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RR RUEHLH RUEHPW
DE RUEHIL #3885/01 3540918
ZNR UUUUU ZZH
R 190918Z DEC 08
FM AMEMBASSY ISLAMABAD
TO RUEHC/SECSTATE WASHDC 0770
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHBUL/AMEMBASSY KABUL 9593
RUEHNE/AMEMBASSY NEW DELHI 4220
RUEHLO/AMEMBASSY LONDON 9302
RUEHKP/AMCONSUL KARACHI 0802
RUEHLH/AMCONSUL LAHORE 6534
RUEHPW/AMCONSUL PESHAWAR 5392
RUMICEA/USCENTCOM INTEL CEN MACDILL AFB FL
RHMFISS/CDR USCENTCOM MACDILL AFB FL
RUEAIIA/CIA WASHDC
RUEKJCS/SECDEF WASHINGTON DC

UNCLAS SECTION 01 OF 02 ISLAMABAD 003885 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958:  N/A 
TAGS: ECON EFIN PREL PK
SUBJECT:  PAKISTAN'S SHARIAT COURT BANS SHORT SELLING ON STOCKS 
 
¶1.  (SBU) Summary:  In October, the Federal Shariat Court of 
Pakistan, a court traditionally concerned with social matters, 
expanded its jurisdiction into the economic realm by directing the 
government to amend its financial laws within six months to impose 
significant penalties on those who engage in short selling.  The 
Court declared that the practice violates the injunctions of Islam 
due to its "speculative nature and underhand dealings."  A ban on 
short selling, if enforced, could deter investment in the already 
battered Karachi Stock Exchange (KSE) but would probably have no 
more than a minor effect on Pakistan's fragile economy.  Short 
selling - the risky practice of selling a financial instrument that 
the seller does not own at the time of the sale - is controversial. 
But economic judgment tends to expose the problems with short 
selling more lucidly than religious decrees.  Expanded Islamic 
regulation of economic behavior could reduce consumer choice and 
shrink markets, heralding a troubling precedent.  End Summary. 
 
Shariat Court Expands its Jurisdiction to Economic Realm 
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¶2. (U) The Federal Shariat Court of Pakistan initiated a case in 
1987 examining whether short selling was Islamic, exercising its 
independent powers to investigate a matter ("suo moto").  The court 
consists of a Chief Justice and four judges.  While the Federal 
Shariat Court does not have jurisdiction over cases relating to 
civil and public laws, under Pakistan's constitution, it is 
permitted to take up laws and shape them in accordance with the 
Quran and Sunnah.  The court has rarely ruled on economic matters, 
traditionally focusing on social matters.  But the October decree 
reflects a rising tide of ideology in Islamic financing and appears 
to expand more aggressively its jurisdiction into the economic 
realm. 
 
Shariat Court Rules Short Selling Violates Islam 
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¶3. (U) For 21 years, the Federal Shariat Court conducted hearings on 
the permissibility of short selling.  Although the Companies 
Ordinance, 1984, explicitly prohibits short selling, many traders 
have been ignoring the law because it imposes no punishment on 
violators.  Short selling has been halted for brief periods before, 
most recently in June.  Thus, short selling exists in Pakistan, but 
under clandestine arrangements.  The court invited parties such as 
Pakistan's Ministry of Finance, the Banking Council of Pakistan, the 
Securities and Exchange Commission, the four provincial governments, 
and Ulemmah (religious scholars) to voice their opinions.  The 
religious court's 57-page ruling, issued on October 24, declared 
that short selling violated Islamic principles.  The KSE Board has 
announced its intent to appeal to the Shariat court's ruling to the 
Supreme Court of Pakistan. 
 
What is Short Selling? 
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¶4. (U) Short selling is a controversial and risky practice done with 
the intent of buying the financial instrument at later date at a 
lower price, in an attempt to profit from an expected drop in the 
price of a financial instrument.  Typically, the short-seller will 
"borrow" or "rent" the securities to be sold, and later repurchase 
identical securities for return to the lender.  If the security 
price falls as expected, then the short-seller profits from having 
sold the borrowed securities for more than he later pays for them. 
But if the security price rises, the short seller loses by having to 
pay more for them than the price at which he sold them.  The 
practice is risky because prices may rise indefinitely, even beyond 
the net worth of the short seller.  Although the practice is risky, 
it is an accepted part of modern economic trading and in most cases, 
adequate market data allows investors to make their own 
assessments. 
 
A Ban on Short Selling Could Deter Trading in Pakistan 
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¶5. (SBU) The edict, if implemented by the court's April 2009 
deadline, would primarily affect Pakistan's largest equity market, 
the KSE.  Banning short selling limits the tools available to 
investors, discouraging speculation but also impairing legitimate 
hedging.  More importantly, the ban could reinforce the perception 
among investors that Pakistan is an over-regulated economy, and that 
the Federal Shariat court may expand its foray into economics with 
 
ISLAMABAD 00003885  002 OF 002 
 
 
further decrees.  Pakistan may be seen as a less attractive 
destination for foreign capital which would further harm its already 
fragile economy. 
 
Comment: 
- - - - 
 
¶6. (SBU) The Shariat Court's decree could herald expanded Islamic 
regulation of economic behavior, setting a troubling precedent.  The 
Federal Shariat Court's 57-page decision imposing a ban on short 
selling contains no economic analysis, in spite of 21 years of 
deliberation and consultations with GOP economic officials.  The 
decision did not cite any independent economic experts.  The ruling 
is obtuse because the first 49 pages of the decree deals with 
irrelevant historical background, only one paragraph announces the 
court's opinion on the specific issue of short selling, and the 
decree provides no analysis to justify its conclusion, regardless of 
the validity of the conclusion itself under Islamic theology.  Many 
average Pakistanis are sufficiently versed in Islamic jurisprudence 
and modern economics to competently formulate counterarguments to 
the religious court's reasoning.  Many Pakistanis will simply ignore 
the court.  But if Islamic regulation of economic behavior via court 
decrees like this expands, then Pakistan's fragile economy could be 
harmed.  End Comment. 
 
PATTERSON