1. MAULANA MUHAMMAD TAQI USMANI, J.---These appeals are directed against the judgment of the Federal Shariat Court dated 14-11-1991, reported as PLD 1992 FSC 501, whereby certain provisions of the House Building Finance Corporation Act, 1952 (hereinafter referred to as Act, 1952) as amended by the Amendment Ordinance of 1979 (hereinafter referred to as the Ordinance, 1979) were declared repugnant to the Injunctions of Islam.
2. The House Building Finance Corporation (hereinafter called 'the Corporation') was established in 1952 for providing finances to the general public to acquire homes. In the beginning, house loans were advanced on the basis of interest. However, in 1978 the Council of Islamic Ideology recommended to abolish interest from some financial institutions, including the Corporation, as an initial step towards an interest-free economy. The Council suggested that, instead of advancing loans on the basis of interest, the Corporation should enter into joint ownership of the house with their clients. The clients should pay rent to the Corporation for the utilization of the share of the Corporation in the property. At the same time the clients will keep on purchasing different units of the share of the Corporation, and thus, the principal amount invested by the Corporation will be gradually restored to the Corporation in the form of the price of the purchase, until the full house is ultimately owned by the client and the Corporation's share is fully purchased by him. On the basis of this scheme, which is normally known in the terminology of Islamic banking as 'diminishing partnership', Ordinance, 1979 was promulgated and the corporation started financing on that basis. Mr. Siddiq-al-Farooq, the Managing Director of the Corporation appeared in this case in person and after hearing him at length, it transpired that the Corporation has abandoned the concept of diminishing partnership' after 31st July, 1989, and at present it is financing on the basis of a fixed return claimed from all the clients. When asked under which law the Corporation has changed the scheme, Mr. Siddiq al-Farooq was unable to point out any amendment in the Ordinance, 1979, and frankly admitted that this change was brought by the Board of Directors of the Corporation in its meeting 2 of 1989 held at Karachi on 31st July, 1989 without any amendment in the law.
3. It is really strange that the provisions of the relevant law were practically repealed by a resolution of the Board of Directors, and the whole purpose of the Ordinance, 1979 was defeated without any explanation or legal justification. It is painful to note that flagrant violation of law was allowed to be committed and perpetuated for all these years which manifests attitude of the people at the helm of affairs to Islamic values and their commitment to enforce Shariah. Such an attitude will have to be curbed if enforcement of Shariah is to be made a living reality. The concerned quarters will have to exhibit necessary vigilance to check and eliminate such flagrant violation of laws. The Shariat Appellate Bench of the Supreme Court of Pakistan can only examine the relevant law in the light of the Holy Qur'an and Sunnah. The impugned judgment of the Federal Shariat Court has, firstly, examined section 4(2) of the Act, 1952 which reads as follows: "The Corporation shall pay to the Federal Government such return on the capital subscribed by the Federal Government wider subsection (1) at such rate as the Federal Government may, by notification in the official Gazette, specify."
4. According to the impugned judgment, the word 'interest' in the original Act, 1952 was substituted by the word "return" through the Ordinance, 1979. However, being based on a fixed rate, it may include interest, though with a different name. It is, therefore, directed by the Federal Shariat Court that this section be suitably amended to clarify that, instead of a return based on a fixed rate relating to the capital, a proportionate share in the income of the Corporation may be given to the Federal Government. We agree with the finding of the Federal Shariat Court. Section 4(1) provides that the Federal Government may increase the C authorized capital of the Corporation. Then section 4(2) gives the basis on which the Federal Government subscribes capital to the Corporation, and that the Federal Government may specify the rate on which a return shall be paid to it by the Corporation. If the rate of return in this subsection means a fixed rate of return relatable to the capital, it obviously amounts to charging interest, and if the rate of return contemplated in this subsection refers to the proportionate share in the income of the Corporation, it should have been either a pro rata profit or a certain proportion of the actual profit, rather than a 'rate of return' which in normal terms refers to a fixed rate of interest. The judgment of the Federal Shariat Court in respect of section 4(2) is hereby upheld and section 4(2) of the Act, 1952 is declared repugnant to the Injunctions of Islam.
5. The same shall be amended in the light of the above discussion. Section 21 Section 21 of the Act, 1952 provides for different ways of raising funds for the Corporation.
6. Subsection (1) to section 21 envisages two different situations in clauses (a) and (b). Clause (a) provides for raising funds by taking loans or issuing certificates for investment on partnership basis, while clause (b) provides for taking loans or issuing, bonds and debentures for its investment for 'investment other than on partnership basis'. It is in this background that subsection (2) of section 21 provides as follows: "(2) The repayment of the principal after adjustment of profits and losses in case of working capital raised under clause (a) of subsection (1) and repayment of principal and payment of interest due in case of funds raised under clause (h) of that subsection shall be guaranteed by the Federal Government."
7. The learned Federal Shariat Court has held the provision of interest in this clause as un-Islamic. No exception can be taken to this finding of the Federal Shariat Court. Raising funds through interest bearing loans is against the Injunctions of Islam as detailed in our main judgment about Riba in the case of Muhammad Aslam Khaki v. Federation of Pakistan and others (Shariat Appeal No,1/92 etc.).
8. Even the guarantee of the principal provided by the Federal Government for the funds raised under partnership arrangement is not in accordance with Shariah in this particular case. The Corporation is almost wholly owned by the Federal Government. Therefore, when another person provides funds to the Corporation on the basis of partnership it means that the Federal Government is entering into a partnership with him. It is a well-established rule of Shariah that a partner cannot guarantee the principal invested by his other partner, because it means that in the case of a loss, the whole loss will be borne by the guaranteeing partner and the other partner will remain immune from any loss. This is a clear violation of the basic principle of Islamic partnership, where losses must be shared pro rata by all the partners. Subsection (2) of section 21 is, therefore, repugnant to the Injunction of Islam in its entirety. Mr. Ghulam Mujtaba, the learned counsel for the Corporation has also conceded before us that the provisions of section 4(2) and section 21(2) are repugnant to the Injunctions of Islam to the extent mentioned above. Section 24 The impugned judgment has then discussed the provisions of section 24(11),(12),(18) along with the 'Investment Regulations, 1979' Subsections (11), (12) and (18) of section 24 read as follows: "24: Conditions for investment.--
(11) The net rental income shall be assessed by the Corporation for a period of three financial years commencing from the financial year in which the proposal has been made and shall be revised every three years thereafter till the entire investment is repaid.
(12) The share of the Corporation in the net rental income shall be fixed at the ratio between the investment of the Corporation and the total estimated cost of the house at the time of the execution of deed of assignment and partnership and shall be revised after repayment of every thirty-six instalments of the principal.
(18) No information given by any person applying for financial assistance and communicated to any of the Directors or employees of the Corporation shall be disclosed or used by such Directors or employees except for lawful purposes of the Corporation without the written consent of such person." The 'Investment Regulations, 1979' read as under: "14(1).---The anticipated gross annual rental income of a house in which investment is made shall be the average of the rental income of similar houses in the locality obtained through a sample survey conducted during the three months preceding the financial year in which the proposal for availing the investment is made: Provided that the results of sample survey shall be reviewed by the Corporation before formal adoption in order to bring them into conformity with other supporting indices or to remove discrepancies, if any. 14(2).---The anticipated gross annual rental income in localities where a sample survey has not been conducted shall be determined by the Corporation in such manner as it may deem proper.
9. 15(1).---The share of the Corporation in the net rental income shall initially be determined as the ratio between the investment of the Corporation and the total estimated cost of the house at the time of execution of the deed of assignment and partnership.
10. 15(2).---The share of the corporation in the net rental income shall be revised after repayment of every thirty-six instalments of principal amount of the investment and shall remain fixed on the balance of the investment so reduced until such further revision, till the entire investment be repaid."
11. The objection of the Federal Shariat Court is that the process laid down for assessment of the 'rental income and fixation of the share of Corporation therein is arbitrary, and against the spirit of partnership. The need of the partner is, thus, exploited, while he is equally entitled to have a say in this matter. A proviso is, therefore, held to be necessary to the effect that the partner will have a right to place the matter before a higher authority nominated by the Corporation, so that the issue may be resolved on an equitable basis. The proposal of the Federal Shariat Court seems apparently justified. However, it may also be kept in mind that it should not open the door for frivolous disputes and prolonged proceedings. The process provided by the 'Investment Regulations, 1979' is a reasonable process, and the partner should enter into the agreement with open eyes. If the Corporation, or any one of its officers, has violated the procedure laid down for the fixation of rent, normal legal remedies will remain available for anyone who can prove the violation. To establish a separate forum for such disputes may bring a flood of complaints and may in turn defeat the system altogether. However, there are certain points that were not attended to by the learned Federal Shariat Court while examining section 24 and its subsidiary Regulations. These are summarized below: "(a) Subsections (6) (b), (9) and (12) of section 24 as well as Regulations 15(2) frequently refer to the 'repayment of the investment by installments'. This terminology is not suitable for the concept of 'diminishing partnership' on which Ordinance 1979 was conceptually based. The original concept, as mentioned at the outset of this discussion, was that the partner will gradually keep on purchasing different units of the share of the Corporation. These instalments are meant to purchase these units. For example, the share of the Corporation is 80% of the property. This share of 80% will be divided into 160 units as simple example. The partner will purchase one unit out of these 80 on monthly basis. No doubt, the net result is that the Corporation will recover its principal through this process. But it should be remembered that this is not the 'repayment of a loan'. It is a purchase. It will be more appropriate, therefore, that the instalments are named 'the purchase installments'.
(b) Subsection (11) of section 24 provides that the net rental income shall be assessed by the Corporation for a period of three years. This period seems to be reasonable so far as the fixation of rent with regard to the locality is concerned. However, there is another aspect that has been overlooked in this respect. As mentioned above, the payment of instalments by the partner is, in fact, purchase of a certain unit of the share of the Corporation. Therefore, as soon as the partner pays an instalment, the share of the Corporation is reduced and share of the partner is increased to that extent. This aspect should be reflected in the rent payable by him. In other words, the rent payable by him should decrease to that extent. In the above example, if the share of the.
12. Corporation constituted 160 units and the partner has paid one instalment, the share of the Corporation came down to 159 units. The rent payable by the partner, therefore, ought to be reduced by 1/160. This adjustment in the rent must take place after every instalment. It does not require a new survey of the rental value as was feared by the representatives of H.B.F.C.; it is simply a matter of calculation which can easily be done. It is not only equitable and gives gradual relief to the partner, but it is a necessary requirement of the concept of 'diminishing partnership' according to Shariah and is being practised by many Islamic financial institutions, even in non-Muslim countries. Mr. Zahid Husain, the Executive Director (f the Corporation admitted that this type of adjustment in the rent is not difficult in any way. This necessary requirement, therefore, must be reflected in the law, and in so far as subsection (11) of section 24 does not take care of it, it is repugnant to the Injunctions of Islam.
13. Section 24(20) Subsection (20) of section 24 reads as follows: "Loans made before the first day of July, 1979 shall, unless the Federal Government otherwise directs, continue to be governed by the terms and conditions on which they had been advanced." The learned Federal Shariat Court has observed about it as follows: "The learned standing counsel for the Federation stated (on the instructions of the Federation) at the bar that the Federal Government does not support this subsection. In view of this admitted position, this subsection is declared repugnant to the Injunctions of Islam." Mr. Ghulam Mujtaba, Advocate, the learned counsel for the Corporation submitted that the Corporation, in this case before the Federal Shariat Court, was represented by its own counsel, and the standing counsel for the Federation had no occasion to concede in the absence of the counsel of the Corporation and without the specific instructions on the subject from the Corporation itself.
14. However, he admitted that this section relates to the transactions which are mostly past and closed. Mr. Zahid Hussain, the Executive Director of the Corporation has, nonetheless, stated that there are still some thousand cases for which compound interest has already been foregone.
15. According to the Constitution, whip declaring a law repugnant to the Injunctions of Islam, we are bound to specify a date from which the decision shall have effect, and thus the judgment of the Shariat Appellate Bench does not have a retrospective effect. So till the date this decision takes effect, the intervening period may be availed by the Corporation for settling these past issues. So far the provision of interest in the above section is concerned, it is certainly repugnant to the Injunctions of Islam. It is held accordingly.
16. For the reasons given in our main judgment of even date in the case of Muhammad Aslam Khaki v.
17. Federation of Pakistan and others PLD 2000 SC 225 and the reasons given above we hereby uphold the judgment of the Federal Shariat Court with the observations and directions contained hereinabove and direct that necessary deletions and amendments be made in sections 4(2), 21(2) and 24 (11), (12) and (20) by 30th June, 2000, so as to bring them in conformity with the Injunctions of Islam as laid down in the Holy Qur'an and Sunnah of the Holy Prophet (p.b.u.h.).