Pakistan scraps Islamic banking order

The Islamic bank ruling sparked protests last year

ISLAMABAD, Pakistan -- Pakistan's Supreme Court has scrapped a two-year-old ruling to introduce interest-free Islamic banking in the country by the end of this month.

Pakistani banks won a reprieve late Monday from a ruling by the country's highest Islamic court that would have forced them to grant interest-free loans under a system the government feared would trigger financial collapse.

In addition to reversing its 1999 ruling, which ordered the abolishment of interest charges, or "riba," to ensure the economy was following Islamic practices, the Shariat bench of the Supreme Court also asked a lower court to re-examine the case.

State-owned United Bank Limited has actively lobbied against Islamic banking and was supported by the government in its request for a review.

The decision by five judges comes as a relief to the government, which was not prepared to tackle the thorny issues of interest-free Islamic banking.

The government argued at the latest hearing that such a switch was unfeasible and "if attempted will pose a high degree of risk to the economic stability and security of Pakistan."

Right-wing

Pakistan has so far resisted an interest-free Islamic banking system

Some of Pakistan's religious parties have been pushing for an interest-free Islamic system -- a demand previous governments had resisted.

Pakistan's banks are mostly interest-based, Western-style institutions.

In its 24-page decision Monday, the Supreme Court said more research was needed before Islamic banking could be introduced. It also said a study of the financial systems used in other Muslim countries should be undertaken.

The Islamic Federal Shariat Court (FSC), a court with powers to declare void any law repugnant to Islam, should make its case again after more work has been done, the Supreme Court ruled.

Interest-based banking was first declared un-Islamic in 1992 by the FSC. It also struck down many banking laws.

The central State Bank told the court a parallel Islamic banking system was already working alongside conventional banks.