beyond riba reconstruction

Beyond Riba: Reconstruction of Just Financial Orde…

The preceding parts of this series have gradually separated concepts that modern banking has merged. Money used for payments is not the same thing as investment capital. A current account is not economically identical to funds deliberately committed to enterprise. Commercial-bank money creation is not automatically riba, but neither should monetary privilege remain beyond scrutiny.

Once these distinctions are accepted, an obvious question arises: how will productive activity actually be financed? No modern economy can function merely by condemning interest. Farmers require seasonal finance.

Manufacturers need machinery and working capital. Exporters must bridge the period between production and receipt of foreign proceeds. Families need housing. Governments require infrastructure. Entrepreneurs need capital before their businesses begin earning revenue. A serious alternative to riba must finance all of these activities (see the model of Robobank). The answer is not to replace every conventional loan with musharakah. Nor is it to rename a predetermined financial return as “profit”.

Islamic commercial jurisprudence developed several different contractual forms precisely because economic transactions differ. Sale, lease, partnership, advance purchase and manufacturing contracts perform different functions and allocate ownership and risk differently. The real task is to connect financial return with an identifiable economic basis.

A useful starting principle is simple: money should not generate a guaranteed return merely because money has been advanced. Return should arise from trade, ownership, service, productive participation or genuine exposure to commercial risk. This does not mean that every legitimate return must fluctuate.

A trader may sell an asset for a fixed profit. A landlord may agree a fixed rent. A contractor may charge a predetermined price. A manufacturer may agree in advance to produce goods for a specified consideration. The prohibition of riba does not abolish prices. What matters is what stands behind the price.

State Bank of Pakistan itself explains murabaha as a sale rather than a loan: the seller acquires a commodity, discloses its cost and sells it at an agreed profit. SBP similarly recognises mudarabah, musharakah, ijarah, salam and istisna as distinct Islamic financing structures.

Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) maintains separate Shariah standards for murabaha, ijarah, salam, istisna and musharakah precisely because each represents a different legal and commercial relationship. The distinction is fundamental.

Consider machinery required by an industrial enterprise. A conventional bank may lend Rs.100 million and require repayment of principal plus interest. Under a genuine murabaha structure, the financier purchases identified machinery, assumes ownership during the relevant period and subsequently sells it to the customer at an agreed deferred price. The return is then legally attached to a sale.

This difference has substance only if the financier actually acquires what it claims to sell. Ownership cannot be reduced to a momentary paper entry while every risk, liability and practical responsibility remains with the customer from beginning to end. The same principle applies to ijarah.

A financier that purchases machinery, vehicles or other productive assets and leases them to a business may legitimately earn rent because it owns an asset whose use is being transferred. Ownership, however, carries obligations.

Structural ownership risks cannot simply be transferred wholesale to the lessee while the financier retains only the right to receive money. The issue is thus not whether rent happens to resemble an interest payment in amount. Economic prices often converge. The decisive issue is whether a genuine lease exists.

Housing illustrates the point particularly well. Diminishing musharakah has become one of the major financing techniques used in Islamic banking. Under its proper conception, the financier and customer acquire a property jointly. The customer pays rent for the financier’s share and progressively purchases units of that share until sole ownership is achieved.

State Bank of Pakistan (SBP) has long maintained specific Shariah standards governing Sharikat-ul-Milk and diminishing musharakah. This can provide a defensible alternative to an interest-bearing mortgage.

Its legitimacy, however, depends upon genuine co-ownership. If the customer bears every cost and risk from the first day, if the bank’s capital is effectively guaranteed irrespective of what happens to the asset, and if the entire arrangement merely reproduces principal plus benchmarked return, the partnership becomes increasingly formal rather than substantive.

The same scrutiny is required in agriculture. Agriculture is ill-suited to rigid debt repayment because its returns depend upon weather, crop disease, market prices, water availability and timing. A farmer may incur losses despite diligence and competence. Classical commercial law contains an instrument remarkably suited to this problem: salam. Under salam, the purchaser pays the price in advance for specified goods to be delivered later.

The farmer obtains working capital before harvest. The purchaser acquires a commercial claim to the future crop and assumes the market risk associated with buying it in advance. This is not charity. It is trade.

Properly developed agricultural salam markets could provide farmers with liquidity without forcing them into compounding debt when crops fail. Warehousing, quality certification, crop insurance or takaful, commodity exchanges and transparent market information would be necessary to make such financing scalable.

Istisna can similarly serve manufacturing, construction and infrastructure. A textile mill, irrigation facility, industrial machine and housing project need not be forced into one universal debt contract.

Partnership financing becomes important where future returns are uncertain. Musharakah permits parties to combine capital and share results. Mudarabah separates capital from enterprise: one party provides funds and another skill and management. Return is connected with actual economic performance.

Their difficulty is equally obvious. Profit-and-loss sharing cannot work where accounts are unreliable, sales remain hidden, related-party transactions are opaque and litigation takes years. A financier unable to determine actual profit will naturally prefer a fixed receivable.

Financial reform requires credible accounts, meaningful audit, digital documentation, effective insolvency laws, reliable registries and quick commercial adjudication. Risk sharing cannot flourish where information itself cannot be trusted. There is, however, another question we rarely ask: why must productive finance remain concentrated in a few large banks?

History offers an instructive example. Rabobank did not begin as the international institution known today. Its origins were local Dutch farmers’ lending cooperatives created by communities seeking access to savings and credit. These locally rooted organisations later established central cooperative institutions in 1898 for support and coordination. By 1900, 67 cooperative farmers’ banks were affiliated with the two central organisations. The network subsequently expanded and diversified far beyond agriculture.

Rabobank is not being cited as an Islamic or riba-free banking model. Its importance lies elsewhere. It demonstrates how communities can mobilise their own savings, understand local productive needs and build financial institutions from below rather than waiting permanently for credit to descend from metropolitan financial centres. Its cooperative character remains significant: Rabobank describes itself today as a bank without shareholders but with members.

Pakistan should study this institutional history carefully. A genuinely Islamic economic order cannot consist merely of replacing interest-bearing documentation with Shariah-labelled contracts while ownership of land, capital, credit and political influence remains concentrated in narrow hands. The larger objective must be economic empowerment of citizens.

Pakistan could develop member-owned agricultural, industrial and enterprise cooperatives at community level, linked to professionally managed provincial and national institutions providing liquidity, clearing, technology, audit and risk management.

Farmers could pool savings and obtain seasonal finance. Small manufacturers could collectively finance machinery. Artisans, traders, exporters and technology entrepreneurs could become members of institutions whose prosperity depends upon the productive economy around them. The relationship would change fundamentally. A citizen would no longer be merely a borrower approaching a distant institution. He could also be an owner and participant in the institution mobilising local capital.

Such organisations must, of course, be protected against political capture. Pakistan’s problem is not shortage of institutions carrying noble names. It is capture of institutions by powerful interests. Cooperative finance therefore requires transparent elections, independent audit, professional management, limits on connected financing and complete disclosure of beneficial ownership.

No local landlord, political family, bureaucratic group or hidden financier should be allowed to convert a community institution into another source of patronage. That safeguard is essential because decentralisation without accountability merely decentralises corruption. Properly designed, however, cooperative finance can disperse economic power.

This has implications far beyond banking. Citizens who collectively mobilise savings, finance local enterprises, create employment and participate in ownership become less dependent upon patrons for economic survival. Economic decentralisation strengthens political decentralisation.

A polity cannot meaningfully describe itself as Islamic while ordinary citizens remain economically subordinate to feudal structures, rent-seeking elites, illicit wealth and political control over access to capital. The Quranic concern with riba belongs within the larger demand for justice, circulation of wealth and protection against exploitation.

The State must facilitate this transformation without controlling it. Its functions should include regulation, payment infrastructure, professional supervision, deposit protection where appropriate, technological support and an effective judicial framework. Cooperative institutions should belong to their members, not ministries or political appointees.

Government must simultaneously reduce its own appetite for bank financing. As long as sovereign securities provide the easiest route to financial returns, banks will have weaker incentives to undertake the harder work of evaluating farms, factories, exporters and new enterprises.

Pricing also needs reform. Replacing Karachi Interbank Offered Rate (KIBOR) with an “Islamic” benchmark changes little if the financier remains assured of essentially the same return irrespective of ownership or commercial consequence.

Pakistan should progressively develop benchmarks derived from the real economy: rental indices, commodity prices, sectoral profitability, infrastructure yields and transparent investment-pool performance.

A genuinely different financial order must finally accept that productive investment sometimes fails. Crops disappoint. Businesses make losses. Technologies fail. If the financier must always recover capital plus return, risk has not disappeared; it has merely been transferred to somebody else.

The test therefore remains straightforward. Where a financier sells, it must genuinely sell. Where it leases, it must genuinely own. Where it becomes a partner, it must genuinely share risk. Where communities pool capital, their members must genuinely control the institution. Where money is lent, principal cannot acquire a guaranteed increase merely because time passes.

The objective is not to make capital sterile. It is to reconnect capital with labour, enterprise, production and community.

There remains, however, a sphere where productive finance cannot provide the answer. Illness, unemployment, education, poverty and temporary distress cannot always be converted into profitable investments. Human vulnerability itself cannot become another financial product.

Part V will examine social finance beyond commercial banking: Bait-ul-Maal, qard hasan, zakat, waqf, cooperatives and public provision.

[To be continued]

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Dr. Ikramul Haq, Advocate Supreme Court, Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE), holds an LLD in tax laws. He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He also served Civil Services of Pakistan from 1984 to 1996.

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      In an international system undergoing rapid transformation, the emergence of a trilateral defense cooperation framework among Pakistan, Türkiye, and Saudi Arabia signals a notable shift in how middle powers are approaching security and strategic autonomy.Three states, each central to its respective region, are seeking to institutionalize collaboration in defense, industry, and crisis management. The significance of this alignment extends beyond bilateral ties and touches upon regional stability, defense industrialization, and the evolving balance of power in Eurasia and the Indian Ocean. The rationale for this cooperation lies in the complementary strengths that each country brings. Pakistan contributes a large, professionally trained military with extensive experience in counterterrorism, peacekeeping, and mountainous warfare. It also maintains a credible nuclear deterrent and has developed a domestic defense industry in areas such as aerospace, missiles, and armored vehicles. Its location provides access to the Arabian Sea and proximity to key trade and energy routes linking South Asia, Central Asia, and the Gulf. Türkiye offers a military with NATO operational experience, combined with one of the fastest-growing defense industrial bases outside the traditional Western suppliers. Over the last decade, Ankara has demonstrated capacity in unmanned aerial systems, naval platforms, electronics, and aerospace subsystems. Its geographic position, connecting Europe, the Mediterranean, and West Asia, makes it a natural bridge between different security theaters. Saudi Arabia adds financial depth, energy influence, and a central role in Gulf security. Under Vision 2030, Riyadh has prioritized localization of defense manufacturing and diversification of partnerships. The Kingdom also carries substantial weight in the Arab and Islamic world, giving any trilateral initiative immediate political resonance across a wide geography. When viewed together, these capabilities form the basis for a partnership that is both symbolic and practical. Symbolically, it represents a commitment by three major Muslim-majority states to take greater responsibility for regional security. Practically, it creates opportunities for joint development, procurement, training, and operational coordination that can reduce duplication and increase efficiency. The regional importance of this alignment can be understood in several contexts. The Middle East and South Asia continue to face a complex mix of traditional and non-traditional security challenges. These include maritime threats in the Red Sea and Arabian Sea, the proliferation of unmanned systems, cyber intrusions, and the persistent risk of transnational militancy. A structured mechanism for consultation among Pakistan, Türkiye, and Saudi Arabia provides an additional channel for de-escalation and coordinated response. In maritime terms alone, the cooperation could contribute to the security of sea lanes that carry a significant portion of global energy and trade. Equally important is the dimension of defense industry collaboration. All three states have expressed a desire to move away from over-reliance on external suppliers and to build indigenous capacity. A trilateral format allows for economies of scale in research and development, co-production, and technology transfer. Areas of immediate potential include air defense systems, drones and counter-drone technology, armored vehicles, naval ships, and cybersecurity infrastructure. Beyond the military domain, such industrial cooperation often generates spillovers into civilian sectors such as aviation, shipbuilding, and advanced manufacturing, thereby supporting broader economic diversification goals. There is also a clear utility in the area of human security. The armed forces of Pakistan, Türkiye, and Saudi Arabia have all been involved in humanitarian assistance and disaster relief, both domestically and abroad. Institutionalizing cooperation in logistics, medical support, and rapid deployment can enhance the region’s ability to respond to natural disasters, which have become more frequent and severe due to climate change. At the global level, the impact of this pact should be assessed within the framework of a multipolar world. The era of reliance on a single security provider is receding. States are increasingly building flexible, interest-based coalitions. The Pakistan-Türkiye-Saudi Arabia arrangement fits this pattern. It is not designed to replace existing alliances, but to complement them. All three countries maintain important relationships with the United States, China, the European Union, and Russia. The trilateral framework offers them greater flexibility and reduces exposure to disruptions in supply chains or shifts in political conditionality. For the wider Muslim world, this initiative presents a model of cooperation based on functional objectives rather than ideological or sectarian lines. It demonstrates that collective action is possible on issues of security, technology, and economic resilience. If successful, it could encourage similar arrangements in Africa and Southeast Asia, contributing to a more decentralized and networked global security architecture. From an economic perspective, defense cooperation often acts as a catalyst for deeper trade and investment. Joint ventures in defense production can lead to partnerships in technology, education, and infrastructure. Secure and stable regions are also essential for the trade corridors that all three states are seeking to develop, whether linking the Gulf to South Asia or connecting Anatolia to Central Asia. The long-term effectiveness of this pact will depend on how it is institutionalized. Three considerations will be decisive. First, the framework must remain open and consultative, so that it is not perceived as an exclusive bloc. Second, communication must be clear that the purpose is defensive and stabilizing, to avoid unnecessary misperceptions. Third, the cooperation must be rooted in sustainable industrial planning and regular exercises, rather than remaining at the level of declarations. The timing of this alignment is significant. The world in 2026 is marked by geopolitical competition, technological disruption, and climate-related stresses. In such an environment, states that can pool resources and coordinate policy are better positioned to protect their interests and contribute to regional stability. In essence, the trilateral defense cooperation among Pakistan, Türkiye, and Saudi Arabia reflects a pragmatic recognition that security in the 21st century is interconnected. No single state can address maritime security, technological change, or humanitarian crises alone. By aligning their capabilities, these three countries are creating a platform that can deliver tangible benefits in deterrence, industrial development, and crisis response. This is not merely a defense agreement. It is an expression of strategic convergence among states that share geography, history, and a stake in a stable international order. If implemented with consistency

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