purposes. The policy has always been that, all laws, practices and procedures would be in accordance with what is provided in the Quran and Sunnah. In fact, BCD Circular No.13, the preamble also states that the banking system was to shift over to the Islamic modes of financing, such is the public policy. After the law has been brought in conformity with the Holy Quaran and Sunnah, way and methods are being employed by the bank to continue the previous usurious Banking Practice, despite the fact that the law has been Islamised in accordance with the Constitution of the Islamic Republic of Pakistan. Such a practice that is sought to be developed by the banks is a fraud on the Islamic provisions. No one can be allowed to play a fraud on the existing law by trying to avert the existence of such law that prescribes that mark up on mark up cannot be charged. The act of entering into a future transaction admittedly is in respect of renewal of financing and does not contain any aspect of actual disbursement or payment. Such contracts are contracts that are against the public policy.

 

 

 

55.       When one is talking of novation of contract it will be seen as to what is the aim for novating the same. The position will have to be seen in its true, proper and correct perspective. The agreement for financing as is termed by the banks is nothing but an agreement of sale and purchase of tangible properties, goods or commodities. Once the goods are purchased by the bank, the bank makes a payment for the purchase of the goods which according to the agreement is termed as the ‘sale price’. The goods are thereafter sold to the customer and such sale is the resale / repurchase on a marked-up price. There are, therefore, two distinct transactions under the said single agreement. The first being the purchase by the bank for consideration. It is at this juncture that the ‘sale price’ is disbursed to the seller namely, the customer. This is the amount that the bank say is the ‘finance’ or the amount to be paid to the customer. The second is in respect of resale by the bank to the customer but such is the actual Murabaha transaction/Bai Muajjal. Thus before entering into this transaction, the bank has to be the owner of the goods/property being sold to the customer. It is thus the first transaction that is entered into. After sale to the Bank, and the bank paying the sale price, being the ‘consideration’ of purchase by them of a defined good/property/commodity, they can  by the ‘Bai Muajjal’ transfer that title to the customer, that they have acquired by purchase of the said property. It is a well established principle of law that no one can transfer a title, better that what he has. Thus the sale is concluded between the bank and the customer upon such purchase price as may be agreed, the repurchase price. It is this price, which is liable to be paid by the customer on deferred payment. After the second transaction, i.e. the sale by the bank to the customer is concluded, the contract of sale and purchase is finalized, the bank becomes an unpaid seller whereby the purchaser is liable to pay the repurchase price. This the purchaser (customer) is indebted to the bank for the repurchase price payable within the period prescribed. Thus repurchase price becomes the debt. Thus the only thing required under the said agreement is recovery of debt, the goods having been sold and consumed by the customer. Such is the loan or debt. Therefore, a clear distinction between the agreement entered into and the debt paid or payable therefor is to be looked into. Once the debt has been determined the contractual obligation under the agreement is concluded and it is the debt now that becomes payable. The amount will be the liability of the customer and such cannot be increased by addition of any mark up. A perusal of Section 23 of the Contract Act categorically states that consideration or object of an agreement is lawful unless it is of such a nature that if permitted, would defeat to provision of any law. A subsequent agreement whereby, there is a settlement of previous debt or is renewal thereof shall in fact amount to defeating the provision of the specific law available. Such will not be novation but an independent agreement contemplating an actual sale and purchase. Such an agreement entered into only for renewing the previous debt shall be a void agreement.  The position in law is absolutely clear. I had also referred to the clear instructions of the State Bank in Regulation XVI above. Such renewal will only be Window Dressing and that all profits shown will be nothing but added mark up. Mark up cannot be allowed to be added on an ‘existing debt’, as there can be no agreement between the parties in respect of that ‘specific debt’ except that there could be enlargement of time, and that too without increase in the debt payable.

 

 

 

56.       The subsequent agreement technically would have no nexus with the previous agreement in which a debt had been created. It is a fresh agreement. An agreement by which fresh commodities, goods or articles are to be sold or purchased, therefore, when goods are sold under the fresh contract there shall be consideration by actual and physical payment in the statement of account and not merely adjustment stating that an amount is due and therefore, the bankers can exercise lien. A lien can only be exercised on a credit in the account of the bank to set off a liability and not by additional credit to set off to the previous debt. A debit will not be a credit of the customer and where it is not a credit of the customer, Section 171 of the Contract Act shall not apply. Section 171 clearly stipulates that a banker in the absence of a contract shall have right to retain a security for such balance goods (bailed to them). A loan or finance or debt given to a customer shall not be an amount or goods bailed to the banking company as such, no right can be claimed.

 

 

 

57.       The subsequent agreement does not have any stipulation that there could be a set off by a subsequent finance. Even if it were there, the question would be that such an amount could be where a mark up has been added thereon for the purposes of adjustment of marked-up price. I am of the considered view that such cannot be done. The argument therefore that the subsequent agreement is a novation and that once a contract is novated the previous contract cannot be looked into is not correct in the present scenario.

 

 

 

58.       If it is presumed for the sake of argument that the last agreement that had been entered into is the agreement on the basis of which the amount due is payable by the defendants/customers then we will have to look into the contract itself. Admittedly, the contract is one of sale and purchase of commodities. In the circumstances it shall be governed by the Sales of Goods Act, 1930. Sale is defined in Section 4 which reads as under:

 

“4. Sale and agreement to sell.--- (1) A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. There may be a contract of sale between one part-owner and another.

 

 

 

(2) A contract of sale may be absolute or conditional.

 

 

 

(3) Where under a contract of sale the property in the goods is transferred from the seller to the buyer, the contract is called a sale, but where the transfer of the property in the goods is to take place at a future time or subject to some condition thereafter to be fulfilled, the contract is called an agreement to sell.

 

 

 

(4) An agreement to sell becomes a sale when the time elapses or the conditions are fulfilled subject to which the property in the goods is to be transferred.”

 

 

 

 

 

It will be seen that a distinction is created in ‘Sale’ and  ‘Agreement of Sale’. A contract of sale is, where the seller transfers or agrees to transfer the property in the goods for a price and such could be absolute or conditional. Sub-Section (4) of Section 4 of the Sales of Goods Act above states, that the ‘Agreement of Sale’ becomes a ‘Sale’ when the time elapses or conditions are fulfilled subject to which the property in the goods has to be transferred. It clearly implies that there has to be conclusion as to the transfer of property in the goods which is the principal element of sale. This Act also came under scrutiny by the Shariat Appellate Bench of the Supreme Court in the case of Islamic Republic of Pakistan v. Public At Large (supra)  and in the judgment in the case of Federation of Pakistan v. Awamunnas (1988 SCMR 2041) that, a contract of ‘Sale’ or ‘Ijarah’ of a commodity shall only be valid where the ‘commodity’ is in existence and that there has to be a transfer of such property. Whilst dealing with the concept  of ‘agreement of sale’ it was stated that where the goods did not exist, the Islamic Injunctions do not recognize such agreement. Sale cannot take place, but an Agreement of Sale can be entered into and this agreement is not a complete ‘Sale’ of ‘Goods’. The sale will only accrue when the commodity is transferred to the purchaser or consideration thereof has been paid. From the principle laid down we see that the agreement which is a subsequent one does not have the ingredients of a sale and at best be treated an ‘Agreement to Sell’. such agreement can possibly be specifically enforced whereby, the purchaser may seek direction against the seller upon payment of actual consideration to sell his property, but if such is not done the purchase price / repurchase price mentioned in the said agreement will not, be taken to be a debt payable by the purchaser. If money has actually been transferred or handed over to him there are only two possibilities, one is the transfer of the property for which money had been given, or the return of the money that had been given to him. The customer will therefore only be liable to the extent that was actually paid to him. If there was damage caused due to the refusal to sell the commodity if there was one, then such shall be required to be proved. The judgment of the Supreme Court was delivered in 1988 has also been reaffirmed in the judgment of Dr. M. Aslam Khaki. I am also of the same view and either where the resultant would be that it is the principal amount that was actually paid would become due but where there is a sale, the sale price has been transmitted and resale is made, the resale price will be payable by the defendants to the plaintiff.  It is well settled principle of law that parties cannot contract out of the provisions of the Act. See in the case of Waman Shriniwas Kini, v. Ratilal Bhagwandas and Co. (AIR 1959 SC 689) it has been held that an agreement to waive an illegality is void on the ground of public police. Similar views have been taken in the case of Anayat Ali Shah v. Anwar Hussain (1995 MLD 1714).

 

 

 

59.       We now come to another question, i.e. whether an agreement without consideration is a valid agreement. Section 25 of Contract Act reads as under:-

 

           

 

“25.  An agreement made without consideration is void unless—

 

 

 

(1)               it is expressed in writing and registered under the law for the time being in force for the registration of documents and is made on account of natural love and affection between parties standing in a near relation to each other, or unless

 

 

 

(2)               it is a promise to compensate, wholly or in part, a person who has already voluntarily done something for the promisor, or something which the promisor was legally compellable to do, or unless

 

 

 

(3)               it is a promise made in writing and signed by the person to be charged therewith, or by his agent generally or specially authorized in that behalf, to pay wholly or in part a debt of which the creditor might have enforced payment but for the law for the limitation of suits.

 

 

 

In any of these cases such an agreement is a contract.”

 

 

 

 

 

The subsequent agreements of finance are not covered by the exception to the general principle, that an agreement without consideration is void. Section 24 of the Contract Act reads as under:

 

 

 

“24.  If any part of a single consideration for one or more objects, or any one or any part of any one of several considerations for a single object, is unlawful, the agreement is void.”

 

 

 

 

 

It will be seen that if any part of a single consideration is unlawful the agreement is void.

 

 

 

60.       I have discussed the unlawful act. Thus the agreements made subsequently with an aim to avoid and defeat the provisions of the law of not charging markup on markup is void.

 

 

 

61.       The question of disbursement has also been dealt with above. It was argued that there is no need of actual disbursement and that debt could be deemed to be disbursement. Reliance is placed on the Judgment of Moudood Ahmed Farooqui v. Ameen Fabrics (PLD 1983 Karachi 176), in which it has been held that ‘debt’ means an obligation and liability to pay or return something owed by one person to another. There is no cavil to this very settled principle that a debt is liability of the person and the reliance on this judgment is not incorrect. The position is what has been stated is that such is liable to be paid to the creditor as such a fresh loan which is given will be that of the customer and from which he clears a previous debt. One is amazed at this argument. This is nothing but a fraud on the statute. Once it is a debt in respect of one agreement it will be a debt in respect of the other agreement also and a liability, therefore, saying that from a finance obtained, it being a debt, a previous debt can be set off has no place. In the said judgment the question was in respect of the dividend declared and not paid to the shareholder, dividend declared becomes the property of the debtor. Debt does not become the property of the shareholder. In the circumstances the case is distinguishable from the present case.

 

 

 

62.       The last point that was argued by Mr.  Azizur Rehman was that the judgment in the case of Dr. M. Aslam Khaki v. Mohammad Hashim reported in PLD 2000 SC 25 is operative from 30.6.2001 and the present laws will continue to be valid till that date. There can be no cavil to the proposition that all laws that are in conflict with the Islamic provisions shall remain valid only upto 30.6.2001. BCD Circulars Nos.13 & 32 have not been declared to be in conflict with the Islamic provisions. What has been said by the said judgment of the Honourable Shariat Appellate Bench of the Supreme Court of Pakistan is that all laws or part thereof that have been declared to be against the injunctions of Islam shall be changed and modified by 30.6.2001 whereafter they shall become invalid and not be acted upon.

 

 

 

63.       Further to the question that has now been raised is that the judgment of Dr. M. Aslam Khaki shall apply prospectively and not retrospectively. High Court is bound by the decision of the superior courts under Article 189 of the Constitution of the Islamic Republic of Pakistan which reads as under:

 

 

 

            “189. Decision of Supreme Court binding on other Courts.  Any decision of the Supreme Court shall, to the extent that it decides a question of law or is based upon or enunciates a principle of law, be binding on all other Courts in Pakistan.”

 

 

 

 

 

Thus, it is clear that the decision of the superior courts namely the Supreme Court is binding on the High Court. In fact, the order of the Shariat Court is also, under Article 203-GG subject to Article 203-D and 203-F binding. The judgment by the Federal Shariat Court was announced in 1992, however, such remained stayed during the period of appeal which was finally decided in 2000. The argument is that as the appeal had remained stayed therefore, it is the judgment by the Supreme Court from which date, it shall be acted upon. What the learned counsel have not looked into is that there are two specific points in the said judgment, be it before the Federal Shariat Court or the Honourable Supreme Court. One is that reliance to the specific laws that were being discussed and admittedly, the laws of banks except Section 79 of the Negotiable Instruments Act, Section 25 of the Banking Companies Ordinance, Rule 9(2) & (3) of the banking Companies Rules, Section 22(1) of the State Bank Act, 1956 and Section 8(2)(a) & (b) of the Banking Companies (Recovery of Loans) Ordinance, 1979 were before the Court. None of these except Banking Companies (Recovery of Loans) Ordinance, 1979 related to the charge of mark up and mark up on mark up. In that law namely, the Ordinance, 1979 there was only the charge of ‘interest’ and was prior in date when the BCD Circulars Nos.13 and 32 came into existence. In fact, BCD Circulars Nos.13 and 32 changed the entire law, its perspective and modes and methods of banking converted them into trade related modes. Loans were only treated to be given without any mark up and increase except for service charges. BCD Circular No.13 categorically states that no mark up on mark up shall be charged and it is well settled principle that nothing can be done indirectly what cannot be done directly. In this regard, Mr. Azizur Rehman had cited two latest judgments that this indirect process namely, entering into future mark up in the case of Mst. Aisan v. Manager, Agricultural Development Bank of Pakistan, Chunian (2001 CLC 57) and Muhammad Ramzan v. Citibank N.A. (2001 CLC 158). The first one being the judgment of the learned Single Judge of the Lahore High Court and the other being a judgment of a Division Bench one of which Judge was the same as who delivered the first judgment. Both the aforesaid judgments are in fact distinguishable in that, they are dealing with Section 15 of the Banking Companies (Recovery of Loans, Advances, Credits and Finances) Act, 1997 which provides for mark up on decree from the date of the institution of the debt till payment. What their lordships had observed is that the judgment of the Supreme Court in the case of Dr. M. Aslam Khaki will for that purpose act retrospectively. In fact a history of the introduction of the provisions of mark up during the period it remained in the court it seems would be, that such was in court and the delay could not be ascribed to the creditor who could not be penalized because of delay of the court. Such had not been considered by the Council of Islamic Ideology as such, it was not provided in BCD Circulars Nos.13 & 32 these provisions not being there, their lordships were absolutely correct in holding that the provisions of Section 15 in the Act, 1997 will only be applicable from the date of the judgment and not retrospectively. The difference and distinct feature in the application of the judgment of the Supreme Court to the present case is that, the said two Circulars having not been declared to be void or ultra vires they, therefore, having been held to be intra vires, will remain in force from the date they were promulgated. According to the doctrine of  stare descisis the precedent in the case of Dr.M. Aslam Khaki gives the authority of established law. The cases earlier decided by the High Court and upon application of the same doctrine would result into the effect that it would be presumed that the courts gave decisions with all possible care and consideration and had not acted per incuriam. What is binding on the other courts under the present Article 189 is the ratio of the decision of the Supreme Court and not any finding or conflict of opinion of the court or any question which was not required to be decided in a particular case. In the present case also a similar situation has occurred whereby the decision of the court is in respect of certain laws that have been specified and will not effect the laws that are in existence but the ratio of the decisions which is based on the Quaran and Sunnah and its application will remain binding. For the purposes of looking into as to what is the scope of the jurisdiction of the Federal Shariat Court we need to read sub-Article (a) of Article 203-D which reads as under:-

 

 

 

            “203-D. The court may, either of its own motion or on the petition of a citizen of Pakistan or the Federal Government or Provincial Government, examine and decide the question whether or not any law or provisions of law is repugnant to the Injunctions of Islam as laid down by the holy Quaran and Sunnah of the holy Prophet (PBUH) (hereinafter referred to as the ‘Injunctions of Islam’).”          (underlining is mine)

 

 

 

 

 

 Thus, the Federal Shariat Court will examine only such question of law or provisions of law that are repugnant to the injunctions of Islam. Reasoning or ratio for arriving at the same will however, remain applicable. The banking system had been converted into Islamic form in 1985. It was not held to be against the injunctions of Islam. This court has to only see that whether the manner in which an agreement had been entered into or otherwise is within four corners of laws laid down by the BCD Circulars Nos.13 & 32. This court for the purposes of looking into the law which is valid and existing shall remain bound by the ratio given in the case of Dr. M. Aslam Khaki. It shall not be that such case is being acted upon retrospectively.  In the case of Sakhi Muhammad v. Capital Development Authority (PLD 1991 SC 777) it was held that “decision would not have the effect of altering the law from the date of its announcement / commencement so as to render void all decisions made by the subordinate courts or authorities made in the light of the earlier interpretation.”  The position is that application of interpretation continues to be on the basis of earlier judgments which were announced as early as 1987.  Dr. M. Aslam Khaki’s case (supra) confirms the earlier view.

 

 

 

64.       The position is that BCD Circulars Nos.13 & 32 are the consequences of the reports of the Council of Islamic Ideology provided for the furtherance of Islamic financing where mark up on mark up has been stated to be un-Islamic and usurious. Riba was disallowed and that because of such disallowance it was in the line with the arguments put forward for the purposes of Islamic financing. In fact, the judgment of the FSC as also the Honourable Shariat Appellate Bench of the Supreme Court of Pakistan have not in any manner held that the law as was enacted is against the injunction of Islam. What has been said is that the bankers have not acted in accordance with law in force. It has also been said that the manner in which Murabaha / Bai Muajjal transaction though lawful transaction have been misapplied by the banks. Misapplication of the law was by the banks. Even if it is held that the said judgment shall be applicable from the date provided therein, the ratio of the case for the purposes of determined and deciding cases shall be applicable on a valid and operative law from the date of the enactment. The definition shall remain applicable from the date when the law came into force. It is not a case where any law has been declared to be ultra vires. I am aware of the well settled principle that where a law has been declared to be ultra vires, the declaration shall act prospectively and not retrospectively. This is a case where the law has been held to be valid, proper and intra vires. In such a situation where a law has been declared to be intra vires, it is only the interpretation of the specified law that has to be taken into account. It cannot be said therefore that this judgment will act prospectively. This judgment only acts to clarify an existing valid law. Even otherwise, this appeal is from the judgment in the case of Mehmoodur Rehman Faisal (supra). This case decided along with many other cases the point in issue. However, in the Supreme Court the leading case came to be the case of Dr. M. Aslam Khaki as such there the case is known by that name. The banks should have anticipated actions and should have protected themselves after the earlier judgment. Appeals may been filed, but any decision could have been forthcoming. The banks were aware of the factum from 1987 onwards when markup on markup was declared against the injunction of Islam by the High Court. Taking refuge therefore, behind the judgment that it shall be applicable from June, 2001 is not correct. No one can be allowed to make a mockery of a legal process, the Islamisation and the provisions of the Islamic modes of transactions/financing. It seems that the law introduced in 1985 was taken by the banks as only a change in the name and as such, continued as if they were charging interest. The banks had thus made a mockery of the law by avoiding and creating legal fictions. The concept never changed. Even today during the course of arguments the question of lending on mark up basis is being spoken. From this it is clear that even today the law is being utilized only as a garb or screen to protect themselves. Laws having been Islamised one needs to understand that they have to be interpreted and acted upon in the manner as they are. They have to be acted upon in the manner they are required to be acted upon and cannot be extended or transformed. In fact it has been observed that “ the Superior Courts of Pakistan have in large number of cases applied the Islamic teachings and philosophy, when the statute law is silent about a situation, the field is unoccupied, so to say, a statutory void is to be filled, or the court has discretion to follow one of the several courses, one of which is more in accord with muslim jurisprudence. Such was held by the Hon’ble Supreme Court has held in the case of Muhammad Bashir versus The State  (PLD 1982  SC 139), that such a void has to be filled up by Islamic Common Practice and provisions. The banks chose otherwise. In the case of Fazal Ghafoor v. Chairman Tribunal Land Disputes (1993 SCMR 1073), it has been held “when there is a vacuum on question of law left by statutory silence, the prevailing mode having full constitutional support, would be that of Islamic Common Law”.

 

 

 

65.       Mr. Ejaz Ahmed has also argued in detail, most of which have been dealt with and covered by the discussion above. However, the important aspect that needs to be seen is with regard to the argument that has been advanced by Mr. Ejaz Ahmed about the concept of mark up on mark and the renewal. Mr. Ejaz states that the marked up price is an agreed consideration and that if such price is not paid the remedy available to the bank to seek recovery. This is a correct proposition. He further says that mark up on marked up amounts to recovering the opportunity cost of money which is not permissible under the Islamic mode of financing. This is also correct. On the basis of this, subsequently, Mr. Ejaz Ahmed dealt with the question of renewal and distinguished the renewal by way of adjustment and continuing facility on a revolving basis. As far as the adjustment is concerned, he states that the amount of sale price is credited to the customer’s account and is set off against the existing liability of the customers on account of the facility originally granted and therefore accounts operates on a revolving basis. As far as continuing facility, he states that the adjustment as stated above, does not take place and the account continues to operate on a revolving basis and in fact, he states that this is an established practice in the banking industry and the customer are aware of this mechanism. He states that such a mechanism is beneficial for customers and it allows to customers to withdraw the amount within the amount of facility at any time and repay the sale as and when the excess money is available to him during the currency of the facility. He states therefore customer benefits from the fact that the mark up is charged only on the outstanding. He states that if the mark up facility is strictly construed to mean that the bank is only obliged to disburse once, then according to him the finance becomes more expensive for the customers as, once the full amount of finance facility is availed the customer will be charged mark up on the full amount. The excess liquidity of the customer will remain lying in the current account with no profit. I do not agree with this proposition. This proposition presupposes dealing in money and mark up on the money. The concept that has been evolved is that the purchase is made by the bank and it is the sale price which is actually disbursed, the repayment is the repurchase price and it is the price that is fixed. There is no concept of addition of further sums by elapse of time. The consideration for the actual sale has to be made by the bank to the customers and has to be done so in its entirety. The customers will be in his right to withdraw the entire amount or to leave any sum in his account. He will be in his right to transfer this amount to saving account or otherwise. Money being the consideration for sale would therefore be required to be transferred to the customer. The second portion of the agreement as discussed above, is the actual finance agreement which in fact is a Bai Muajjal. ‘Bai’ meaning sale and ‘Muajjal’ meaning upon deferred payment. This Bai Muajjal or Murabaha transaction is that, the bank having purchased as resold this commodity at a higher price to the customer. At this point, the customer is not required to pay the sale consideration but what is required is to do so within the specified period at an agreed repurchase price. The consideration for the sale of the commodity by the bank to the seller cannot be adjusted against this repurchase price as, it is Bai Muajjal the payment is deferred. The consideration for the resale by the bank to the customer is a contract between the two and such becomes a debt. This debt is therefore only liable to be paid by the customer. There is therefore no question of a revolving facility. It is the amount that is available with the customer being the sale consideration of the sale made to the bank. This amount can be utilized at the wish and whims of the customer.  I am therefore not convinced that the transactions as stated by Mr. Ejaz are in true spirit the financing as provided under BCD Circulars Nos.13 and 32.

 

 

 

66.       The next question therefore is whether the purchase price can be increased and which has been answered by Mr. Ejaz saying that it depends on the meaning ascribed to the word ‘increase’ and accordingly the increase in the purchase price has been classified as (a) where the increase is not permissible; (b) where increase has been permissible. In the first classification he states that mark up on overdue instalment where the finance facility is payable in instalment and due dates of instalments are specified in the agreement and where mark up on overdue amounts in the cases of lump sum payment agreements no increase can be allowed. He states that however increase would be permissible in specific transactions namely the mark up is to be booked by the banks on accrual basis or where there is a fresh sanction or the renewal of the working capital or where there is a restructuring or rescheduling of liability. I will also not subscribe to this view. What cannot be done directly cannot be done indirectly. It is also a well settled principle that if a certain thing has to be done in a certain manner it has to be done in that manner and no other. I have already discussed above, that markup in itself is only restricted for the purposes of arriving at the repurchase price and once such is arrived at the amount of repurchase price becomes the debt, therefore, there could be no question of separation of mark up. The mark up has to be capitalized which is also provided in the Prudential Regulation. Unless such mark is capitalized the repurchase price cannot be determined. Thus, if the mark is capitalized and added to the principal amount (principal meaning the sale price) and having arrived at the repurchase price any increase by way of renewal, capitalization, booking on accrual basis or by any means will be nothing but addition of mark up on mark-up.

 

 

 

67.       In a Hadis narrated by Abdullah ibn Abu Qatadah reported in Book 9, Number 3795 of Sahi Muslim the following was said:

 

           

 

“Abu Qatadah demanded (the payment of his debt) from his debtor but he disappeared; later on he found him and he said: I am hard up financially, whereupon he said: (Do you state it) by God? By God. Upon this he (Qatadah) said: I heard Allah’s Messenger (PBUH) said: He who loves that Allah saves him from the torments of the Day of Resurrection should give respite to the insolvent or remit (his debt).”

 

 

 

 

 

The concept of increase n money rational to time cannot be  allowed. In another  Hadis narrated by Uthman ibn Affan reported in Book 8, Number 3849 of Sahih Muslim the following was said:

 

           

 

“Allah’s Messenger (PBUH) said: Do not sell a dinar for two dinars and one dirham for two dirhams.”

 

 

 

 

 

In another Hadis narrated by Abu Sa’id al-Khudi in Book 9, Number 3854 of Sahih Muslim the following was said:

 

           

 

“Allah’s Messenger (PBUH) said: Gold is to be paid for by gold, silver by silver, wheat by wheat, barley by barley, dates by dates, salt by salt, like by like, payment being made hand to hand. He who made an addition to it, or asked for an addition, in fact dealt in usury. The receiver and the giver are equally guilty.”

 

 

 

 

 

In another Hadis on this subject narrated by Abu Hurayrah in Book 9, Number 3856 is as follows:

 

           

 

“Allah’s Messenger (PBUH) said: Dates are to be paid for by dates, wheat by wheat, barley by barley, salt by salt, like for like, payment being made on the spot. He who made an addition or demanded an addition, in fact, dealt in usury except in case where their classes differ. This hadith has been narrated on the authority of Fudayl ibn Ghazwan with the same chain of transmitters, but he made no mention of (payment being) made on the spot.”

 

           

 

68.       From the above, it will be clear that any increase or difference in the value thereof will be usurious and will come within the definition of ‘Riba’.  I am not inclined to grant such increase.

 

 

 

69.       In view of the above, I am of the considered opinion that once the agreement has been entered into and the repurchase price determined there can be no renewals by increasing the debt. If there is a renewal or restructuring nothing can be added to arrive at extended figure. The question that needs therefore to be answered is what will be the amount payable by the defendant/customer of the banks. If they have entered into a subsequent agreement or addition of mark up thereon, I have already held that subsequent agreements are void. The bank can only seek recovery of the amounts of the marked up price under the first agreement. However, if the bank is able to establish the fact that the amount has been actually disbursed under the subsequent agreement and it is not for the purpose of adjustment of the previous debts and that there has been a defacto sale and purchase in commodity in that situation all agreements that may have been entered into for such purposes and independent of the previous agreements can be looked into and money shall be recoverable there-against. Every agreement will therefore have to be proved. For this evidence needs to be led. If the bank has chosen to extend the time for repayment of the amounts given it cannot increase the sum. Naturally if extension is given there is a consideration that he is unable to pay at that point of time. If there is delay in the repayment of the debt, the banks shall be free to proceed to recover the amount of loss caused to them by such delay. This however shall be required to be proved. In the case of Dr. M. Aslam Khaki the Honourable Shariat Appellate Bench of the Supreme Court of Pakistan has observed that:

 

 

 

“… If the purchaser could not pay at the due date because of his poverty, the Qur’anic command is very clear that he should be given more time till he is able to pay. The Holy Qur’an says:

 

 

 

 

 

 

 

And if he (the debtor) is poor, he must be given respite till he is well-off. (2:280).

 

 

 

However, if the purchaser has delayed the payment despite his ability to pay, he may be subjected to different punishments, but it cannot be taken to be a source of further ‘return’ to the seller on per cent per annum basis as contemplated in Section 79.”.

 

 

 

70.       What has been stated is that agreements that have been entered into on a subsequent date will be the only agreement that can be looked into and all agreements that have concluded by elapse of time shall be deemed to be past and closed transactions. I do not agree with this view. Admittedly, the bankers have chosen to reform or rename the transactions though, it continues to emanate from one single account. If the account is the same it will be seen that the certain amount was due and payable on a certain date and remained unpaid. It is this debt that continues in the subsequent agreements. The sanction letters clearly show that they are renewal of facility and such renewal of facility by way of subsequent agreement is only a garb to get out of the legal restrictions imposed on them by BCD Circulars Nos.13 & 32. Such cannot be allowed. A valid law being acted upon shall have to be acted in the manner as it prescribes. When its says mark up on mark up cannot charged, the same cannot be charged in any form or manner whatsoever. When it says that in the event of a default being committed, recovery has to be made and no mark up on mark up or penalty can be charged, it specifically implies and assumes without ambiguity that no mark up even if restructured can be allowed. It is my considered view that the first agreement continues to be effective for the recovery of the debt by the unpaid seller, the Bank, despite the fact that new agreement may have been entered into. The said agreements are nothing but a continuance of the first agreement and only for the purposes of enhancement and charge of mark up by elapse of time. I am, therefore, of the view that such will not be deemed to be a past and closed transaction and shall continue till such time the payment of the debt caused by the first agreement is made over or the agreement is extinguished by being fully acted upon or that by a concluded case decided by any court of law. All pending proceedings in respect of any finance on the basis of the ‘Murabaha’ or ‘Bai Muajjal’ shall continue to be current.”

 

 

 

 

 

44.                    On this question of ‘finance’, ‘accommodation’ and ‘obligation’, I do not agree with the arguments of Mr. Azizur Rehman.  The definition of ‘finance’ as contained in the Banking Tribunals Ordinance, 1984 categorically states that “Finance includes an accommodation or facility under a system which is not based on interest but provided on the basis of participation in profit and loss, mark-up or mark-down in price...” The word accommodation or facility has to be read in conjunction with the words “not based on interest” and in reading the fact that it is not based on interest, reference will have to be made to the provisions of BCD Circular No.13 issued by the State Bank of Pakistan in respect of the finances to be granted in terms of the Islamic system of banking. 

 

 

 

 

 

45.                    It will be of importance to note that the Banking Tribunals Ordinance, 1984 was a law promulgated by the Parliament and the word ‘finance’ was defined to mean an accommodation or facility under a system not based on interest.  By Ordinance LVII of 1984 the Banking Companies Ordinance, 1962 was amended and the definition of “loans advances and credits” included finance and the definition as contained in the Banking Tribunals Ordinance, 1984.  Thus by incorporation the ‘finance’ was brought within the purview and scope of sections 24 and 25 of the Banking Companies Ordinance, 1962.  In addition to the above, by the promulgation of the Ordinance LVII of 1984 being the “Banking and Financial Services (Amendment of Laws) Ordinance, 1984 many other amendments were brought about, so that the State Bank of Pakistan could enforce the Islamic System of Banking in Pakistan.  In Section 7 of the Ordinance of 1962, the words, "participation term certificates, term finance certificates, and such other instruments as may be approved by the State Bank” were inserted.  In section 7 a new clause (aa) was inserted,

 

“(aa) the providing of finance as defined in the Banking Tribunals Ordinance, 1984;”

 

 

 

It is thus clear from the insertion, that the Act was amended to bring in the Islamic provisions of law.  The State Bank of Pakistan in terms of section 25 of the Banking Companies Ordinance, 1962 issued directions giving details as what is, ‘finance in the system not based on interest’.  In view of the above, under section 3A of the Banking companies Ordinance, 1962 and in view of Hashwani’s case afore referred the provisions contained in section 25 allows the State Bank of Pakistan to give directions to the Banking companies and the non banking financial institutions (NBFIs) also to act in accordance with such directions.  Such directions are binding on all the banks NBFIs.  In view of the above, it is clear that the directions are as a consequence of promulgation of the Statute or an Act of the Parliament.  Otherwise also under Section 25 the State Bank can give directions to the bank whenever it is satisfied that it is necessary or expedient in public interest.  It has done so therefore.  Infact the agreements entered into subsequently by banks are the sale and purchase of commodities.  The concept is one which is contemplated by BCD Circular No.13 of 1984.  The banks can therefore not take a place otherwise.  The State Bank have acted within their authority in issuing the said circulars.  I do not, therefore, agree with the proposition of Mr. Azizur Rehman in this respect also.

 

 

 

 

 

46.                    It has been argued with some vehemence that as the levy of interest has continued and that, if such levy that has already been made is not allowed such shall amount to in fact serious loss and prejudice to the bank.  I have already said that no doubt there may be a loss, but then, the law that had been settled in fact has been that the banks were required to proceed in the manner that, they would not charge any interest and will act in accordance with law, i.e., banking in the Islamic system of financing. 

 

 

 

47.                    In the case ZAHEERUDDIN and other v. THE STATE and others (1993 SCMR 1718) which appeal was dismissed by a majority view.  In the majority judgment it has been observed:-

 

 

 

            “The contention, however, has not impressed us at all.  The term ‘positive law’, according to Black’s Law Dictionary, is the law actually enacted or adopted by proper authority for the Government of an organized jural society.  So that term comprises not only enacted law but also adopted law.  It is to be noted that all the above-noted cases were decided prior to the induction of Article 2A in the Constitution, which reads as under:-

 

 

 

            “2A. Objectives Resolution to form part of substantive provisions.—

 

 

 

            The principles and provisions set out in the Objectives Resolution reproduced in the Annex are hereby made substantive part of the Constitution and shall have effect accordingly.”

 

 

 

            It was for the first time in the Constitutional history of Pakistan, that the Objectives Resolution, which henceforth formed part of every Constitution as a preamble, was adopted and incorporated in the Constitution, in 1985, and made its effective part.  This was an act of the adoption of a body of law by reference, which is not unknown to the lawyers.  It is generally done whenever a new legal order is enforced.  Here in this country, it had been done after every martial law was imposed or the Constitutional order restored after the lifting of martial law.  The legislature in the British days had also adopted the Muslim and other religious and customary laws, in the same manner, and they were considered as the positive laws. 

 

 

 

            This was the stage, when the chosen representatives of people, for the first time accepted the sovereignty of Allah, as the operative part of the Constitution, to be binding on them and vowed that they will exercise only the delegated powers, within the limits fixed by Allah.  The power of judicial review of the superior Courts also got enhanced. 

 

 

 

            The abovementioned Constitutional change has been acknowledged and accepted as effective by the Supreme Court.  Mr. Justice Nasim Hasan Shah, considering the changed authority of the representatives of the people, in the case, Pakistan v. Public at Large, (PLD 1987 SC 304 at p. 356), stated as follows:-

 

 

 

            “Accordingly unless it can be shown definitely that the body of Muslims sitting in the legislature have enacted something which is forbidden by Almighty Allah in the Holy Qur’an or by the Sunnah of the Holy Prophet or of some principle emanating to be unIslamic.”

 

 

 

Mr. Justice Shafiur Rahman, in his judgment in the same case, also relied on the Article 2A (Objectives Resolution), in forming his view at pages 361 and 362, of the above judgment, as follows:-

 

 

 

      “The concept of delegated authority held in trust enshrined in verse 58 has invariably and consistently been given an extended meaning.  Additionally all authority being delegated authority and being trust, and a sacred one for that matter, must have well-defined limits on its enjoyment or exercise.  In the Holy Qur’an moreso, but also both in the Western and Eastern jurisprudence delegated authority held in trust has the following attributes:--

 

 

 

(i)                 The authority so delegated to, and held in trust by, various functionaries of the State including its Head must be exercised so as to protect, preserve, effectuate and advance the object and purpose of the trust,

 

 

 

(ii)               All authority so enjoyed must be accountable at every stage, and at all times, like that of trustee, both in hierarchical order going back to the ultimate delegator, and at the other end to the beneficiary of the trust.,

 

(iii)             In discharging the trust and in exercising this delegated authority, there should not only be substantive compliance but also procedural fairness.”

 

 

 

            This aspect was made absolutely clear by the Supreme Court in Federation of Pakistan v. N.W.F.P. Government (PLD 1990 SC 1172 at page 1175) in the following words:--

 

 

 

            “It is held and ordered that even if the required law is not enacted and/or enforced by 12th of Rabi-ul-Awwal 1411 A.H. the said provision would nevertheless cease to have effect on 12th Rabi-ul-Awwal.  In such state of vacuum, vis-à-vis, the statute law on the subject, the common Islamic law/the Injunctions of Islam as contained in Qur’an and Sunnah relating to offences of Qatl and Jurh (hurt) shall be deemed to be the law on the subject.  The Pakistan Penal Code and the Criminal Procedure Code shall then be applied mutatis mutandis, only as aforesaid.”

 

 

 

It is thus clear that the Constitution has adopted the Injunctions of Islam as contained in Qur’an and Sunnah of the Holy Prophet as the real and the effective law.  In that view of the matter, the Injunctions of Islam as contained in Qur’an and Sunnah of the Holy Prophet are new the positive law.  The Article 2A, made effective and operative the sovereignty of Almighty Allah and it is because of that Article that the legal provisions and principles of law, as embodied in the Objectives Resolution, have become effective and operative.  Therefore, every man-made law must now conform to the Injunctions of Islam as contained in Quran and Sunnah of the Holy Prophet (p.b.u.h.).  Therefore, even the Fundamental Rights as given in the Constitution must not violate the norms of Islam.”

 

 

 

48.                    I am also of the same view.  The BRD Circulars (supra) are also on the same term and cannot be deviated from.  Interest is unIslamic and cannot be allowed.  Rollover, as discussed is also unIslamic and cannot be allowed.  The discussion in the case of Qayum spinning (supra) is the reply the arguments of Mr. Aziz. I have given an anxious thought and reconsidered my earlier view in light of the argument of Mr. Aziz, but have been unable to convince myself otherwise. I therefore hold that all agreements that have been entered into and not be acted upon, as no disbursements have been made, are void. No claim can be made by the banks on the basis of the said agreements. All documents, whether negotiable instruments or otherwise are as a consequence are also void. I also hold that no roll over can be allowed, and that the amount payable shall be the amount on the basis of the agreement against which disbursement has been made.  The statement/Break-up of liability filed by the plaintiff is from 9.5.1993 and not from the date of the actual disbursement.  I, do not find force in the argument of the Plaintiff.  I find force in the arguments of the defendants.

 

 

 

49.                    Having gone through the pleadings I agree with the accounts filed by the counsel for the defendant No.1 as under:-

 

 

 

            A.        NICF

 

 

 

1.                   Amount transferred into A/c 2164 from

 

I.I. Chundrigar Road to Corporate

 

Branch on 24.01.1989 EXB. 6/19                       Rs.59,83,054.00

 

 

 

2.                   Deposit made by defendants during the

 

Period 24.01.1989 to 28.11.1990 i.e.

 

Last Date of Operation of A/Cs.  Thereafter

 

plaintiff bank did not allow any operation.            Rs.1,90,09,483.00

 

 

 

3.                   Withdrawals during the period

 

24./01.1989 to 31.11.1990.                                 Rs.1,81,79,791.74

 

 

 

4.                   Mark-up @ 0.43/1000/Day from 01.01.1989

 

to 31.12.1990 upto the date when operation

 

of Account was frozen.                                     Rs.15,72,896.18

 

 

 

5.                   Balance of outstanding NIFC A/C as on

 

31.12.1990 (After appropriating Mark-up)           Rs.67,26,258.00

 

 

 

 

 

A.        NIDF

 

 

 

1.                   Sanctioned amount as per transferred date

 

25.01.1989 Annexures: “S” (Exb P/19)

 

Expiry on 31.12.1990                                         Rs.1.5 Million

 

 

 

2.         Actual amount disbursed/availed             Rs.10,99,325.00

 

            Evident from Exhibit 6/20 P-131             Rs.02,15,297.00

 

            (Inclusive M-Up Amount)                                  Rs.13,14,622.00

 

 

 

2.                   Mark-up from 25.01.1989 to 31.12.1990

 

@ 0.31/1000/Day (Sanction Rate)                      Rs.02,40,598.36

 

 

 

 

 

C.                 PAD/Outstanding L.Cs. Inclusive US Aid L.C.

 

 

 

(i)                  L.C. Amount (Annexure F of Suit)

 

 

 

(ii)        Less: 10% Cash Margin Paid                 Rs.35,40,000/-

 

            Vide Cheque No.070706 dated

 

            Drawn at BCCI                                                Rs.03,55,000/-

 

 

 

Less: Payments

 

 

 

(i)         03.04.1990                                            Rs.09,19,705/-

 

(ii)        09.06.1990                                            Rs.09,67,248/-

 

(iii)       Subsequent payments                            Rs.09,84,334/-

 

            TOTAL                                                Rs.32,26,287/-

 

 

 

Principal Balance Outstanding                            Rs.03,13,713/-

 

 

 

Mark-up for the purposes of Repurchase Price:

 

 

 

1)                  1st shipment @ 11% for 18 months

 

i.e. 08.09.1988 to 07.03.1990                  Rs.092,915.29

 

 

 

2)                  2nd shipment @ 11% for 18 months

 

i.e. 18.11.1988 to 17.05.1990                  Rs.159,152.42

 

 

 

3)                  3rd shipment @ 11% for 18 months

 

i.e. 30.11.1988 to 29.05.1990                  Rs.273,039.51

 

 

 

4)                  Subsequent interest @ 16.425%

 

From 30.05.1990 to 31.12.1990.              Rs.187,862.41

 

5)         TOTAL MARK-UP                             Rs.712,993.00

 

 

 

Total Liability of A+B+C is summarized as follows:

 

 

 

 

 

                        PRINCIPAL     MARK-UP      TOTAL

 

 

 

NICF                51,53,363.24      15,72,896.20     67,26,259.44

 

NIDF               10,99,325.45         4,55,895.36     15,55,220.81

 

PAD                  3,13,713.00         7,12,933.63     10,26,646.63

 

 

 

TOTAL            65,66,401.69      27,41,725.19     93,08,125.88

 

 

 

 

 

 

 

50.                    Having agreed with the contention of the defendant No.1, the amount admitted by them being a sum of Rs.9,308,125.88 is liable to be paid by the defendant No.1 to the plaintiff. 

 

 

 

51.                    I now come to the question whether the defendants No.2 to 5 are liable as guarantors.  It is the case of the plaintiff that the defendants No.2 to 5 are guarantors.  Whereas in the written statement the same has been denied that, the defendants No.2 to 5 never executed any guarantee as annexed with the plaint and that, the property shown to be mortgaged with the bank belongs to the defendant No.1 and not defendants No.2 to 5.  It is stated that the signatures on the guarantee are not the signatures of defendants and that no document was executed by the defendants No.2 to 5 by themselves or on their behalf.  It is also stated that on the dates mentioned on the guarantee the defendants No.2 to 5 were not directors of the company in 1987.  There being a categorical denial, the onus lay on the Plaintiffs to prove that the guarantees were signed by the Defendants 2 to 5. No evidence has been led by the plaintiff to prove that the signatures contained on the guarantee is, in fact the signatures of the said defendants No.2 to 5.  In view of the above, I hold that the defendants No.2 to 5 are not liable. The suit is dismissed as against the said Defendants.

 

 

 

52.                    The suit is, therefore, decree against the defendant No.1 in the sum of Rs.9,308,125.88 with costs.  Suit is also decreed for sale of the mortgaged properties.  The suit is decreed with mark-up on the decretal amount at the rate of 11% chargeable once and shall not be compounded in any manner whatsoever.

 

 

 

 

 

Karachi,

 

Dated:-06.08.2001.                                                                    J U D G E

 

 

 

 

 

Aziz