Renowned American poet Robert Frost once remarked “A bank is a place where they lend you an umbrella in fair weather and ask for it back when it begins to rain.” One may tend to agree or disagree with this observation; however, there is no denying this reality of business, which not only applies to banking institutions but also to institutions in other sectors of the industry.
Banks would argue that they do not wish to accumulate NPA (Non Performing Assets) and if they do, then their existence is in jeopardy. However, the important point is “what constitutes NPA? “At times, there is nothing social about those, which constitute NPA. A good reflection of this fact could be observed in the financial performance of certain public sector undertakings in economies like India, which have a welfare motive and social objective to be fulfilled and yet maintain a decent financial track record. Another example could be NGO’s, which typically have only social objective and yet continue to remain sustainable. Hence, it would be a misconception if we relate NPAs to being social. Being social and maintaining asset quality are no different. It’s more about quality of management, aspirations and sticking to the fundamentals of business.
By definition, banks are considered as a bridge between those who “have” and those who “do-not-have”. Islamic banks are very cautious, when it comes to choosing these “Haves” and “Have Nots”. In fact, by making the right choices, banks do play a social role by not deploying funds accumulated from “Haves“ to inappropriate “Have Nots ‘ More so, by choosing the appropriate “Have Nots” the amount of social service that the bank does also gets manifold.
As a matter of fact, at times, not being fascinated by wrong is also equivalent to near right. As someone rightly said, Don’ts are as important as Do’s in life and we could extrapolate it to business. The World Bank and several jurisdictions like India, Malaysia and others are focusing on financial inclusion i.e. providing banking services to the unbanked population. It aims to ensure that no section of society is financially excluded. Rightly so, it connects every citizen of the country to the mainstream financial world. A country could accurately determine its financial strength or weakness, if its people subscribe to formal credit system i.e. borrowing from a government recognised entity rather than informal credit system such as funds originating from private entity or individual. In case the government of the country wishes to waive certain portion of the credits for weaker section of the population, farmers for instance, then in a formal credit system it is feasible to be done.
On the contrary if the source of credit for a citizen is informal, government can’t really validate or verify the accuracy of the credit and hence have no legal sanctity to pardon it. Additionally the financial inclusion plan should also be characterised by a motivation to bank more often, and shouldn’t merely be symbolic. India had experienced both with its conventional banking system.
A financial inclusion plan few years ago was characterised with some macro level requirements like ensuring a significant proportion of branches to be opened every year in rural areas etc. However, there was very little to be talked about at the micro level like account features for instance. The current financial inclusion plan mandates an account to be a driver for insurance as much as savings. It is termed as no frills account with a certain minimum stipulated overdraft and insurance for account holder as well. A combination of savings, insurance and overdraft makes the overall proposition for the account holder very attractive and one feels motivated enough to operate the account periodically. On the same lines, it is important that Islamic banks pursue their social roles wholeheartedly so that benefits that arise from it for the society are also complete in all respects. Another dimension of social role that an Islamic bank could play is choice of sectors, which shall be given credit on a priority basis. In general, any economy needs food security and therefore it becomes almost imperative that banks in that country offers credit to agriculture sector. Similarly, infrastructure needs of any country are growing exponentially and financing is core to fulfilment of such needs. Healthcare is yet another important sector and there is no denying that “Health is Wealth” but assurance of good health cannot be unlinked from financing.
Therefore, it is important that sectors that require financing and are vital to society should be given a due reference. This is something which is not only required for Islamic banks, but also conventional banks. In India, for instance, central bank have come up with a policy called “PSL — Priority Sector Lending” which requires domestic banks to necessarily facilitate a certain proportion of their credit facility to key sectors like agriculture which otherwise remain less attractive from a commercial angle, but are very vital from a nation’s sustainability point of view.
Foreign banks too are not isolated from scope of this policy, though their focus as required by PSL policy is slightly different and they are expected to service credit requirements of SME (Small and Medium Enterprises) and strengthen export capabilities of the economy. As of now, we touched upon dimensions, which apply to Islamic banks but are not unique to Islamic banks and also addressed by conventional banks. Islamic banking is more about making money by doing good, by having a proper due diligence on the source and target of funds and greater emphasis on value systems and humanity.
Having said that, social role that is expected from an Islamic bank is usually larger. Whereas a conventional bank chooses to focus more on credit worthiness of the customer, an Islamic bank prefers to focus on the “purpose” for which the borrowed funds are being sought. For the right purpose, there shouldn’t be a constraint of credit because it is ultimately going to help and return as a benefit to the society. There are at times some huge projects which are not in the scope of one particular entity to be financed totally.
In such situations, Islamic banks (if they exist in a particular economy) could help the financing to be absolute. However, there are also projects like Medina airport in Saudi Arabia, which has the reputation of being 100% Shari’a compliant with respect to financing. One may argue that this may not necessarily be a social service; however, I would say financing is a very sensitive matter. Partially financed projects take no time to be labelled as a liability rather than an asset. Investment ideas that have potential but remain unfunded for reasons like not originating from entrepreneurs with a proven track record, leads to disappointment and discourages creativity in general. Hence, financing at the right time to the right people for a right cause is indeed a social service.
We never know, a port funded today could be a reason for offering food to thousand homes tomorrow. Hence, it would be premature to have a very narrow view on social service. As mature bankers, a holistic view of the projects shall be taken into consideration and then evaluated. Imagine a society with a string Islamic banking system that only finances the right projects.
In such a scenario, none of the deserving projects shall be denied credit and none of the undeserving projects will be facilitated with credit. This could ensure that we will arrive at a capital market, which has no exposure to interest bearing instruments, and a society, which has zero availability of prohibited articles like liquor, pork and prohibited destinations like casinos etc. Wouldn’t it be ideal capital market and society to have? The only golden rule to be followed is — Financing the appropriate defined as Shari’a compliant and not financing the inappropriate defined as Shari’a non- compliant.
In the absence of financing, survival of the inappropriate may not last long. Sooner or later the inappropriate will have to exit and isn’t that a service to the society and a social role that Islamic banks could be instrumental with?
The larger point we are trying to make is, social role isn’t confined to direct social acts. Our acts, which add value to society indirectly, are also at par with social acts. As an analogy in the game of cricket it’s not necessary that one has to score runs as a batsman or pick wickets as a bowler to win the match, “catches win matches” ‘ and by not dropping those catches a fielder too can be a match winner.
Similarly, Islamic banks can engage in a social role in ways much simpler than microfinance by choosing their clients and projects wisely.