User:Zahid Alig/sandbox

Indian Muslims need Merchant banking instead of Islamic Banking (Syed Zahid Ahmad Alig: economicinitiatives@gmail.com)

Banking is considered as pre-required condition for inclusive growth; but according to Islamic belief the person dealing with interest shall be punished in hell (after death) against committing major sin. That’s why Muslims have been found poorest in terms of access to bank credits. Amongst those Muslims who have opened bank accounts, with intention to get rid of interest; many along with avoiding bank credits, keep aside the interest amount accrued over their deposits. Around 3% Muslims don’t care about interest and even try paying bribes to avail bank credits. Often they don’t intend to pay back their loans and thus damaging Muslim’s credibility. As a result banks are forced to mark Muslim concentrated areas as red zone and are reluctant to disburse bank credits in these areas.

According to Sachar Committee Reports Muslims had 7.4% share in saving deposit amounts with SCBs in 2005 against 4.7% share in PSA outstanding amounts. Considering the same ratios for Muslims in Time Deposits and Credits at SCBs by 16th September 2016, we observe that Indian Muslims suffer financial losses in terms of bank credits worth Rs. 1,95,739.61 crores due to lower credit deposit ratio when compared with other religious communities. This loss pushes Muslims behind other communities. With 40% illiteracy and 31% headcounts living below poverty line, Indian Muslims are rather pulling Indian economy downwards.

Sachar committee Report also suggests that Muslim workers play vital role in our economy. As much as 20.5% Muslim workers are engaged in manufacturing activities followed by 12.4% Hindu upper caste workers. Similarly 16.8% Muslims are in wholesale and retail trade again followed by 13.4% Hindu upper caste. Muslims in construction are 6.8% followed by 5.1% Hindu OBCs. In Transport, storage and communications 6.4% Muslim are there followed by 4.8% Hindu upper caste. But with higher financial exclusion, Indian Muslim workers are unable to convert their skills and resources into entrepreneurial assets. In absence of any corporate vision and support, 97% Muslim workers are engaged in unorganized sector. As much as 85.6% Muslim workers have to either work on own account; or are unpaid workers in family enterprises; otherwise treated as casual workers. To ensure development of Indian economy in a balanced way, we thus need to address the financial exclusion and economic plight among Indian Muslims.

So far much has been done by RBI to ensure sector, region, caste and gender based financial inclusion. Still these initiatives could not help ensure financial inclusion of Muslims. Then last year taking inspirations from Hon. Prime Minister’s motivational remarks during 80th anniversary celebrations of the RBI, the Committee on Medium-term Path on Financial Inclusion was constituted with objective of working out a medium-term measurable action plan for financial inclusion. By December 2015, that committee submitted its final report. The committee dealt about financial exclusion of Muslims and marked separate chapter on interest free banking. The committee duly recommended that commercial banks in India may be enabled to open specialised interest-free windows with simple products like demand deposits, agency and participation securities on their liability side and to offer products based on cost-plus financing and deferred payment, deferred delivery contracts on the asset side. The committee further recommended that in the event that interest-free banking is allowed in India, the extant regulatory guidelines in respect of capital and liquidity as applicable in the case of commercial banks would have to be made applicable to those as well. By 29th August 2016, towards mainstreaming the community who have been somehow financially excluded for religious reasons RBI in its Annual Report 2016 (vide Section VI-25) proposed to explore the modalities of introducing interest-free banking products in India in consultation with the Government. Since the model proposed by RBI is not supposed to offer credit without interest rather expected to promote financial participation in livelihood or businesses of customers by mode of products based on equity, lease and trade etc., it would be better to call this model as Participatory banks instead of terming it as Islamic banking.

Once introduced in India, besides ensuring financial inclusion, the participatory banking may also help raise tax revenues along with inducing interest free foreign capital to meet financial needs for our infrastructure development. This may further help reduce interest payments burden on public debts. Reduced debt burden can help India relax tax structures; ultimately reducing the cost of output and inflation level in the economy. Under equity and lease based financial models, the poorer people can avail finance at no risk or cost, but certainly needs to prove strong business proposal along with attractive cash flow and attitude to draw investor’s attention. Such model does not allow investment into unsound and unethical proposals; thus insulates banks from piling NPAs. This model also safeguards banks from risks of monopolistic competitions to get higher shares in outstanding bank credits. Since cost plus finance, equity and lease based products are supposed to be executed through legal contracts only after verification of tangible assets, it discards the scope of frauds by way of manipulating financial documents.

The only financial institution promoted by Islam was Baitulmaal (public treasury) wherein the wealths were not meant to hold rather distributed instantly on the basis of need. However to promote merchandise merchant banking was developed during Islamic caliphate (7th to 12th Century). This included formation of joint stock companies to extend capital support for international trade and investment through partnership etc. Various financial instruments like promissory notes, bill of exchange; saving and transactional accounts were developed. The system of double entry book keeping, maintaining ledgers etc. helped developing base for banking system. But the banking used by Muslims during Islamic caliphate was inclined to merchant banking and not conventional banking. After losing caliphate along with Baitulmaal and advisory council thereupon, the Muslims lost hold over financial system. With fall of Islamic caliphate the prevalent financial infrastructure allowed the capitalists groups to promote banking system by 14th century. The conventional banking system developed across the globe during 14th to 20th century.

During mid 20th century, Muslims felt the need to develop Interest free banking. So in 1957 few Muslims established Al Rajhi Bank. Today it is the largest interest free bank in the world. In 1975 the Organization of Islamic Cooperation (OIC) on the name of Islam pooled financial resources to establish Islamic Development Bank (IDB) with objective to extend interest free finance for community development. After IDB, the Muslim community found it easier to pool community financial resources on the name of Islam. So 1975 onwards, many Islamic banks emerged. First Dubai Islamic bank (1975), then Kuwait Finance House (1977), followed by Qatar Islamic Bank (1982), and Abu Dhabi Islamic Bank (1997) etc.. Since these banks are not promoting core Islamic financial prayers; rather working on Shariah guided commercial instruments like Murabaha (cost–plus finance), Mushraka (equity participation), Sukuk (Shariah guided bonds), Ijara (leasing) and Takaful (Shariah guided insurance) etc. they should not be called as Islamic Bank, rather be called as Participatory Bank.

Since the so called Islamic banks around the world are not dealing the core Islamic financial prayers like Zakat (taxes over surplus income), Qurbani (sacrificial), Qard E Hasna (Interest free loans), Waqf (devoting assets for public welfare), Sadqah (alms), Infaq (spending for welfare), or Isaar (sacrificing from limited resources for the poorer and more needy) etc. they should not be called as Islamic banks. Considerably the Shariah laws tend to change in accordance to human needs in different periods and circumstances. So in case of not promoting core Islamic financial prayers, or interest free lending (Qard E Hasna), rather doing purely commercial businesses through participating by mode of Shariah permissible financial modalities, these banks may be better termed as participatory banks or Merchant Banks or even Shariah Compliant Banks but certainly not as Interest-Free banks or Islamic banks.

In India we especially need to avoid calling interest free banks as Islamic banks, otherwise we may put our socio – political environment into risk and may also miss the opportunity to ensure better financial inclusion along with putting curb on fiscal imbalances and inflations. Thus let us call for Participatory banking instead of interest free or Islamic banking in India. We should seek introduction of participatory financial products in India only as tools for financial inclusion of all Indians irrespective of their religion and caste etc. At present RBI needs Government’s consultancy to set modalities for introducing interest free financial products and services in existing banks. We hope that the Government would extend appropriate suggestions to the RBI for introducing interest free (Participatory) banking products in India.

On 31st January 2012, the Department of Financial Services under Ministry of Finance, Government of India had published the report of Key Advisory Group on NBFCs. Under section 4.3 of that report the it was clearly suggested that “we therefore urge the RBI to issue a clarificatory circular stating therein that the 2nd January 2009 circular on Fair Practice Code applies to those NBFCs that are disbursing interest based loans and does not prohibit NBFCs from undertaking other forms of financing such as participative financing / non-interest based financing. As regards NBFCs that are undertaking participative financing and / or any other non-interest based financing, the following directions should be complied with: (i) The Fair Practice Code should set out the model on which facilities will be granted to borrowers. The NBFCs should also set out the commercial considerations for its facilities, (after factoring in aspects such as cost of funds, expected return and other parameters to determine credit viability). The Fair Practice Code should be displayed on the website of the NBFCs and updated periodically; (ii) The borrowers should be made aware of these commercial considerations in the agreement and the loan sanction letter. Expected returns, servicing charges should be communicated separately. If the expected rates of return and service charges are different for different category of borrowers, then the same should be communicated to the borrowers.”

If the Government of India continues extending similar directions with regard to open participatory banking windows in existing banks, India will find easy way to address financial exclusion of Indian Muslims along with restricting any conflict among religious communities. The other way to help promoting economic development of India along with assuring financial inclusion of Muslims is to promote merchant banking at retail level so that enterprises in unorganized sector could take its benefits and help rising India at better growth trajectory. By doing so, we will help ensuring ‘Sabka Saath Sabka Vikas’ along with promoting financial inclusion and maintaining balances among active forces in our socio – economic environment.