Law:

Section:

(a) State Bank of Pakistan BCD Circulars Nos.13 & 32 of 1984-----Financial Institutions (Recovery of Finances) Ordinance (XLVI of 2001), S.3---Banking systems---Interest based and mark-up based---Distinction---Salient features---Prior to introduction of Islamic system of financing in year, 1984, bank financing was purely based on interest---Borrower's liability was calculated simply by applying agreed rate of interest to the duration borrower retained the loaned amount---Interest based financing was purely time related---With introduction of Islamic system of financing through BCD Circulars Nos.13 and 32 issued by State Bank of Pakistan in year, 1984, interest based financing was abolished with effect from year, 1985 and permissible modes of financing, including mark-up in price was introduced; only exception being that where it was a case of on-lending of foreign loans by financial institutions, interest was allowed to be charged-As a result of introduction of mark-up based financing in year, 1984, under BCD Circulars 13 and 32, all financial institutions in Pakistan were prohibited from charging any additional sum on account of delay caused by customer in repayment of its obligation created under an agreement based on mark-up---Even where financial institutions had themselves extended time of repayment with the consent of its customer, it was unlawful to charge additional mark-up for such extended period---Obligation under mark-up based agreement once fixed could not be enhanced so as to entitle a financial institution to charge any sum over and above the original contracted amount---Mark-up beyond original contractual period or charging of mark-up upon mark-up both being in the nature of interest and violative of restrictions contained in BCD Circulars Nos. 13 and 32 were invariably declared by Courts as unlawful---Only original contracted marked up price was allowed to be recovered---After introduction of Islamic system of financing, whenever there was any attempt on the part of a financial institution to charge additional mark-up in violation of restrictions contained in both the Circulars of State Bank of Pakistan, the same was declared by Courts as…

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