In early days of Islam money consisted of gold or silver coins that appreciated in relation with most goods. These days we have paper currency without base that loses its purchasing power over years. Consider a loan of RS.6, 000, 000. Would it not be unfair to pay it back after five years without any compensation as its principal value has diminshed and in verse 2.279 return of original/principal value is regarded as just.

Most of us agree that return of a loan of 1000 grams of gold in the same quantity and quality after five years does not entail any Riba. But what about if the gold after five years costs 50 % more than it used to five years ago? Are we paying interest by returning full 1000 gram? No!.

A provision for loss of purchasing power of the amount loaned and incidental costs cannot be regarded as usury. In verse verse 2.279 just return of original/principal value is prescribed..

In USA in many States the bank cannot charge more than 12% pa on credit card dues but in Pakistan they are free to charge as high as 3.50% per month meaning 52% per annum and we say we are Islamic Republic. 

Monetary illiteracy among our legislators has prevented our financial laws to be molded in Islamic spirit. But our bigoted Mullas create hurdles as they want us to use Miswak instead of tooth brush. They fail to realize that underlying principle is cleaning teeth – not using miswak. Similarly they regard many modern things as Un-Islamic whereas their underlying principles are in conformity with the traditional Islamic values. 

Abolishing interest before basing the monetary sytem on gold and silver would be like putting cart before the horse. But in any case employment of interest for covering operating costs and inflation cannot be regarded as usury. 

Few Ulemas see tha Element of "Sharar" i.e. avarice and mischeif in Insurance. That is the same type of attitude as regarding Television as bad or saying that since air planes have crashed air travel is haram! 

Insurance business in India and Pakistan was properly regulated by the Insurance Act and laws are enacted to protect the interests of the policyholders from time to time. If the nation decides to swith to the Interest free economy certain laws would need to be modified e.g. there is compulsion to invest a specified percentage of the reserves in Government Securities on which interest is allowed.  Such laws would need to be changed. The yield of insurance companies would be higher if the restrictions on investments are modified.

In construction of premiums rates the companies use assumptions based on experience of the industry. These assumptions generally relate to claims likely to be paid, investment yield on the reserves and the administrative expenses. So instead of interest rate the assumption would relate to profit and loss on investments. It would need to be resolved what sort of treatment would be given if the premiums were paid late. 

Late Payment Surcharge: Have you noticed, at present KESC charges almost 10% late payment surcharge compounded monthly on electricity bills. Similar exorbitant late payment surcharge is levied by Telephone and Gas companies. A foreign bank charges 3.50 % per month compound interest on credit card balances that amount almost to over 52% annual  compound interest. According to an expert in Fiqah all such exorbitant interest charges would have to be abandoned. But the KESC or the bank may be able to charge penalty of a fixed amount irrespective of the amount of bill or loan installment. The amount of penalty can be anything forms RS.10 to RS. 1000 or more as long as it does not depend upon the amount of default. Our Financial law must take care of all such practices that skin the hides of consumers like lambs and Islamic system or the interest free operations are no guarantee that the greedy financial instutitions would not exploit the consumer.

In Interest Free Operations it also needs to be resolved how in life insurance business, policy loans would be treated. At present interest is generally charged  @15% per annum which is exorbitant. In many countries life policies guarantee a rate of interest of only 7% as they would charge on policy loan. One company in Pakistan had such limit but after nationalization it was revised for new policies as the 100% policyholders were taking loan and investing in national saving certificates who had started offering much higher interest.

General Ziaul Haque had started to talk about Interest free banking.
What the bankers did was change the name of savings account to
Profit and Loss account and continued with the old system of allotting profit. They also introduced Interest Free House Building Loans and  made acquisition of loans for house building more difficult as well as 
expensive. Now one does not pay interest but what one pays as something like rent that comes to much greater amount than the interest that used to be charged in early days of  House Building Finance Corporation or by the banks in private sector prior to their nationalization in the seventies. 

People in USA and most other countries get loans for purchases of 
cars, houses, appliances etc. hardly at 3 to 9% interest. Here in Pakistan we have to pay much higher interest or the socalled rent or something like that under Islamic banking. The idea of common Muslim is that under Islamic Banking we should get Loan without any Interest or Mark Up.That ofcourse is not commercially viable - only the State or charity can do that. But if in the commercial banking one has to pay more than what we used to under convential banking then object of saving us from exploitation would be defeated. If we have to pay rent on the loan under Islamic Banking and if the rent is higher than the conventional banking interest, it would be akin to Riba and tantamount to consumer explotation in the name of Islam. 

If you obtain a loan from a bank and because of your own ingenuity and hard work you make large profit and the Islamic Bank cuts much larger share from your profit than conventional Interest then the object of Islamic Banking is defeated in a way. Nevertheless it is upto the Islamic Banking to allow you to retain larger profit than the pro rata in consideration of your ingenuity and labor. But the good thing is that if you suffer a loss the Islamic Bank may not be able to recover the  amount lost in your venture whereas under conventional banking you have to pay back loan and interest irrespective of what happens to your venture.

If the Interest rates are regulated by the Government, then it can be regarded only as a provision for covering operating costs and a reasonable margin for inflation and profit and not as Riba or usury.
Usury must be defined in our laws such as a rate of interest 10 % higher than the bank rate fixed by the State Bank and like developed countries we should fix maximum limits beyond which the banks cannot charge Interest. 

Although the reinvention of wheel in the name of Islamic banking had been given a big push by General Zia, it has not made much headway. The agricultural loans provide a good testing grounds for Islamic Banking. If a farmer takes a loan of RS. 3 lacs and makes a profit of RS. 10 lacs mostly due to his own ingenuity and the fertile land, the question arises what percentage of profits would go to the moneylender? If that works out to be considerably higher than twice the inflation rate or the rate of interest charged by conventional bankers, it may well be consumer exploitation.

However, many frauds have been perpetrated in the name of agricultural loans. Loans to ghost farmers or on nonexistent land were taken and the billions of Rupees were squandered. All that happened due to onnivance of the corrupt bank official and the politicians or feudal in the area. 

Crop Insurance and Agricultural Loans:
Besides ghost farmers, loans were obtained by proxy farmers or touts of feudal on the land rendered unfit for agriculture due to salinity and some sort of soil trouble and the banks were unable to recover the amounts in default. Back in 1995 the Government was thinking introducing crop insurance but the insurers refused to launch the crop insurance scheme in the manner desired by the Government and insisted on some sort of subsidy or reinsurance cover to be provided by the Government. 

The sad fact is that incidence of fraudulent claims is very high. In the West it is not easy to catch all of them but here people are not so clever and most of them are caught expect in case of car lifting. Life insurance of dying persons declaring him fit and healthy and even arranging bogus medical reports are quite common and a number of cases of misrepresentation and non-disclosures are caught by the claim investigators and the claims are repudiated. In Casualty insurance the fraudulent claims of fire and accident of vehicles are common. But major source of loss in motor insurance is car snatching. Organized networks involving personnel of law enforcement have been busted but new gangs spring up with their connection in tribal areas as well as law enforcement and people of big cities like Karachi are the prime victims. 

Instead of following such dubious schemes as Islamisation of economics, banking, insurance etc, we should take advantage of the research and experience of other nations and their knowledge and skills  and concentrate on building the character of our people, create civic sense among them, help them acquire knowledge and skills, end their exploitatation by feudals and sardars. Economic systems by themselves would not solve our problems. True reformation would come only if each of us resolves to sincerely strives for adopting a character according Islamic ideals of tolerance and justice. Believe in the equality of man; and believe that religious duties consist in doing justice, loving mercy, and endeavoring to make our fellow-creatures happy is the essence of a true religion which is Islam.