Islamic Banking Has A Bright Future in India, Abdur Raqeeb

Islamic Banking has been a hot topic in India for the last few months. The debate on whether Islamic Banking is permissible in India has a lot of dimensions. In an interview with Pramod Thomas, H Abdur Raqeeb, Convener, National Committee on Islamic Banking, points out the benefits of Islamic Banking to the deprived class. Abdur Raqeeb, who is also the General Secretary of Indian Center for Islamic Finance (ICIF), here describes what really Islamic Banking means.


How do you perceive the recent Kerala High Court order regarding Islamic banking?

First of all, I wish to clarify that the recent verdict of the High Court of Kerala was not on Islamic banking but for the participation or rather having a share of 11% in an NBFC-Non Banking Financial company- based on Shariah principles by State of Kerala or its agencies like Kerala State Industrial Development Co-KSIDC. Continue reading

JanSeva Chennai Branch Launched – Interest Free Credit Society – Loans

Jan Seva Chennai branch was launched at a gala function in Preston International College building in Chennai on  22-1-11.

Jan Seva

Jan Seva

Jan Seva ( www.janseva.in ) a Cooperative Credit Society Ltd registered with Govt of India under Multi State Cooperative Societies Act 2002 has been functioning successfully in other parts of India including Mumbai and Vaniyambadi.

Jan Seva takes inspiration from economic guidelines given by Quran and Sunnah, and practices a interest free model, where risk and reward are both shared by donor and also the acceptor who in essence are also cooperative society members.

The launch function was well attended by the elite of the muslim community including businessmen, muslims organizations, financial providers like WealthCity etc. Arrangement was also made for muslim women.

After the opening qirat by Sheik Omar Khan Madani, brother S.Ahmed Meeran, owner Professionl Couriers gave the welcome speech introducing all the speakers, where he stressed the need for interest free economic model keeping in view the explicit warning seem in Quran and Sunnah for those who deal in Riba or Interest. Brother Ahmed Meeran is also the one of the Directors of Jan Seva and president of local Chennai branch.

His introduction was followed by Dr.Rahamatullah, Chairman, JanSeva speech where he detailed how JanSeva function and activities it is involved into. He highlighted the fact that 77% of Indian population has no access to organized financial system, and also reminded the spate of suicides linked with micro finance institutions recently, where organizations have taken advantage of this lacuna to exploit the poor and the needy with exorbitant interest rates.

He also clearly stressed that this Janseva service is open to all Indian irrespective of religion o caste or creed and also that JanSeva is not a Charitable organization but a Social Business on self sustaining model based on profit/loss and ethics.

He explained in detail how risk management strategies adopted by big banks and rbi are in a smaller scale adopted by JanSeva, so that members can have professional management and how janseva works as a micro bank itself on its own. JanSeva also provides both secured and unsecured loans to its members ranging from 2000 to 51 lakhs he pointed out and as laid out in their info flyer.

He was followed by Brother Dr.Jawahirullah President TMMK, who spoke eloquently and highlighted the need for these kinds of initiatives to be taken for the economic upliftment of muslim community.

Later H Abdur Raqeeb, Secretary, Indian Center for Islamic Finance, highlighted the need to bring in Islamic Finance and Banking in India. He pointed out that in almost all major countries Islamic Banking is operational and govt have legalized it and in countries like Malaysia about 40% of depositors are non muslims, hightiting the fact that Islamic Banking will be beneficial to all.

He also detailed the meets he had with Finance Minister Pranab Mukarjee, Salman Khursid, RBI personals etc and other muslims leader to take up the cause of Islamic Banking forward.

The chief Guest of the function Mr.Macca Rafeeb of Farida group, President South India FICCI,( who has also been awarded Padma Shri) stressed the need for muslims to take initiatives on their own and not get isolated from the main stream. He pointed out that during apartheid many black had left educating their children etc and due to the consequence of it even today they are a generation behind the other communities. He pointed out the muslims in south Africa had educated their children gotten involved in financial activities etc and in almost all major business courses commercial establishments we can see Indian in South Africa occupying high positions.

He stressed the need to take example from it and for muslims to form self help group, NGO or credit societies for financial upliftment of the muslims.

A brief question and answer session followed and vote of thanks given by Jiffery Qasim who is the Treasurer of the Chennai branch of JanSeva.

A call was also made to all Muslims to join as members and invest through JanSeva buying shares etc so that the poor and the needy can be benefited.

Even though it was a small initiative it hold the platform and potential for larger interest free financial institutions of the betterment of muslims community and other at large.

Ajmal

WealthCity / MuslimVoice

Chennai

Justice Krishna Iyer backs Islamic banking in India

A major campaign to introduce Islamic banking and finance into India was kicked off in the Kerala city of Kochi on Friday with Justice Krishna Iyer taking the lead. “I welcome Islamic finance in India,” said Iyer, a former Supreme Court judge.

“Islamic finance has proven successful in poverty alleviation and promoting sustainable growth in many countries, including the United States, and it is very relevant in our country where 20 million people are starving,” Iyer said.

Justice Krishna Iyer backs Islamic banking in India

The justice made this statement while proclaiming the plan to hold an international seminar in Kochi on Oct. 4-6 on the prospects of introducing Islamic finance in India. He said Islamic finance, which is based on humane principles, was good for all of humanity.

“Those who support humanism should welcome Islamic banking and finance in India,” Iyer told the gathering, which was attended by a large number of prominent personalities including TPM Ibrahim Khan, additional solicitor general of India.

The seminar is organized by the Islamic University in Shanthapuram in cooperation with the Jeddah-based Islamic Research & Training Institute (IRTI) of Islamic Development Bank. International speakers include Bambang Brodjonegoro (Indonesia), Omar Chapra (Saudi Arabia), Mohammed Obaidullah (IRTI), Monzir Kahf (USA), Nazim Ali (Harvard University), Ali Quradagi (Qatar), Hussain Hamid Hassan (UAE) and Nizam Yakuby (Bahrain). Continue reading

In good faith – Efforts to introduce Islamic banking in India are gaining momentum

In good faith

Going the ethical way: Islamic banking makes depositors virtual shareholders

Efforts to introduce Islamic banking in India are gaining momentum

By Vijaya Pushkarna

Eighteen months after the Committee on Financial Sector Reforms under Raghuram Rajan recommended the inclusion of interest-free banking, the effort to add this salient feature of Islamic banking into the country’s financial sector has gained momentum.

The reason lies in the very attractive stock pile of over $3.5 trillion lying with Arab investors. They will bank or invest them only in an “interest-free banking system” in consonance with the Sharia, the Islamic code of law. As of now, the Indian banking system does not have an option of people investing without seeking interest.

“The only stumbling block in almost all the savings and investments of the Arab world coming to India is the absence of regulation allowing interest-free banking,” said Dr Ausaf Ahmad, former chief economist of the Jeddah-based Islamic Development Bank. At a recent international conference organised by the Indo-Arab Economic Cooperation Forum and Delhi-based Institute of Objective Studies, there was a general consensus that India was ideally placed to be the investment destination because of its vibrant democracy, socio-economic policies and growth potential.

“Arab investors have lost confidence in the west after 9/11. The $500 billion India needs for infrastructure in the next five years, for instance, will come through the Islamic banking route,” said Abdur Raqeeb, convener of the National Committee on Islamic Banking and general secretary of the Indian Centre for Islamic Finance. He is confident that the finance minister would consider the proposal of interest-free banking.

Mohammad Manzoor Alam, chairman of Institute of Objective Studies, said that those spearheading the move to have Islamic banking say that commercial banking has resulted in capital being concentrated in a few hands.

Islamic banking makes depositors virtual shareholders, getting a share in the profits and equally sharing losses. The investments will also go into fields considered noble, and not into sectors like liquor and tobacco manufacturing and production of arms and ammunition. “Interest-free banking is about justice and equity, and about ethical investment,” said Alam. Islamic banks in the UK and other countries have substantial participation by non-Muslims, because the investments will be in companies involved in non risky businesses.

It is a challenge to convince the plural and secular Indian society that Islamic banking is not just for Muslims. P. Chidambaram preferred to call it a “participatory banking” concept when he promised to set up a committee to examine the feasibility of interest-free banking.

In India, there are a number of small credit societies that operate the interest-free route. A couple of years ago, a private company launched the India Islamic Index comprising equity of Sharia-compliant companies.

Rahman Khan, deputy chairman of the Rajya Sabha, and Salman Khursheed, minister for minority affairs, have been advocating the need to include interest-free banking as an option. “We are asking the authorities to open the doors because India is aspiring to be the hub of knowledge power, is a leading global player and wants to be the leader of the developing countries. These objectives won’t be achieved unless the roadmap of development in the fields of capital intensive social sectors gets the requisite funds,” said Alam.

A beginning of sorts was made when SEBI approved Sharia-compliant mutual funds floated by Taurus, Reliance, Tata and Bajaj Allianz. RBI Deputy Governor K.C. Chakrabarty recently told a delegation that though they were ready, it was for the government to amend the banking regulations.

http://week.manoramaonline.com/cgi-bin/MMOnline.dll/portal/ep/[email protected]@@&contentType=EDITORIAL&sectionName=TheWeek%20Business&programId=1073754899&contentId=7087515

Islamic finance can do wonders, particularly in a country like India

Prasoon S. Majumdar

Editor, Economic Affairs

The Sunday Indian

It is reported that the Kerala state government is all set to tap the investments from the Middle-East region through the Islamic finance route. It is also reported that the centre has yet not given a nod for Islamic banking, though it has been under deliberation for long.

Though there are challenges in creating an enabling framework for Islamic banking, given the conventional banking regulations, but then some kind of proactive thinking is required for opening doors for Islamic finance, knowing well that it has done wonders in the other parts of the world.

It is a known fact that Islamic finance is governed by Sharia, and is known to be conservative with its philosophy. Under Sharia, interest income is not permitted and along with that the funds cannot be used for speculation, alcohol and a few other sectors.

This is still fine, but the biggest diversion of Islamic banking from the conventional Indian banking is that the former does not just lend, but becomes an equity partner in the project, sharing both the profits and losses, whatever might be the case. Another activity which defines Islamic banking is that the banks can engage in trading, purchase and resale of properties and investment and various other activities, which is not permissible under the Indian Banking Regulation Act, 1949.

Along with this, there are constraints as the bank rate — maintenance of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) as per the provisions of Banking Regulation Act, 1949, involve the concept of interest, which is not permissible under Sharia Act.

All in all, there are challenges but then just like there are separate regulations for Non-Banking Financial Companies (popularly known as NBFCs) in India, similar provisions can be created to cull out Islamic banking and finance within the country.

But then — as per few experts opinion, if being conservative is an issue then in that case the scheduled commercial banks in India are no less. That is the reason probably that the current NPA or the Nonperforming Assets of most banks on an average is almost negligible and that is also the reason that Indian banks are by far immune to global crises.

But then with the growing needs from Indian industry and overall infrastructural development, Indian banks can only do that much. Knowing the fact that how Islamic finance have done wonders to economies like Malaysia and Indonesia.

Not just that, Islamic banking is popular in the US too — so much so that as of 2009, it has been home to at least 19 odd providers of Islamic banking products and services including retail banking, investment banking, mortgages services, to name a few.

The fact is, Islamic finance can do wonders, particularly in a country like India.

As such culturally, the Sharia philosophy is not much departed from Indian ethos, but more than that if India can go ahead and create provisions for Islamic funds then, the later would find an worthy investment destination, as India has a huge investment appetite for years to come and more than that returns on investment are relatively higher when compared to other parts of the world.

Moreover, Indian industrial borrowers’ mindset has been attuned to conservative borrowing which makes the investment/lending option even safer. Not just this, with growing political and financial unrest in the Middle-East region, Islamic finance can find a safe heaven within India.

In addition to all this, provisioning of Islamic banking would also open a window of opportunity for Indian banks, as they can then mobilise funds from regions like Middle-East and invest in India, which  is currently nor permitted.

It is my own personal experience that there are a lot of investors who are sitting on the fence, across the Middle-East region, eager to invest in India, particularly the Indian real estate, but then they are waiting for an able partner who can effectively mobilise their funds through the Islamic banking route.

It is needless to state that Islamic finance pose a huge opportunity and we should be proactively thinking in provisioning the same within the country. Post 9/11, petro-dollars are actively eyeing for a safe investment destination as they have been extremely apprehensive about investing in the US.

And this is the opportunity that India should avail, given the fact that as a destination its economic scenario is not just safe but vibrant. It has been reported that France has already amended its laws to issue sukuk (Islamic bond) of one billion euro. Also Indonesia has launched its dollar sukuk earlier this year, which was hugely successful.

And lastly if most developed countries like UK, Japan, Singapore and Hong Kong have embraced Islamic finance and banking, then what are we waiting for?

http://www.iipmthinktank.com/asp/musings.asp?s_id=8302&pageno=1

Plea to expedite interest-free Islamic banking

Plea to expedite interest-free Islamic banking Special Correspondent


‘It will be hugely beneficial for underprivileged sections of the society’


JAIPUR: A joint delegation of Rajasthan Muslim Forum and the Indian Centre for Islamic Finance met Union Minister of State for Finance Namonarain Meena in New Delhi on Saturday to discuss with him the feasibility of interest-free Islamic banking in the country.

Experts in the delegation brought to Mr. Meena’s notice a recommendation of the Union Government’s Committee on Financial Sector Reforms, headed by Raghuram Rajan, for creation of a framework for interest-free banking. They said the new banking system would not only be viable for the coun-try but also beneficial for underprivileged sections of society.

The delegation’s members included Indian Centre for Islamic Finance general secretary H. Abdur Raqeeb and Jamat-e-Islami Hind Rajasthan president Mohammed Salim, who is also a member of the Rajasthan Muslim Forum.

The delegation pointed out that large sections of Muslim population in different States had kept themselves away from conventional banking because of their religious faith not allowing transactions involving interest. Their investments could benefit the national economy if interest-free banking was permitted in the country.

Mr. Salim said the noted agricultural scientist, M. S. Swaminathan, had recently observed that Islamic banking could be the solution to farmers’ suicide in Vidarbha. About 40 per cent customers of Islamic banking institutions in Malaysia and 20 per cent in Britain are non-Muslims.

Mr. Abdur Raqeeb submitted to the Union Minister the documents relating to methods and techniques adopted by modern and secular countries to create a level playing field for conventional and Islamic banking. “When London, Tokyo, Singapore and Hong Kong can become hubs of Islamic finance, why not Mumbai or Cochin?” he asked.

The delegation said in a statement that Mr. Meena assured of looking into the issue seriously and promised that he would hold detailed discussions with the officers of his department in this connection.

http://www.thehindu.com/2010/04/19/stories/2010041957570500.htm

When London, Tokya, Singapore and Hong Kong can become hub of Islamic Finance, Why not Mumbai or Cochin?

H Abdur Raqeeb explains finer points of Islamic Banking to Mr Naro Naramain Meena. At left is Engr Md Saleem
A delegation concisting of Engineer Muhammed Saleem, President, Jamaat e Islami Hind, Rajasthan and Mr. H Abdur Raqeeb, General Secretary, Indian Centre for Islamic Finance met Naro Naramain Meena, Ministry of State for Finance in New Delhi to discuss the feasibility of Interest Free Islamic Banking in India.

Mr. Engineer Saleem submitted a Memorandum on behalf of Rajasthan Muslim Forum, which is an umbrella organisation consisting of Jamaat e Islami Hind, Mansuri Panchayath, All India Majlise Mushawara, Progressive Muslim Front, Indian Union Muslim League, Association for Protection of Civil Rights and host of other organisations and associations. Memorandum requested to accept the recommendation of Dr. Raghuram Rajan, Chairman, Committee on Financial Sector Reforms to create a framework for Interest Free banking in our great country.

Mr. Saleem urged in the Memorandum that Islamic banking is not only for Muslim but also helpful for Minorities and Marginalised and shared the recent statement of MS Swaminathan, Father of Green revolution that Islamic Banking can be solution for farmer’s suicide in Vidarbha.

Mr. H Abdur Raqeeb added that 40% customer of Malaysia and 20 % customer of Islamic bank Britain are Non Muslims.

Mr. H Abdur Raqeeb also submitted the important documents related to the methods and techniques adopted by the Modern and Secular countries to create level playing field for conventional and Islamic Banking and argued that when London, Tokya Singapore and Hong Kong can become hub and house of Islamic Finance why not Mumbai or Cochin?

The honourable Minister assured that he would go through the documents in detail and will have discussion with his officials and higher authorities regarding the issue.

http://luthfispace.blogspot.com/2010/04/when-london-tokya-singapore-and-hong.html

Mohammed Sadath, Office executive,  Indian Center for Islamic Finance

Problems And Prospects Of Islamic Banking In India – Road Map Ahead

By H Abdur Raqeeb

Banking institutions have emerged as very necessary for everyone, poor as well as rich. It is needed to deposit and protect the saving however meagre it may be. Poor labourers, construction workers and others migrating to the urban centres of the country from remote corners must have access to banking to transfer their earning to the families in far off places. Also several social initiatives, welfare programmes and schemes of the government both state and central do require bank accounts of those targeted – below poverty line segments – to receive money safely in their account. Also credit is provided to people through banks. All these requirements have made banking an inevitable part of life of today’s men and women.

Even after forty years, since nationalisation of the banks about 60% population do not have access to formal banking and only 5.2 % of villages have bank branches. Marginal farmers, land less labours, oral lessees, self employed and unorganised sector enterprise, ethnic minority and women, Aam Aadmi of our great country continue to form the financially excluded class. The financial exclusion of a large segment of the population has far-reaching implications for the socio-economic and educational uplift of the masses. These financially excluded classes would not hesitate in sharing a “return” on their investment but they often find it difficult to meet the demand of a pre determined return unrelated to the yield. If finance is available without the burden caused by pre-determined interest rates, it will be a welcome development for the marginalized and also especially for SME’s. Interest-free Islamic Banking can fill up this gap.

For Muslims, as per the Sachar Committee report based on census 2001 data, the percentage of household availing themselves of banking facilities is much lower in towns and villages where the Muslim population is high. This is due to a certain mindset prevailing in the banking sector which has categorized Muslims and Muslims dominated areas as ‘Negative Zones’ as documented in Sachar report. Prohibition of interest and thus for reasons of faith Muslims are away from the conventional banks as referred to in the report of the Committee on Financial Sector Reforms –CFSR of the Planning Commission headed by Dr. Raghuram Rajan

Interest Free Banking

In the absence of an alternative to the convention based on interest, in the state of Kerala where Muslims make up around 25% of the population of Kerala, which was 31.8 million according to the 2001 Census, it is reported that thousands of crores earned in interest is kept in suspended accounts, as believers do not claim it. Muslims both rich as well as those employed in the Gulf invest their money on gold and real estate which are not productive investments. They also indulge in lavish spending in marriages and other rituals and many of them fall into trap of bogus financial institutions lose their hard earned money.

Therefore there is a strong case to have an alternative system based on equity instead of the debt based banking system catering and caring to the unbanked segments more specially of the marginalized and minorities -particularly Muslims in the country

Government Initiative

RBI Working Group

In 2005, Government of India asked Reserve Bank of India to examine Islamic banking instruments and constituted a Working Group headed by Mr. Anand Sinha, Chief Manager, Department of Banking and Operation and Development along with senior Bankers from SBI, ICICI and Oman International Bank that came up with its report in 2006 which said: In the current statutory and regulatory framework it would not be possible for banks in India to undertake Islamic Banking activities and concluded that if the banks are allowed to do Islamic banking appropriate amendments are required in Banking regulations Act 1949.

National Workshop

After the GOI announcement that Islamic banking is not feasible in India, several interactive sessions were held by ICIF, one of them was a National Workshop on “Road Map on Islamic banking” in Sept 2006, which was participated by prominent National and International Islamic experts and bankers. It passed resolution that Islamic Banking is relevant in the 21st century and India may implement the same by obtaining inputs from the global example in UK, Malaysia and Singapore. It also chalked out a plan of action as well.

CFSR-Planning Commission Recommendation

In August 2007, Govt. of India under the Planning Commission constituted a high level committee on Financial Sector reforms (CFSR) under the chairmanship of Dr. Raghuram Rajan, former chief economist, IMF along with other eleven members who are the finest financial and legal minds in the country.

CFSR submitted its final report in Sept. 2008 to Prime Minister with the specific recommendation of interest free banking in the country:

“Another area that falls broadly in the ambit of financial infrastructure for inclusion is the provision of interest-free banking. Certain faiths prohibit the use of financial instruments that pay interest. The non-availability of interest-free banking products (where the return to the investor is tied to the bearing of risk, in accordance with the principles of that faith) results in some Indians, including those in the economically disadvantaged strata of society, not being able to access banking products and services due to reasons of faith. This non-availability also denies India access to substantial sources of savings from other countries in the region.

While interest-free banking is provided in a limited manner through NBFCs and cooperatives, the Committee recommends that measures be taken to permit the delivery of interest-free finance on a larger scale, including through the banking system. This is in consonance with the objectives of inclusion and growth through innovation. The Committee believes that it would be possible, through appropriate measures, to create a framework for such products without any adverse systemic risk impact.” (Chapter 3: Broadening Access to Finance, Page: 72)

Why Islamic Banking?

The collapse of leading Wall Street institutions, notably Lehman Brothers, and the subsequent global financial tsunami and economic recession, Islamic banking is seriously being considered and has emerged as a possible alternative to the conventional banking because of the followings:
• It is based on Ethical and Socially Responsible Investments (SRI)
• It aims at Equity and Justice and leads to poverty alleviation and
• It acts to new dimension to assets and actual projects aiming to support real economic growth instead of financial engineering.
• It provides services to under banked populations ignored by conventional banks

Efforts Undertaken – Meeting RBI & FM

When it was learnt that RBI is considering implementing a few recommendations of Dr. Raghuram Rajan Committee on Financial Sector Reforms (CFSR), ICIF contacted the Governor RBI and sought an appointment to plead for the case of the recommendation of CFSR regarding Interest-free banking. Accordingly a delegation of ICIF met the Deputy Governor Dr. K.C Chakrabarty on September 11, 2009 and presented a memorandum along with the important documents. RBI conveyed that it has no reservation regarding interest free banking but for that an amendment in the Banking regulations has to be passed in the Parliament which can be done by the Central government.

A memorandum was submitted to FM, Mr. Pranab Mukherjee to accept the recommendation of CFSR committee on interest free banking and suitable legislative amendment. Several meetings and interactions have taken place with the officials of the Finance Ministry and RBI in this regard till now.

In order to amend the Ranking Regulations Act 1949 and accommodate a level playing field for Islamic banking, a bill has to be passed in Parliament. For this, Banking Amendment Bill has been prepared and vetted by Dar Al Shariah, Dubai Islamic Bank and submitted to Parliament secretariat by an MP to be undertaken as a Private Member’s Bill in the next session of Parliament.

Kerala & Islamic Banking

Another significant development has taken place in the state of Kerala. Govt. of Kerala under KSIDC (Kerala State Industrial Development Corporation) has taken a courageous and commendable step to form an Islamic Investment company named Al Barakah Financial Services Company, an NBFC after an exhaustive feasible report undertaken by a reputed international consulting firm Ernst & Young. This NBFC will be turned into a global Islamic bank as soon as the RBI accommodates it after an amendment in the Banking regulations. Dr. Subramaniam Swamy has submitted a petition in the High court to stop the participation of the Kerala Government. Admission of his petition has put a hold on the proceedings for the time being.

Misunderstanding

To bring Interest free Islamic Banking, misunderstanding and misinformation among the Muslim masses as well as non-Muslims have to be removed. The need and necessity of interest free Islamic finance and banking has to be spread among the Muslims, common people, religious scholars, business men, bankers, politicians, and other stakeholders.

• Among Muslims, criticism has been raised against the banking approach itself. Some allege that it is nothing but the changes of nomenclature only. Some other questions its capability to meet all the financial requirements of modern day economy. Some go further to say that the whole exercise is futile, with the macro level money creation process remaining the same, what is attempted through so called innovative products is nothing but a cosmetic touch and even in international arena, Islamic banks have to price their investments on Global standards like London Inter-bank Offered Rate (LIBOR) which are essentially interest based. These issues have to be addressed properly by the Islamic scholars, finance experts and those who campaign for Islamic Finance and Banking.

• Justice Mufti Muhammed Taqi Usmani, Chairman, AAOIFI (Accounting and Auditing Organisationfor Islamic Financial Institutions) mentions in his famous book titled ‘An introduction to Islamic Finance’:
“Islam, being a practical way of life, has two sets of rules: one is based on the ideal objectives of Shariah which is applicable in normal conditions, and the second is based on some relaxations given in abnormal situations. The real Islamic order is based on the former set of principles, while the latter is a concession which can be availed at times of need, but it does not reflect the true picture of the real economic order.

Living under constraints, the Islamic banks are mostly relying on the second set of rules; therefore, their activities could not bring a visible change even in the limited circle of their operations. However, if the whole financing system is based on the ideal Islamic principles, it will certainly bring a discernible impact on the economy”. (Page 24)

• In the plural and secular country like ours, misunderstanding among majority community has to be addressed; Islamic banking is not just for Muslims. It is only a mechanism for financing business without providing debt. It is also to be focused that it is based on ethics and Socially Responsible Investment (SRI). It has to be show cased that 40% customers in Islamic banks in Malaysia are Chinese of other communities and also in UK, 20% customers are Non Muslims.

Ms. Perrine Fiorina of CELENT, Strategy consulting for financial institutions, talks of ‘Promising Future of Islamic Banking’ thus:

“In addition to the large and untapped Muslim population, Islamic Banking is currently beginning to attract Non-Muslim customers, who are interested in alternative way of banking. Indeed, a growing number of Non-Muslims are turning to Islamic Banking as customers spooked by turmoil in the western banking system increasingly see the sector as a safe and more connected to the real economy. In my opinion, Islamic banking will benefit from this new customers interest and grow even more quickly than it recently did”.

Even Vatican has offered Islamic Finance principles to Western banks as a solution for worldwide economic crisis. “The ethical principles on which Islamic Finance is based may bring banks closer to their clients and to the true spirit which should mark every financial service” the Vatican’s official newspaper, L’ Osservatore Romano said.

Recently, France has amended its laws to issue SUKUK –Islamic Bonds based on assets-of one Billion Euro.

• Post 9/11, oil money has stopped being invested in U.S and is looking for a safe investment destination, and India could well be that destination given its safe economic scenario, huge market, skill and educated labour and good growth rate.

• Among the intellectuals, scholars and politicians, a doubt is lurking in the mind whether banking operations are feasible without the base of interest.

• As Dr. Hussein Hamid Hassan, Chairman, Shariah Board, Dubai Islamic Bank has said “Conventional banks have since inception, had only one product, that is loan with interest, Shariah has unlimited products to suit every customer and every project under any circumstances”.

Various products with Arabic words have to be suitably presented in the prevailing banking terms and the reasons why they are preferable to the conventional banking products and practices provided as they are based on real economy rather than financial engineering in conventional banking has to be suitably highlighted.

Modern, secular and industrialized countries like Britain, Singapore, Hong Kong and Japan have become hub of Islamic finance and banking. If London, Tokyo, Singapore and Hong Kong can become hub and house of Interest free Islamic finance and banking Why not Mumbai and Cochin?

10-Point Programme of Action

A 10-point programme of action is suggested to this august house for consideration and serious follow up to make the dream of Islamic Finance and Banking become a reality which will change the face and fortune of the community as well as the country, if Almighty wills.

1. Interest free Islamic banking is emerging as a possible alternative to conventional Finance and Banking – Know why?

2. Start discussion in our circle & make it an integral part of our all programmes.

3. Bring out special issues and supplements in the print media, create space for discussion in electronic media, usage of internet to share the latest development & progress

4. To remove Misconception among Non-Muslims that interest-free banking is not only for Muslims, a group of strong supporters among them- Abu Talibs has to be included in our efforts to spearhead this great cause.

5. Create awareness among Muslim Scholars, Students and the General Public by using Jum’a Sermons, Conferences, seminars, etc.

6. Human Resource Development – Skills & Spirits, Competence & Character specific to Islamic Shariah – Fiqh ul Muamilat and modern finance and banking has to be produced.

7. General awareness in Media – lobbying for Islamic Banking, Takaful – Islamic Insurance, Sukuk – Islamic Bonds.

8. Conduct seminars & symposium – Contact B-Schools, Professional associations, etc.

9. Create political will – contact & convince MPs of all parties to enable amending Banking Regulation act, 1949 in Parliament.

10. Planning for Islamic Micro finance & Mega Private Islamic Banks when permission granted.

(H Abdur Raqeeb is Convener, National Committee on Islamic Banking & General Secretary, Indian Centre for Islamic Finance (ICIF). The paper was presented at Islamic Investment and Finance conference on March 28, 2010 at India Islamic Cultural Centre in New Delhi).

Trying to bring Islamic banking to India

By M D Nalapat

Islamic Banking and Finance Journal

There are more Muslims in India than there are in Pakistan, which is why it is surprising that successive governments have so far done nothing to bring Islamic banking into India. The consequence of such neglect is that millions of observant Muslims are forced to park their savings in dubious entities, because they have been deprived of financial institutions in India that are Sharia-compliant and avoid the payment of interest, because of its ban in the Quran (3:130).

Indeed, the Quran sets forth some very healthy financial principles,such as the avoiding of the giving of finance to unsavoury businesses (5:2), and the showing of compassion to the financially disadvantaged (2;280).

As has been pointed out by several scholars,the prohibition of interest is not unique to Islam, but is also found in Judaism and Christianity ( Psalms 15:5, Nehemiah 5:7).

However, throughout the world, the giving and taking of interest has become widespread Financial experts estimate that more than $50 billion of funds from the Gulf can flow to India, should Islamic banking institutions be set up in the country.

This will generate 2.7 million jobs in the country,both directly and indirectly. At present, almost all the surplus cash of the Gulf countries is parked in London (which, ironically, is the world’s top “Islamic Banking” centre), New York, Zurich and Frankfurt. Naturally, the financial instititions headquartered in these locations would not like to see India emerge as a competitor in the parking of funds from the Gulf.

Though Muslims are a minority in India and are generally less affluent than Hindus, in sheer numbers they make India the second largest Muslim nation in the world. Cumulatively, their investment power is tremendous and represents an untapped resource for Islamic Banking.

They are aware of the strong historical and civilisational ties between India and the Arab world, and are nervous that this may result in funds moving away from them. Indeed, many Arabs are justifiably upset that they have suffered a collective loss of $1.3 trillion because of the numerous malpractices of financial institutions in the US and the EU, and would prefer to place their money in India.

However, thus far, because of the immense influence that financial entities in the US and the EU have over the Reserve Bank of India and the Ministry of Finance, thus far, the policy changes needed to attract such funds have not come about So pervasive is the influence of US and EU funds over India’s financial policymakers that the Reserve Bank of India significantly slowed down economic expansion in India during 2007-2008 by raising interest rates to levels not seen in more than a decade.

Although the RBI justified this as an anti-inflation measure,they themselves know that such painful steps have no impact on price rise,caused as this is by speculation and by policies that favour the middleman over the producer and the consumer.

All that the policy of high interest rates has done was to make several segments in Indian industry less competitive than they were when interest rates were low. The policies followed by the monetary authorities in India have forced several corporates to borrow money from London and other centres in the developed world,at a profit for these centres of 3%.

Small wonder that there is so much pressure on India to prevent the authorities from taking steps that could attract funds from the Gulf. Had the authorities in India encouraged their domestic companies the way policymakers in the US and the EU unfailingly do, India would not have been in today’s situation,when even tiny Taiwan exports double the volume India does Recently, the government of Kerala, a state that has ties with the Gulf that go back for 1600 years, sought to set up an Islamic Banking division in one of their financial institutions.

However, a politician having close links with a section of the Hindu religious leadership has got the Kerala High Court to stay the operationalisation of this move.

India’s courts are famously liberal when it comes to granting stays,with some even lasting for decades. In countries such as the US or the UK, stays are granted only after the court is convinced that there exists a strong prima facie case in favour of the individual making the request. In the case of India, stays by a court are granted far more liberally.

The Kerala High Court order means that the attempt by the state’s Communist rulers to set up an Islamic banking system in a state where 20% of the population are Muslims may be indefinitely delayed. Bankers in Europe and in the US can rest easy, knowing that it may be a long time before the estimated $1.16 trillion dollars parked in so-called “Islamic Banking” institutions in these locations faces competition from India

Although it is true that several policymakers allow themselves to be unduly infuenced by interested parties operating overseas, the fact remains that overall, India’s policymakers are a patriotic group. Indeed, with all their faults, India’s administrators have done a commendable job in ensuring a modicum of stability in the face of frequent political upheavals.

Hence, this columnist is optimistic that it will not be long before India copies the Malaysian model, and brings Islamic banking into the country. Closer economic interaction between India and the Gulf is in the interests of both sides. The GCC countries and India are complementary in their skills and congruent in their interests. The setting up of Islamic banking divisions within the existing banking network in India would ensure a substantial flow of investible funds into the country.

Of course, none of this money would get diverted to industries such as gambling and alchohol, that are barred in Islam. A beginning has been made by the Jamaat-i-Islami Hind,which has set up a committee on Islamic banking under a noted scholar, Mr Abdur Raqeeb. Some influential policymakers within the Congress Party are also active in seeking to overcome the block to Islamic banking that has been artificially created by international interests keen to ensure that India does not take money away from them India is a secular country, and therefore Islamic banking needs to be seen not as a “Muslim” issue, but as one that involves the welfare of each citizen,whether Muslim, Christian, Hindu, Jain, Sikh or Buddhist.

After all, the huge volume of remittances from Indians working in the Gulf benefits the entire country and not simply those belonging to a particular religion.

Islamic banking therefore needs to be viewed less as a religious right than as a secular advantage. Allowing India’s observant Muslims to gain access to domestic funds that are Sharia-compliant would ensure that they avoid getting duped by unregulated and often dubious entities that seek to profit from their faith.

The Islamic world is India’s natural partner, and one way of strengthening such linkages would be through the introduction of Islamic banking in India Indeed, it can be argued that the healthy financial principles mentioned in the Quran were the earliest enunciation of the “mutual fund” concept. Unless mutual gain comes from mutual effort, and unless moral principles are given primacy in decision-making, the world will witness further man-made catastrophes such as the 2008 financial crash.

This was caused entirely by the greed of some 380 individuals, who were the prime movers in the relentless speculation that artificially drove up the prices of commodities such as food grains, copper, steel and oil. Sadly, apart from a handful,not one of the 380 have suffered any legal consequence of their devastating economic attack on humanity.

Indeed,the Obama administration seems as deferential to them as was George W Bush. Small wonder that speculation in commodities is once again rearing its poisonous head, making the price of oil and other essentials rise despite the weakened state of the international economy. Judging by the way in which Barack Obama, Gordon Brown, Angela Merkel and others are obedient to their whims, it looks as though those guilty of causing the distress of hundreds of millions in their insatiable greed for money will once again plunge the world into chaos, and soon.

In such a context, the need to create financial systems grounded on moral values becomes clear. Should Islamic banking entities finally get sanctioned in India, and should they function in the way that is intended, then not only Muslims but Hindus and others will start putting their savings in them. As the sages say, we need to look for good everywhere, so as to reach it everywhere.

Credit: Islamic Banking Information

Problems and Prospects of Islamic Banking in India – Road Map ahead

By H Abdur Raqeeb is Convener, National Committee on Islamic Banking & General Secretary, Indian Centre for Islamic Finance (ICIF)

Modern, secular and industrialized countries like Britain, Singapore, Hong Kong and Japan have become hub of Islamic finance and banking. If London, Tokyo, Singapore and Hong Kong can become hub and house of Interest free Islamic finance and banking, why not Mumbai and Cochin? asks the author while analyzing problems and prospects of Islamic banking in India. The paper was presented at an Islamic banking conference in New Delhi recently— Editor

Banking

Banking institutions have emerged as very necessary for everyone, poor as well as rich. It is needed to deposit and protect the saving however meagre it may be. Poor labourers, construction workers and others migrating to the urban centres of the country from remote corners must have access to banking to transfer their earning to the families in far off places.

Also several social initiatives, welfare programmes and schemes of the government both state and central do require bank accounts of those targeted – below poverty line segments – to receive money safely in their account. Also credit is provided to people through banks. All these requirements have made banking an inevitable part of life of today’s men and women.

Even after forty years, since nationalisation of the banks about 60% population do not have access to formal banking and only 5.2 % of villages have bank branches. Marginal farmers, land less labours, oral lessees, self employed and unorganised sector enterprise, ethnic minority and women, Aam Aadmi of our great country continue to form the financially excluded class. The financial exclusion of a large segment of the population has far-reaching implications for the socio-economic and educational uplift of the masses.

These financially excluded classes would not hesitate in sharing a “return” on their investment but they often find it difficult to meet the demand of a pre determined return unrelated to the yield. If finance is available without the burden caused by pre-determined interest rates, it will be a welcome development for the marginalized and also especially for SME’s. Interest-free Islamic Banking can fill up this gap.

For Muslims, as per the Sachar Committee report based on census 2001 data, the percentage of household availing themselves of banking facilities is much lower in towns and villages where the Muslim population is high. This is due to a certain mindset prevailing in the banking sector which has categorized Muslims and Muslims dominated areas as ‘Negative Zones’ as documented in Sachar report.

Prohibition of interest and thus for reasons of faith Muslims are away from the conventional banks as referred to in the report of the Committee on Financial Sector Reforms –CFSR of the Planning Commission headed by Dr. Raghuram Rajan

Interest Free Banking

In the absence of an alternative to the convention based on interest, in the state of Kerala where Muslims make up around 25% of the population of Kerala, which was 31.8 million according to the 2001 Census, it is reported that thousands of crores earned in interest is kept in suspended accounts, as believers do not claim it.

Muslims both rich as well as those employed in the Gulf invest their money on gold and real estate which are not productive investments. They also indulge in lavish spending in marriages and other rituals and many of them fall into trap of bogus financial institutions lose their hard earned money.

Therefore there is a strong case to have an alternative system based on equity instead of the debt based banking system catering and caring to the unbanked segments more specially of the marginalized and minorities -particularly Muslims in the country

Government Initiative

RBI Working Group

In 2005, Government of India asked Reserve Bank of India to examine Islamic banking instruments and constituted a Working Group headed by Mr. Anand Sinha, Chief Manager, Department of Banking and Operation and Development along with senior Bankers from SBI, ICICI and Oman International Bank that came up with its report in 2006 which said: In the current statutory and regulatory framework it would not be possible for banks in India to undertake Islamic Banking activities and concluded that if the banks are allowed to do Islamic banking appropriate amendments are required in Banking regulations Act 1949.

National Workshop

After the GOI announcement that Islamic banking is not feasible in India, several interactive sessions were held by ICIF, one of them was a National Workshop on “Road Map on Islamic banking” in Sept 2006, which was participated by prominent National and International Islamic experts and bankers.

It passed resolution that Islamic Banking is relevant in the 21st century and India may implement the same by obtaining inputs from the global example in UK, Malaysia and Singapore. It also chalked out a plan of action as well.

CFSR-Planning Commission Recommendation

In August 2007, Govt. of India under the Planning Commission constituted a high level committee on Financial Sector reforms (CFSR) under the chairmanship of Dr. Raghuram Rajan, former chief economist, IMF along with other eleven members who are the finest financial and legal minds in the country.

CFSR submitted its final report in Sept. 2008 to Prime Minister with the specific recommendation of interest free banking in the country:

“Another area that falls broadly in the ambit of financial infrastructure for inclusion is the provision of interest-free banking. Certain faiths prohibit the use of financial instruments that pay interest.

The non-availability of interest-free banking products (where the return to the investor is tied to the bearing of risk, in accordance with the principles of that faith) results in some Indians, including those in the economically disadvantaged strata of society, not being able to access banking products and services due to reasons of faith. This non-availability also denies India access to substantial sources of savings from other countries in the region.

While interest-free banking is provided in a limited manner through NBFCs and cooperatives, the Committee recommends that measures be taken to permit the delivery of interest-free finance on a larger scale, including through the banking system. This is in consonance with the objectives of inclusion and growth through innovation.

The Committee believes that it would be possible, through appropriate measures, to create a framework for such products without any adverse systemic risk impact.” (Chapter 3: Broadening Access to Finance, Page: 72)

Why Islamic Banking?

The collapse of leading Wall Street institutions, notably Lehman Brothers, and the subsequent global financial tsunami and economic recession, Islamic banking is seriously being considered and has emerged as a possible alternative to the conventional banking because of the followings:
• It is based on Ethical and Socially Responsible Investments (SRI)
• It aims at Equity and Justice and leads to poverty alleviation and
• It acts to new dimension to assets and actual projects aiming to support real economic growth instead of financial engineering.
• It provides services to under banked populations ignored by conventional banks

Efforts Undertaken – Meeting RBI & FM

When it was learnt that RBI is considering implementing a few recommendations of Dr. Raghuram Rajan Committee on Financial Sector Reforms (CFSR), ICIF contacted the Governor RBI and sought an appointment to plead for the case of the recommendation of CFSR regarding Interest-free banking.

Accordingly a delegation of ICIF met the Deputy Governor Dr. K.C Chakrabarty on September 11, 2009 and presented a memorandum along with the important documents. RBI conveyed that it has no reservation regarding interest free banking but for that an amendment in the Banking regulations has to be passed in the Parliament which can be done by the Central government.

A memorandum was submitted to FM, Mr. Pranab Mukherjee to accept the recommendation of CFSR committee on interest free banking and suitable legislative amendment. Several meetings and interactions have taken place with the officials of the Finance Ministry and RBI in this regard till now.

In order to amend the Ranking Regulations Act 1949 and accommodate a level playing field for Islamic banking, a bill has to be passed in Parliament. For this, Banking Amendment Bill has been prepared and vetted by Dar Al Shariah, Dubai Islamic Bank and submitted to Parliament secretariat by an MP to be undertaken as a Private Member’s Bill in the next session of Parliament.

Kerala & Islamic Banking

Another significant development has taken place in the state of Kerala. Govt. of Kerala under KSIDC (Kerala State Industrial Development Corporation) has taken a courageous and commendable step to form an Islamic Investment company named Al Barakah Financial Services Company, an NBFC after an exhaustive feasible report undertaken by a reputed international consulting firm Ernst & Young.

This NBFC will be turned into a global Islamic bank as soon as the RBI accommodates it after an amendment in the Banking regulations. Dr. Subramaniam Swamy has submitted a petition in the High court to stop the participation of the Kerala Government. Admission of his petition has put a hold on the proceedings for the time being.

Misunderstanding

To bring Interest free Islamic Banking, misunderstanding and misinformation among the Muslim masses as well as non-Muslims have to be removed. The need and necessity of interest free Islamic finance and banking has to be spread among the Muslims, common people, religious scholars, business men, bankers, politicians, and other stakeholders.

• Among Muslims, criticism has been raised against the banking approach itself. Some allege that it is nothing but the changes of nomenclature only. Some other questions its capability to meet all the financial requirements of modern day economy. Some go further to say that the whole exercise is futile, with the macro level money creation process remaining the same, what is attempted through so called innovative products is nothing but a cosmetic touch and even in international arena, Islamic banks have to price their investments on Global standards like London Inter-bank Offered Rate (LIBOR) which are essentially interest based. These issues have to be addressed properly by the Islamic scholars, finance experts and those who campaign for Islamic Finance and Banking.

• Justice Mufti Muhammed Taqi Usmani, Chairman, AAOIFI (Accounting and Auditing Organisationfor Islamic Financial Institutions) mentions in his famous book titled ‘An introduction to Islamic Finance’:
“Islam, being a practical way of life, has two sets of rules: one is based on the ideal objectives of Shariah which is applicable in normal conditions, and the second is based on some relaxations given in abnormal situations. The real Islamic order is based on the former set of principles, while the latter is a concession which can be availed at times of need, but it does not reflect the true picture of the real economic order.

Living under constraints, the Islamic banks are mostly relying on the second set of rules; therefore, their activities could not bring a visible change even in the limited circle of their operations. However, if the whole financing system is based on the ideal Islamic principles, it will certainly bring a discernible impact on the economy”. (Page 24)

• In the plural and secular country like ours, misunderstanding among majority community has to be addressed; Islamic banking is not just for Muslims. It is only a mechanism for financing business without providing debt. It is also to be focused that it is based on ethics and Socially Responsible Investment (SRI). It has to be show cased that 40% customers in Islamic banks in Malaysia are Chinese of other communities and also in UK, 20% customers are Non Muslims.
Ms. Perrine Fiorina of CELENT, Strategy consulting for financial institutions, talks of ‘Promising Future of Islamic Banking’ thus:

“In addition to the large and untapped Muslim population, Islamic Banking is currently beginning to attract Non-Muslim customers, who are interested in alternative way of banking. Indeed, a growing number of Non-Muslims are turning to Islamic Banking as customers spooked by turmoil in the western banking system increasingly see the sector as a safe and more connected to the real economy. In my opinion, Islamic banking will benefit from this new customers interest and grow even more quickly than it recently did”.

Even Vatican has offered Islamic Finance principles to Western banks as a solution for worldwide economic crisis. “The ethical principles on which Islamic Finance is based may bring banks closer to their clients and to the true spirit which should mark every financial service” the Vatican’s official newspaper, L’ Osservatore Romano said.

Recently, France has amended its laws to issue SUKUK –Islamic Bonds based on assets-of one Billion Euro.

• Post 9/11, oil money has stopped being invested in U.S and is looking for a safe investment destination, and India could well be that destination given its safe economic scenario, huge market, skill and educated labour and good growth rate.

• Among the intellectuals, scholars and politicians, a doubt is lurking in the mind whether banking operations are feasible without the base of interest.

• As Dr. Hussein Hamid Hassan, Chairman, Shariah Board, Dubai Islamic Bank has said “Conventional banks have since inception, had only one product, that is loan with interest, Shariah has unlimited products to suit every customer and every project under any circumstances”.

Various products with Arabic words have to be suitably presented in the prevailing banking terms and the reasons why they are preferable to the conventional banking products and practices provided as they are based on real economy rather than financial engineering in conventional banking has to be suitably highlighted.

Modern, secular and industrialized countries like Britain, Singapore, Hong Kong and Japan have become hub of Islamic finance and banking. If London, Tokyo, Singapore and Hong Kong can become hub and house of Interest free Islamic finance and banking Why not Mumbai and Cochin?

10-Point Programme of Action

A 10-point programme of action is suggested to this august house for consideration and serious follow up to make the dream of Islamic Finance and Banking become a reality which will change the face and fortune of the community as well as the country, if Almighty wills.

1. Interest free Islamic banking is emerging as a possible alternative to conventional Finance and Banking – Know why?

2. Start discussion in our circle & make it an integral part of our all programmes.

3. Bring out special issues and supplements in the print media, create space for discussion in electronic media, usage of internet to share the latest development & progress

4. To remove Misconception among Non-Muslims that interest-free banking is not only for Muslims, a group of strong supporters among them- Abu Talibs has to be included in our efforts to spearhead this great cause.

5. Create awareness among Muslim Scholars, Students and the General Public by using Jum’a Sermons, Conferences, seminars, etc.

6. Human Resource Development – Skills & Spirits, Competence & Character specific to Islamic Shariah – Fiqh ul Muamilat and modern finance and banking has to be produced.

7. General awareness in Media – lobbying for Islamic Banking, Takaful – Islamic Insurance, Sukuk – Islamic Bonds.

8. Conduct seminars & symposium – Contact B-Schools, Professional associations, etc.

9. Create political will – contact & convince MPs of all parties to enable amending Banking Regulation act, 1949 in Parliament.

10. Planning for Islamic Micro finance & Mega Private Islamic Banks when permission granted.

(H Abdur Raqeeb is Convener, National Committee on Islamic Banking & General Secretary, Indian Centre for Islamic Finance (ICIF). The paper was presented at Islamic Investment and Finance conference on March 28, 2010 at India Islamic Cultural Centre in New Delhi)

[Photo by cdn.wn.com]