Musharraf appeals against Islamic banking

After years of legal wrangles, Pakistan's supreme court last year ordered the government to switch to an Islamic banking system. At the last minute Islamabad convinced the court to delay the decision for another year. Now again a rushed appeal has begun to halt the switch to an interest-free economy due at the start of next month.

Hardline clerics, angered by General Pervez Musharraf's alliance with America and his recent concessions over Kashmir, are trying to use the case to drum up opposition to the regime.

In appeal hearings before the sharia court, which governs Islamic laws in Pakistan, government lawyers argued yesterday the new law would severely harm the country's already weak and debt-ridden economy.

"The transformation of the entire financial system is not practicable," government advocate Raza Kazim told the court. "If attempted there is a high degree of risk and likelihood of permanent damage to the already fragile economy of the country."

As a compromise it appears the state will offer to set up a parallel Islamic banking system for religious-minded customers. The idea of mandatory interest-free banking was first introduced more than a decade ago by rightwing ideologues under the rule of Nawaz Sharif, the then prime minister. They wanted to stop banks charging interest from borrowers and paying interest to depositors.

Western governments, which have lent billions of dollars in aid to Pakistan over the 1990s, convinced Mr Sharif to drop the idea. But when he returned to power in 1997 he again began legal proceedings to reform the economy, hoping a ban on interest would mean he too could avoid paying interest on millions of dollars in international business loans.

Most other Muslim countries which have introduced Islamic banking systems have found other ways to offer interest payments. Economic analysts in Pakistan fear an interest-free economy would make it hard for the country to attract much-needed foreign investment or to secure further loans from international lenders.

In Pakistan the case has become a key element in a new campaign of opposition against Gen Musharraf, led by a growing body of rightwing clerics, frustrated militant fighters and even Islamist retired army officers. For the past 20 years Pakistan has encouraged these militants and co-opted Islamist elements into its political system. Now they are beginning to turn against the state that supported them.

Since September 11 Gen Musharraf has allied himself clearly with America in the war against his former allies, the Taliban. In the last month he has promised to halt militant infiltration into Kashmir, angering a powerful force in society which believes the decade-long guerrilla war against the Indian army is a legitimate "freedom struggle".

This opposition movement appears to be encouraging other rightwing elements in the country. Earlier this month there were brawls at the supreme court after religious hardliners who support the interest-free economy law complained about the judges and lawyers hearing the case. There have been dozens of rallies to show support for the Kashmir cause and several militant leaders have defied government bans to appear in public.

This week a prisoner convicted of blasphemy was gunned down in prison in Lahore by a sectarian extremist while he waited for an appeal hearing to begin.

The religious right wing, so long courted by the Pakistani state, is fast becoming its greatest threat.