Forex trading is haram: Malaysia’s Fatwa Council

Malaysia’s National Fatwa Council has ruled that foreign exchange trading is forbidden or ‘haram’ for Muslims as it was against the Islamic Sharia law.

“A study by the committee found that such trading involves currency speculation, which contradicts Islamic law. For that reason, the National Fatwa Council has decided that it is haram for Muslims to participate in such trading,” the Council chairman, Dr Abdul Shukor Husin, was quoted as saying by the Star newspaper.

He said Muslims should not participate in forex trading as there were many doubts about it, given that it involved individuals using the Internet with uncertain outcomes.

“Other forms of trading in foreign currencies, such as trading by money changers or between banks, are permissible as they do not involve currency speculation or uncertain outcomes,” he said.

Dr Husin said the meeting also decided that it was permissible for Muslims to invest or save under the Premium Saving Certificate scheme by a local bank here.

He said the committee was satisfied with the briefing given by the country’s central banks Shariah panel regarding the scheme’s implementation.

Dr Husin added that the committee also agreed to formulate guidelines on Muslim couples having their wedding ceremony in a mosque to allay doubts that the ceremony purportedly follows Christian practices, the report said.

No Going Back on Islamic Banking, Says Sultan

The Sultan of Sokoto and President General of the Jamatul Nasril Islam (JNI), Alhaji  Muhammad Sa’ad Abubakar III, Thursday joined issues with opponents of Islamic banking, asking why Islam is being portrayed in bad light in the country.

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He said there was no going back on the establishment of Islamic banks in the country, further expressing worries about the violence in the North-east.

He said:  “So many people have said so many things about Islamic banking. Why is it that whenever anything Islamic is mentioned, those who are not Muslims kick against it? That is what we need to ask ourselves here. Is the word Islam bad? Why is it that when anything Muslim is mentioned, it is equated with violence?”

The Sultan challenged members of the JNI to spend time on soul-searching over the issues with a poser: “Why is it that anybody who is not a Muslim is afraid of [religion of] peace?” Continue reading

Islamic Finance – Separating myth from reality

Over the past decade, Islamic Finance has become a burning and topical issue around the world (Europe, Middle East and Asia) and has most recently reached Nigeria, over the introduction of the Islamic Banking model to the financial industry by the Central Bank of Nigeria. This has generated outcry from some quarters and not so unexpected media frenzy.

A lot of scepticism and public opinion has been garnered about the motive behind the introduction of this alternative system of banking in Nigeria. However before this alternative mode of financing is dispelled by the general public or the government, the concept needs to be explored and understood in order to clarify its purpose and subsequent effect on the country.

What is Islamic finance? 
Islamic Finance is a form of Finance that is in accordance with Islamic Law (which is also known as the Shariah Law). Islamic Law provides for the rulings and guidance on the Islamic way of life. One of the objectives of Islamic Law is the preservation of good for humanity. Hence it believes in the universal principles of equity, justice, fairness and accountability on the one hand and the preservation and distribution of wealth for the common good on the other. How is this achieved? This is by the prohibition of interest, otherwise known as „Riba (Quran 2:275). Riba is regarded as an unjustified increase in capital which is used to oppress the poor in the capitalist-driven conventional system of finance. It is worthy to note that the prohibition of interest as outlined in Islam is also endorsed by other religions such as Christianity (Deuteronomy 23:19) and Judaism. In summary, the Shariah provides a framework that can help strengthen the conscience and integrity in the market place. Continue reading

India has enormous opportunity for Sharia-compliant investments – Gulf News

With nearly 200m Muslims, the country could expand sector

By Rushdi Siddiqui, Special to Gulf NewsPublished: 00:00 June 19, 2011

When you consider that there are nearly 200 million Muslims in India, it is surprising that one of the world’s fastest growing economies has little or no facilities for them to invest their money in a Sharia-compliant manner.

Indeed, the total size of 100 per cent Islamic funds registered for sale in India was a miniscule $3.1 million (Dh11.4 million) as of March 2011, according to Lipper, a Thomson Reuters company.

India has enormous opportunity for Sharia-compliant investments

India has enormous opportunity for Sharia-compliant investments

Not that India’s reluctance to embrace Islamic finance is unusual in non-Muslim countries, like so many other places, there is a hostility to the practice based on the incorrect belief that it is a political or religious movement, or that it propagates an ideology that is inconsistent with democratic values.


It is fair to say that the Islamic finance industry also shares some of the blame for this perception, it is not yet savvy or sophisticated enough in the realm of public relations and marketing.

But, actually, India is important for the growth of Islamic finance. The country has historical ties to the Gulf, and is not only part of the Bric group of nations (Brazil, Russia, India and China), but it is also categorised as a rapidly developing economy (RDE).

So India presents an obvious opportunity, but the question remains: is India ready for Islamic finance?

Key effect

The recent establishment of an Islamic finance institution in Kerala, with the backing of the local government, has at least gone some way to suggesting that it is. One of the key effects of this has been the revelation that Islamic finance is about business and not religion, it does not favour one religion over another. Islamic finance is “user agnostic”; its door is open to all.

In recognition of this, the local proponents and Indian stakeholders should perhaps think about rebranding Islamic finance.

Turkey has achieved this by renaming Islamic banking “participation banking”. This is an initiative that India could certainly consider.
Soon, as it happens, India will have “participation banking” at its doorstep — Turkey’s Bank Asya, an Islamic bank, announced in March its interest in establishing a representative office in India.

Fourteen of the countries that make up the G20 have some form of Islamic fin-ance, including India. The UK, for example, has been involved in Islamic finance since the early 1980s and it is still a well-functioning inclusive secular democracy.

A more technical question is: if India was to expand its level of Islamic banking, should this be a retail or wholesale approach?

A deposit-taking Islamic commercial bank, that is, retail, will present more challenges, as legislation, regulations, and mindset issues still need to addressed. Second, what is the number of bankable Muslims in India?

How many Islamic funds, with small minimum amounts, have been launched and available to the onshore “man on the street” since the BSE launched their Sharia index in 2010?

It is also worth mentioning that a number of financial scams have been perpetrated on this generally financially illiterate Muslim community, hence, new offerings are viewed with scepticism.

A wholesale approach implies fewer signs-offs from regulatory bodies, because it is not dealing with the public’s money. For example, in 2006, Bahrain-based Islamic investment bank, Gulf Finance House, embarked on the ambitious Energy City India, a $2 billion project in Maharashtra.

Other areas for consideration for India include Islamic trade finance funds (major bilateral trade with GCC) and Islamic venture capital (VC) funds working with technology parks in, say, the UAE for areas like alternative energy, health care, water and others.

But it does not mean non-bankable Indians would be excluded from Islamic fin-ance. Indeed, some of the recent developments with micro-finance in Andra Pradesh have not left the best impression with recipients and regulators.

I have said elsewhere, unlike micro-finance, which creates a creditor-debtor relationship and interest rates often becomes usurious, we should look at Islamic micro-funding, as an equity approach aligns the interests of the parties and prevents the debt trap.

The amounts to be disbursed would be the same, and the areas for funding will be Sharia-compliant, as micro-finance doesn’t typically involve financing the “sin” sector.

The funding would be for Muslims and non-Muslims, therefore building future customers. Obviously, vetting and monitoring costs are higher, but it should result in more focused investments.

Finally, if Islamic finance is involved in developing local infrastructure, financial enfranchisement and contributing to employment – as it no doubt would be – I imagine that the opposition to it on the part of chief ministers of Indian states would eventually fade away.

The writer is global head of Islamic Finance at Thomson Reuters. Opinions expressed are in his personal capacity.

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 ( ) 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.


WealthCity / MuslimVoice


Tata Targets Gulf in India Shariah Stock Fund: Islamic Finance

Nov. 3 (Bloomberg) — Tata Group’s investment unit is seeking to attract about $100 million within three years to India’s first Shariah-compliant fund aimed at global investors, targeting equities in a country that lacks regulations for establishing an Islamic debt market.

The Tata Indian Shariah Equity Fund has $3 million after being set up in June to tap investment mainly from the Middle East, said Mumbai-based Tata Asset Management Ltd., which oversees $5 billion in stocks and bonds, in an e-mailed reply to questions yesterday.

Tata Targets Gulf in India Shariah Stock Fund: Islamic Finance

Tata Targets Gulf in India Shariah Stock Fund: Islamic Finance

India has no Islamic finance policies, restricting sales of Shariah-compliant bonds in a nation with 157 million Muslims, according to Paris-based BNP Paribas SA and Standard Chartered Plc. The nation’s benchmark Sensex stock index rallied 16.5 percent this year, compared with a 13.6 percent advance for MSCI Inc.’s emerging-market share index. Overseas investment in Indian equities climbed 86 percent this year to a record $26.1 billion as of Nov. 1.

“India remains a great story for most institutional investors globally,” Rohit Chawdhry, who helps manage $350 million of assets at Bahrain Islamic Bank, the Persian Gulf country’s second-largest Shariah-compliant lender, said in an e- mail Nov. 1. “An Indian sukuk would likely see a blow-out response if there is one, given that there is almost nothing in terms of external sovereign issuance from India.”

Malaysia’s Example

A 13-member panel of experts headed by Raghuram Rajan, a finance professor at the University of Chicago and former chief economist at the International Monetary Fund, recommended in April 2008 that India introduce banking that complies with the religion’s ban on interest to attract capital.

Prime Minister Manmohan Singh said last week during an official visit to Kuala Lumpur that he would ask the central bank to learn more about Islamic finance from Malaysia, the world’s biggest market for sukuk. “There have been, from time to time, demands that we should experiment with Islamic banking,” he said.

The Reserve Bank of India will conduct a study when the need arises, Deputy Governor Subir Gokarn told reporters in Mumbai yesterday. Gokarn said the central bank hasn’t received a formal request from the government on the proposal.

India’s southern state of Kerala’s plan to set up an Islamic investment company to sell India’s first sukuk was blocked by a provincial court in January after a petition was filed against it by Subramanian Swamy, whose Janata Party opposes the national Congress Party-led government, according to a Jan. 6 report on The Hindu newspaper’s website. The Kerala high court heard arguments from Swamy, a former member of the national parliament, against the plan yesterday, Press Trust of India reported.

Non-Bank Institutions

Several non-banking institutions in India offer financial products that adhere to Muslim tenets, Kuwait Finance House Research Ltd., owned by Kuwait Finance House KSC, said in an Oct. 26 report without specifying the services.

Funds are able to tailor products to comply with Shariah law by excluding investments in businesses involved in tobacco, liquor, pork and gambling that are prohibited. Islamic debt markets require changes in tax rules because they often base payments on the exchange of assets, given the religion’s ban on interest.

The Dow Jones Islamic Market World Index, a global gauge that tracks shares which meet Shariah law and has a market value of $12.7 trillion, rose 7.2 percent this year. The Dow Jones Global Index of stocks worldwide gained 7.8 percent.

Islamic Bond Sales

Global sales of sukuk fell 29 percent to $13.5 billion so far this year, from $19.1 billion in the same period of 2009, according to data compiled by Bloomberg.

Islamic bonds, which use asset returns instead of interest, returned 12.2 percent this year, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. Bonds in developing markets gained 16.9 percent, JPMorgan Chase & Co.’s EMBI Global Diversified Index shows.

The difference between the average yield for emerging- market sukuk and the London interbank offered rate has narrowed 22 basis points, or 0.22 percentage point, in the fourth quarter to 351 yesterday, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index.

The extra yield investors demand to hold Dubai’s government sukuk rather than Malaysia’s widened 21 basis points since Sept. 30 to 392, according to data compiled by Bloomberg. The yield on Malaysia’s 3.928 percent Islamic note due in June 2015 was little changed at 2.46 percent today, prices from Royal Bank of Scotland Group Plc show.

Similar Product

The Tata Select Equity Fund, a similar stock-investment product that’s restricted to domestic investors, returned 19.5 percent annually over the past 14 years, beating the Sensex’s 13 percent gain, according to the statement from Tata Asset. Tata Group is India’s largest industrial company.

Not all Shariah-compliant funds in India received a positive response from the market. HSBC Asset Management (India) Pvt. discontinued its HSBC Amanah India Shariah Fund in November 2009 because it didn’t attract sufficient demand a year after it was introduced, Vikramaditya, chief executive officer of the Indian investment unit of HSBC Holdings Plc who uses only one name, said in an e-mailed response to questions yesterday.

Pakistan, Thailand

Pakistan, which has the world’s second-biggest Muslim population totaling 175 million, plans to sell 80 billion rupees ($933 million) of sukuk this month and next, the central bank said on Oct. 29.

Hindus account for 80.5 percent of India’s 1.2 billion population, while Muslims make up 13.4 percent, according to the U.S. Central Intelligence Agency’s World Factbook.

Countries with smaller Muslim populations are taking steps to develop Islamic finance. Australia plans to amend laws to ensure products are taxed fairly, the national taxation board said on Oct. 13. South Africa, whose 737,000 Muslims account for 1.5 percent of its population, will forgo charging tax on three Islamic structures to allow home loans that meet Shariah principles, the country’s Treasury department said in August.

Thailand is considering issuing as much as 50 billion baht ($1.7 billion) in 2011, Dheerasak Suwannayos, president of the state-run Islamic Bank of Thailand, said in an interview in Kuala Lumpur on Oct. 25.

“The intentions are there, but you need the political will to do it,” Singapore-based Rafael Martinez Dalmau, head of portfolio management for BNP Paribas, said in an interview in Kuala Lumpur on Oct. 26. “I think each country will have to evolve at its own pace.”

–With assistance from Anurag Joshi and Anil Varma in Mumbai. Editors: Simon Harvey, Garfield Reynolds.

To contact the reporter on this story: Soraya Permatasari in Kuala Lumpur at [email protected]

To contact the editor responsible for this story: Sandy Hendry at [email protected]

Islamic banks need to boost image

The only way sceptics will be convinced to use them is if brands are built up

  • By Rushdi Siddiqui, Special to Gulf News
  • Published: 00:00 April 25, 2010

What is the “elevator” pitch of Islamic finance to the non-Muslim and the sceptical Muslim? Why do news releases often become articles in Islamic finance?

Although, it is a 40-year phenomenon, has an Islamic bank broken in to the top 100 global brands, competing with Coca-Cola, Citibank, Google, etc? How about national or regional trusted brands?

What about an admired company to work for? Should Islamic banks be reaching for such “reachable” aspirations or continue attempting to win Islamic finance awards that appear every other month?

Perception is reality, and, for Islamic finance, the reality is it needs a better perception!

Public and media relations in Islamic finance have been tagged as an overhead or cost rather than being seen as an investment in the equity brand or goodwill.

Islamic finance operates in a conventional macro-environment, so is held hostage to external shocks and stresses.

The media, western or local, wants to know how these external shocks impact banks’ operations, (compliant equity) products, depositor confidence, inter-bank liquidity, etc, and a “no comment” or “we don’t have exposure to toxic assets,” may no longer be responsive enough.

Islamic banks have been accused by some of being product pushers, including pushing conventional products wrapped in an Islamic wrapper, hence, eroding its authenticity. This is ripe for a PR media campaign against loss of integrity.

During the GCC real estate boom, dedicated Islamic financial institutions like Gulf Finance House (GFH), Arcapita, Tamweel, Amlak, Investment Dar and others became recognised brands beyond their borders, but where are they now?

However, if we look at windows and subsidiaries, like HSBC Amanah, Citi-Islamic, Standard Chartered Saadiq, etc, such entities, probably under the guidance of an established parent’s policies, have better managed the message. Litmus test question: where would a recent college graduate, interested in Islamic finance, apply for a job?


There may be some lessons for Islamic banks from the windows/subs of conventional banks, including building a savvy internal PR team by poaching competent communicators from reputable PR firms.

The local based PR firms probably have a good feel for the Islamic finance client needs and budgets. There are probably only a few Dubai-based agencies, Shamal Marketing, Hill & Knowlton, Asdaa and Financial Dynamics, that have an in-depth understanding of Islamic finance and how to manage an effective Islamic finance communications campaign. But that’s another article.

Islamic finance in the (selected) Muslim countries is like a Friday khutbha, preaching to the coverts. We hear about it being ethical (why not “green”) financing, does that imply everything else is unethical?

We hear about avoidance of bankruptcies and fiscal support during this crisis, but what about real estate exposure, corporate and retail and provisioning and ensuing confidence factor?

Now, what is the message for Islamic finance in the world’s biggest secular democracies like India (150 million Muslims) and the US (nine million Muslims), and Silk Road countries like China (20 million Muslims)?

How much do the external geo-political events and internal flare-ups impact the prospects for Islamic finance in these countries?

Are they looking at Islamic finance differently than Singapore, Hong Kong, Korea, Japan, the UK, Luxembourg, France, and Malta, countries that see themselves as Islamic finance hubs?

Public relations, as part of business development, may say a wholesale approach is better suited than a deposit taking retail strategy in such places, because of the lack of a level regulatory playing field and political sensitivities to external or internal events for the latter.

‘Smoke and mirrors’

What is the message to Muslims who view Islamic finance as “smoke and mirrors?”

If they see, for example, an Islamic mortgage with the same down payment, tenor, and profit rate as a conventional mortgage, a common conclusion is “what’s the difference?”

Implied in the comment is the unreasonable conclusion that an Islamic mortgage should be cheaper (why?) or that an Islamic bank should be operated on a non-profit basis. A more appropriate conclusion may be “there is no financial cost of being a Muslim,” ie, market pricing performance!

The real difference is what happens in case of a mortgage default due to hardship? Who will evict the mortgagee first, Islamic or conventional lender, as that should go to the ethical nature of the financial system.

PR is an integral part of Islamic finance, no different than the importance of a good marketing department, and Islamic banks need to think about building their brands and message in good and bad times, strategies across markets, and convincing the sceptics.

Finally, an open challenge to PR firms, is there a more appropriate name for Islamic finance that captures its brand essence?

The writer is the Global Head of Islamic Finance, Thomson Reuters. Views expressed in this column are of the writer and cannot be attributed to his organisation.

India looks to start Shariah compliant financial products

By Sarbajeet K Sen & Dipak Mondal Apr 27 2010 , New Delhi

India needs to actively consider allowing introduction of Shariah-compliant Islamic finance products to channelise savings of the muslim community, K Rehman Khan, deputy chairman of Rajya Sabha, said onTuesday.

Speaking at the India Shariah Finance Summit in the capital, Khan said the mutual fund industry is the best vehicle for popularising Shariah-compliant products. He pointed out that mutual funds are largely compliant with Islamic finance principles since they do not pay interest.

The concept of charging or paying interest is prohibited under Islamic law. “We should start adopting the mutual fund route in a bigger way for Islamic banking. Shariah compliant mutual fund schemes will help to channelise savings of the huge Islamic population in India,” Khan said.

Khan said Indian Muslims should have the option to invest in Shariah-compliant products. “Muslims have every right to seek an avenue for investment that complies with their religious faith,” he said.

Speaking on the occasion, Abizer Diwanji, executive director and head of financial services, KPMG, said the mutual fund sector could be opened up for Shariah compliant products. “The present laws are amenable to mutual fund instruments that are compliant with Islamic finance. However, innovation in the industry is lacking and hence such products are not hitting the market,” he said.

Diwanji said bringing out Islamic finance products would be a step towards greater financial inclusion.

“Muslims are an underbanked community in India. Islamic finance could be a very big component for financial inclusion that the government is pushing for,” he said. Muslims account for around 13.4 per cent of the population or around 175 million people in absolute terms. Diwanji said the Reserve Bank of India could also consider offering specialised licences for Islamic banks, while doling out fresh bank licences as promised in the Union budget.

Sashi Krishnan, chief investment officer, Bajaj Allianz Life Insurance, which offers — Pure Stock Pension Fund –a Shariah-certified scheme, said Islamic financial products have seen growing acceptance in India over the past few years.

“The government is already working on a project to analyse the future of interest free banking in India, while the mutual fund and insurance industry are also developing Shariah compliant products,” he added.

Krishnan said the challenges to the popularity of Islamic finance in India are distributors who are not equipped to sell Shariah compliant products, besides a lack of certifying agencies and standardisation of Shariah-based products.

Economics of Islamic Banking in India

Economic exigencies and political expediency in a country with more Muslim population than Pakistan, at least after six decades of independence, should consider introduction of Islamic Banking as part of reforms in the Banking Sector. Since this intervention requires some important changes in the regulatory regime in line with those obtaining in more Muslim liberal countries like Malaysia, the logic and logistics in this regard require some explanation which this article intends to present.  It is good to recall that even Raghuram Rajan Committee on Financial Sector Next Generation Reforms made a reference to this aspect.

Prospects for Islamic Banking in India:

Few companies are already dealing big in Shariah Investments funds. Many financial sector players eying upon trillion dollars Islamic investment funds. Parsoli and Eastwind have launched their Islamic Indices; and Reliance Money and Religare have launched Shariah compliant PMS, and Indian Stock market is observing fair business in Shariah Compliant Stocks. If China is going for Islamic banking to attract Islamic Investment Funds, why should India hesitate developing Islamic banking with 150 millions Muslim who may help to pool around one trillion dollars Islamic investment funds from Gulf countries that too on equity base; which may keep our national current account and fiscal deficit under control?

No visualization document for Islamic banking in India:

So far Islamic banking has been considered as a religious matter for Indian Muslims and thus it was denied with a fear of financial segregation, a threat of parallel banking system along with a hidden fear for SCBs to loose Muslim depositors. There has never been any public committee analyzing the impact of Islamic banking in India because Muslims of India were never so evocative about features of Islamic banking in India. Though the concept of Islamic banking is driven by ethics of Islam, it has more economic rationality compared to its religious rigour which needs some genuine study by professionals having basic knowledge of Islamic banking with expertise on Indian economy because Islamic banking carries more advantageous features to boost real sector economy compared to financial sector.

Islamic banking and bankruptcy:

Islamic banking also restrains the chances of bankruptcy because it adheres to strict credit rating system by disallowing indebted economic agents to avail more debt finance. The strict regulations for credit rating under Islamic banking could save our financial and economic enterprises from bankruptcy. The Islamic banking mechanism would certainly strengthen the credit rating system to provide security of funds for depositors and investors. Moreover since equity finance by Islamic banking allows the banks to recover the assets by right of ownerships, it would be fairer on the part of financial institutions to recover assets in case of bankruptcy or crisis by any individual or enterprise.

Islamic Banking for Inclusive Growth:

Islamic banking is more desirable for achieving Inclusive growth of India. It is interesting to evaluate probable impact of Islamic banking in different segments of Indian economy. Islamic Banking has the potential to tame the liquidity and inflation problems along with allowing inclusive growth. Structural changes in the Indian economy during post-reform period are no barometer for equitable growth. For real inclusive growth, we have to ensure increase in income and employment status of workers in all segments. Empirical evidences reveals that though India has registered better growth rate in recent years, the number of poor living below poverty line has increased. Our household consumption which has declined in recent years is driven by household income; while corporate savings reflects income of the corporate sector which has increased over the years during the last decade and half. The fruits of growth seem to have favoured more the corporate sector than vast sections of population below the poverty line.

Similarly the share of financial sector in GDP has increased in recent years. It is well known that the SCBs extend debt finance. The interest component ipso facto becomes part of GDP.  Interest rate sensitivity to inflation is well known. However, equity finance if extended with far lower costs of credit has potential to restrict inflation and there is enough evidence from West Asia in this regards.  Simultaneously the dividend shared by depositors on equity finance helps equitable distribution of income generated by financial sector.  Once the basic difference between the debt and equity credit is understood, it will be easy to appreciate its potential contribution to better economic growth.

With low collateral strength of farmers and poor workers associated with unorganized sector manufacturing units and retail service outlets do not encourage SCBs to extend more debt finance. With schemes of loan waiver, the debt markets are shrinking in agriculture sector. Even the SHGs and JLG schemes of Micro Finance have failed to add livelihood stocks for the poor and vulnerable. Inequitable distribution of resources led naturally to serious imbalances both across sectors and regions and need systemic corrections that are possible with the new instrumentality of Islamic Banking. It is time that the policy makers realise these options as imperative at this moment of economic history when the youth unrest is showing itself in drifting to intrusive terrorist attractions. Enough price has been paid by the economy that cannot afford this any longer.

Insights into Islamic banking reveal its potential to build infrastructure for our agriculture sector where the economies of scale are hostile to adding new infrastructure to the farm worker households. Islamic banking could also help our unorganized sector due to its non-insistence on collateral as a precondition for lending even small sums of money. This would also alter the desperate labour-capital ratios in rural India, in particular, in States like Uttar Pradesh, Bihar, West Bengal and the seven sisters of North East.  Financial empowerment of the vulnerable sections of population is a near possibility at quicker pace with Islamic Banking.

Islamic banking may induce our political leaders to substitute grants and subsidies with equity finance schemes through specialized financial institutions because equity finance allows access to credit without adding debts to borrowers. Equity Finance helps achieve self-reliance. The stabilization funds for poor farmers / artisans may be utilized to experiment such finance. Islamic banking unlike what many think has less to do with religion than with economics.

Islamic Banking and Financial Inclusion:

Though we do not have any survey to compare community wise financial exclusion in India, the study of data available through Sachar Committee report reflects Muslims are most disadvantaged community in financial sector, and banking is inversely related to concentration of Muslim Population. Muslims have over 80% financial exclusion due to interest based deposit and credit schemes available with financial institutions and SCBs. Due to restrictions on Islamic banking India, financial sector could not attract even the rich Muslims to partake in the growth story of India. Even the worker participation in institutional growth is evident from the Muslims employed in the financial sector, if one were to go by the statistics put out in this regard: RBI and SCBs, have just 0.78% and 2.2% share of Muslims in employment with RBI and SCBs. Similarly the participation of Muslims in specialized financial institutions and corporations like SIDBI, NABARD and NMDFC is also desperate. Hard to believe but true, that even Institutions like National Minority Development and Finance Corporation (NMDFC) have no Muslim managers.

The Sachar Committee Report reflects that Indian Muslims have a share of 7.4% in saving deposits while just get 4.7% in credit (in terms of PSAs). If we consider this as a standard proportion in national aggregate deposits at and credits by SCBs according to annual report of RBI for year 2007-08, Indian Muslims annually loose around Rs. 63,700 crores because Muslims would have a credit deposit ratio of 47% against national average of 74%. It shows that Indian Muslims annually loose around 27% of their deposits (by not availing as credits). After Islamic banking this deficit may be removed to curb financial loss to Indian Muslims. With 31% Muslims living below poverty line and 40% Muslim workers as own account workers, this big deficit of credit is apparently a serious economic disadvantage. Muslims avail just 4% and mere 0.48% credits from special financial institutions like NABARD and SIDBI respectively because there also the community has to indulge in interest which is strictly prohibited in Islam. Of course, although it is well understood that the credit worthiness does not get related to either caste or creed but on the related assets and repayment capabilities the underlying assets could generate, quicker and easy access to finance has the innate potential for asset creation and related product markets at least in the domestic environ as proved in the SHG group efforts in the southern States.

The schemes launched by RBI, NABARD, SIDBI and Ministry of Finance for financial inclusion focus on providing access to credit and other financial products. Just as allowing access to Meat shops for non-vegetarians by definition is the surest route for excluding all vegetarians, interest-based banking system has a potential for exclusion of a majority of Indian Muslims. On the other hand, introduction of Islamic banking will allow the Muslims to work with other community members in banking sector; it would definitely help us build civilized economy.

Introduction of Islamic banking in India apart from pleasing 150 million Indian Muslims, the second largest community of India, our government will certainly gain diplomatic advantage to make financial dealings with Muslim dominated nations especially to attract trillion dollars of equity finance from gulf countries. The fall of giants in the world financial sector like Lehman Brothers in the aftermath of the US sub-prime mortgage crisis, we need to be alert to the alternate sources from where FDIs could flow into the Indian economy and Islamic nations are the potential alternatives. Our opening the doors for Islamic Banking at this juncture would also accelerate the fund inflows and slight decoupling of the US Dollar to inviting the Euro. Since Islamic Banking encourages equity finance even the small players could enter the Equity Markets and the SME bourses likely to come into being shortly would have better access through Islamic Banking channels as the SMEs mostly have inadequate collaterals to offer for their expansion needs in their growth stage.

Islamic banking and nationalized banks:

It must be made clear, however, that Islamic banking is not a children’s game. It requires even better professional expertise compared to conventional banking because it deals more with commercial projects than mere monetary credit and debit transactions. Indian Muslims may feel privileged in terms of Islamic ethics required for Islamic banking but they certainly lack professional efficiency to manage modern commercial banking on Islamic ethics. The organic link between the Islamic and nationalized banking emerges from the innate professional competencies developed by Institutions like the SBI, Bank of Baroda, Bank of India, Corporation Bank that has recently opened its representative office in Dubai with a view to shortly raise to the status of a commercial bank, Under Islamic banking mechanism thrust would be on equity deposits and credits while interest charged would be replaced with profit margins on commercial credits and interest expended over deposits would be replaced by dividend on equity finance with deposits mobilized as equity deposits by banks.

It is expected that with introduction of Islamic banking in India, the first choice of depositors and investors would be nationalized banks as despite contradiction of interest, Indian Muslims have a confidence in nationalized banks. To ensure safety of deposits majority of Muslims depositors would prefer to join Islamic banking managed by nationalized banks. However it is expected that Foreign Investors looking to invest in India through Islamic banking, would prefer to have services of foreign banks. As far as Indian Muslims are concerned, they have to make hard efforts to find their place in managing Islamic banking in India because they lack required financial depth; infrastructure and more importantly they have poor credibility among the depositors and investors due to some past failures of financial institutions.

Interest-free banking may add Muslims to formal financial sector. Through this financial inclusion of Indian Muslims to formal sector Islamic Banks, it is expected that Indian nationalized banks may see additional savings and credit which may help banks to gain higher rate of profits compared to their SLR. After successful operation of Islamic banks by our nationalized banks, private banks may also enter into business of Islamic banking.

Stock Market Capitalization

Since Islamic banking focuses on equity deposits and finance, it is expected that Stock market will be the most preferred avenue for investments by future Islamic banks of India because currently it is our stock market which is attracting new investments under Shariah Finance schemes. Technological innovations would facilitate easier flow of equity-based deposits of Islamic Banks into the rising Indian Stock Markets. It is just common sense that when equity based financing takes place through Islamic banking route, the number of D -mat accounts may surge in millions.

Corporate Sector and Islamic Banks

Even the Corporate sector would be a gainer. All the companies listed in stock markets will get additional potential investors to genuinely subscribe their shares instead of speculator trading. Even the Bond Markets may stabilize.  Long term resources for the infrastructure sectors like the irrigation, power, Oil, and communication projects could be faster and easier through Islamic Banking route. New modes of public private partnerships for the execution of infrastructure projects may emerge. The total investment in India for infrastructure, during 2006–07 was estimated to be around 5% of GDP. It has to be 9% of GDP by 2011-12, it means that we would require Rs. 207,291 crores in 2006-07 and Rs. 574,096 crores by 2011-12 to finance our infrastructure. The total investment amounts to Rs 20,56,150crores for the 11th five year plan of which Rs. 1436,559 crores is supposed to be met from Public Investment while Rs. 6,19,591 from private investments.

Islamic banking through promoting equity finance from national and international markets may reduce this burden of keeping national current account and fiscal deficit well under control and probably we need not to worry about interest payment on borrowings. Since Islamic banks may also have managerial control over commercial financing, government might use Islamic banking units as source to mobilize tax revenues as well, which might reduce mobilization costs for public revenue for governments.

With equity finance, our Government may also convert grants, subsidies and stabilization funds into equity for Islamic Banks to lend equity finance to priority sector agents instead of highly subsidized lending which costs a lot to the exchequer.

Islamic banking to counter Terrorism:

The experience of Islamic banks of Malaysia and Britain may be interesting; as in Malaysia, the Chinese businessmen are the biggest customers of Islamic banking; in Britain also, Islamic banks are not for Muslims alone. Stringent anti-money laundering measures are in place in these countries and have seen far less terrorist intrusions during the last decade. The Shariah principles require transparency in monetary routes. Every extended credit under Islamic Banking will need supportive document with managerial control of the fund to monitor the use of credits, which may not be available with debt finance under interest-based banking. All we have to put is a fairer and strict audit system to monitor the fund flows. The universal nature of banking through Islamic Banks prevents surreptitious routes for investments and mutual funds.  The petro-dollars and SDRs have the potential for greater flows and these would also contribute to more dynamic commodity markets. With the financial muscle, the youth among the Muslims may look to better contribution to domestic GDP through better education and higher productivity.

In fine, Islamic Banking should be seen as a powerful economic instrument capable of creating multi-sectoral impacts and should therefore be invited with lot of cheer instead of sneer. It contributes to greater stabilization, helps the real economy significantly, and reduces unemployment and more than any thing acts as a powerful antidote to poverty sans huge subsidies and grants that are making a big dent in our fiscal framework. It would open the doors for financial inclusion faster and quicker.

*The author would like to thank Dr. B. Yerram Raju, Regional Director, PRMIA, Hyderabad Chapter and Dr. Ausaf Ahmad, Former Economist, IRTI, IDB, Jeddah for their valuable guidance in making out this paper.