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
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.
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.
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).