People often ask that if countries like UK, France and Switzerland can adopt Islamic banking, why can’t India? Perhaps they forget that unlike these countries, India has a history of communal violence since colonial days. Owing to this historical baggage it is politically inconvenient for any ruling party including Narendra Modi led BJP to support Islamic banking.
Thus on 9th December 2016 the State Finance Minister discarded RBI’s proposal of Islamic banking by saying that on consideration of inter-departmental group report, it is observed that even to introduce limited products, various legal changes would be required. Moreover, the objectives of financial inclusion for which Islamic Banking was explored by RBI has no relevance, as Government has already introduced other means of financial inclusion for all citizens (like Pradhan Mantri Jan Dhan Yojna, Suraksha Bima Yojna, Pradhan Mantri Mudra Yojna etc). Furthermore the way RBI officials, cabinet ministers and the parliamentarians are now ignoring fresh queries in this regard, it is clear that the Government is not open for Islamic banking in India.
Shiv Sena member of parliament Charakant Khaire opposed this concept of Islamic Banking in Parliament. The government and subsequently the RBI took an about turn and proclaimed that as equal opportunities were available to all citizens to access banking and banking services the introduction of interest-free windows in the banks was not being pursued. Financial circles are of the opinion that the government and the RBI have taken a negative stand due to the political atmosphere prevailing in the country. Across the world, the Islamic finance and banking sector is flourishing with the active support of the World Bank and the IMF.
Islamic finance and banking analysts and thinkers are of the opinion that the opposition to Islamic banking is political and this sector has been opposed on religious lines without giving logical thought on its lucrative business angle. Its opponents have not bothered to look at the benefits it would bring for the Indian economy. Merely opposing it for its religious tag is not a good idea and exposes the ignorance on the subject
Earlier in 2006 the RBI’s Working Group (to examine the financial products used in Islamic banking) had mentioned that ‘as distinct from modern, conventional banking, Islamic banking due to its inextricable influence of religious doctrines has often evoked a sense of mysticism and curiosity’. After ten years RBI again analyzed; and this time recommended Islamic banking windows for financial inclusion. But the way it was proposed with Islamic tag instead of secular mode there were doubts that the Government would approve it. To maintain ethics in banking we may need to adopt principal guidance from religious doctrines. Instead of proposing any banking model with religious tag, RBI should have better proposed an Ethical Board to suggest ethical guidelines for the banking business in India. That Board should have comprised of scholars from different religions with banking background to suggest sought ethical guidelines. Since all religions guides towards ethics, ethical board should not be tagged with any particular religion.
It should also be noted the contemporary Islamic banking model has neither been promoted by the Prophet Muhammad ﷺ nor by his companions (Sahabas). Islam instead of promoting any banking model has rather instituted infrastructure of Baitulmaal to support financial prayers and interest free transactions. But despite prohibition of interest under Islamic governance, interest based lending were carried on by Non-Muslims. After decline of Islamic rulers in the world, Muslims were in need of innovative banking model that adhere to Shariah principles. Thus in 1950s Islamic banking model was articulated by using Shariah compliant financial products. Tag of Islam caused emotional attachment of Muslim community towards this particular banking model. This model helped bankers attract excess surplus capital held by Muslims especially from gulf nations. Later this model was introduced in many secular nations with prime objective of drawing surplus capitals from Muslims.
Based on level of economic development, the model of banking and finance for particular economy may differ from each other. Historically the models of banking and finance have drastically changed. Since Islam is the last among Godly defined religions (followed by Judaism and Christianity); it would be applicable for all present and future civilizations. Therefore, instead of prescribing any particular banking model for a particular economy Islam just aimed at guiding the humanity through ethical principles to transact fairly and justly. According to Islamic doctrines accumulation of wealth through interest or by any other unethical practice is prohibited; wealth should not be hoarded with misery; nor should circulate among the rich only. Islam also guides the humanity to attain economic growth by inducing need based expenditure. Islam guides the humanity to provide support (from excess of wealth) to the poor and needy among relatives, neighbours, prisoners and wayfarers etc. These being ethical teachings may be traced in other religions as well.
Interest is not forbidden in Islam only but by religious scriptures of Christianity and Judaism as well. Interest is also dispirited in Indian scriptures. Scholar L. C. Jain in his book ‘Indigenous Banking in India’ (published by Macmillan and Company, London in 1929) has written that “from the early Buddhist literature usury was held in contempt, as appears from the special law made against it by Vasishtha – the well-known law-giver of that period. The highest castes were not to be usurers, but the Vaishyas, who were traders, were excluded from the operation of the law. In the Jatakas also, the condemnation of usury can be seen; ‘hypocritical ascetics are accused of practising it”.So ideally Muslims along with Jews, Christian, Hindus Upper Castes and Buddhists need to refrain from interest. In other words prohibition of interest should not be termed as Islamic law, rather be considered as ethical issue guided by almost all religions and not only by Islam.
No doubt certain government schemes like Jandhan (PMJDY) is aimed at helping the poor get connected with banks, but inclusive growth cannot be assured unless the poor and deprived section of the society is allowed to improve their livelihoods by accessing affordable finance. And here we miss the required target because micro finance or bank loans can hardly help growing capital base for any establishment. Still 98.64% Indian establishments are unable to access stock market because just 1.36% establishments (7,93,446 out of 5,84,95,359) are registered under Ministry of Corporate Affairs. Despite maximum number of listed companies Indian stock markets are unable to find place in top ten stock exchanges in the world. India further needs to increase the number of listed companies by converting informal establishments into formal establishments along with improving their capital base. By providing micro equity to smaller and micro establishments we can increase the number of listed companies along with improving their capital base.
Major source of finance for 80.1% Indian establishments is Self–finance. Just 2.2% urban establishments are financed through borrowings from financial institutions against 2.4% rural establishments financed by this source. So it is clear that there is huge untapped market for financing commercial establishments in India. We need to ensure that maximum micro establishments in India should be allowed to access equity finance (like corporate draws from stock market). The performance of SME Exchange to support only 50 companies by raising Rs. 379 crores (with no trading during 2015-16) shows that 99% smaller and micro establishments are still unable to access equity from SME Exchange. Also be noted that private equity business in India is on rise because they succeeded tapping the potentials of unlisted companies and providing better returns to investors compared to stock market. Since private equity players have yet not reached 41.9 million Own Account Establishments in India, there is still huge untapped market. If Indian banks start investing micro equity into Indian micro and smaller establishments the deficit in supply of equity (after stock market and private equity) can be covered in Indian market.
Since banking segment has little experience in equity financing and also being constrained for investing less than 30% paid up capital of any company Indian banks directly invested major amounts in listed companies. But with fall in international trade after global financial crisis business of these companies trembled. They kept losing their stock prices and finally burdened the banks with as much as 55% of total NPAs. Indian banks may finance micro establishments after observing lower NPAs (12.3%) through micro industries compared to medium and large industries. There are around 60 millions self-employed workers engaged in micro establishments in India with financial need between Rs. 50,000 to Rs. 5 lakhs. It is too big to be ignored. Since Indian banks have done direct access to these micro and tiny establishment, they can try tapping them through MFIs with supply of equity finance under ticket size in the range of Rs. 50,000 to 5 Lakh.
Since under Micro Equity, the returns are linked with actual cash flow of the customer’s business, the Banks or MFI would be required to take actual transactions record of customer’s livelihood. These transactional records would help calculating the volume of transactions, amount of value additions, income generation, capital formation and payable or paid taxes. This may help us retrieve better estimates required for national accounting and taxation. India should develop advance technical support system for micro and tiny entrepreneurs to allow them use mobile app for maintaining transactional records along with financial entries related to investment, sale purchase and taxation. The cost of the app should obviously be borne by Government through taxes raised under this system.
India genuinely needs to work for financial inclusion; not just by pushing the poor to open bank accounts or by motivating general public for less cash economy. To really put India on higher growth trajectory with inclusive growth, we need to allow our banking network reach micro establishments with products like equity and lease finance instead of inducing for micro credits and loans. To develop Indian financial segment we should explore potential markets for products like micro equity, lease, forward sale, bill discounting and mutual insurance etc. It’s high time we all should stand as only Indians ensuring that fair opportunities for economic growth be provided to all without reading religious identity of each others.
Syed Zahid Ahmed, founder of Economic Initiatives, working on alternative financial products for inclusive growth in India, said: “I think we should avoid labeling interest-free banking as Islamic banking. Otherwise it will only invite opposition from the majority community and political leadership in India. We will keep pursuing interest-free banking without a religious tag and probably in collaboration with non-Muslims.”
There is no doubt that after the RBI decision all discussion on Islamic banking is back to square one. But those who have relentlessly worked to promote it in India are hopeful that one day Islamic banking will become a reality in the country.
Republished IslamicBanker’ Article From Issue 25: Any banking model with religion tag is against secularism