An Anachronism?

Islamic Banking in India

Subhash Gatade

Faith based banking in a country which has secularism en- shrined in its constitution! Does not it sound anachronous?

Well, as far as the present dispensation at the centre led by the Bharatiya Janata Party (BJP) is concerned—which has an altogether different take on secularism—it does not seem to think so. And that's why it has gladly accepted the proposal by the Saudi Arabia based Islamic Development Bank (IDB)—an international investment organisation—to start its operations here. In fact this proposal is considered a positive outcome of PM Modi's visit to Saudi Arabia sometime bnck.( April 2016) Although a date has not been announced when the Bank would start its operations here, all the formalities regarding its launching have been completed and even the city for its first branch in India has been identified. Ahmedabad would see the first branch of this Bank.

What is more India's state-owned Exim Bank would also extend around US $100 million as credit to IDB to facilitate exports to its member countries. The bank—which has 56 Islamic states as its shareholders, while Saudi Arabia holds around a quarter of its shares, UAE is its fifth shareholder—also plans to contribute towards medical treatment of rural poor in India. It plans to donate 350 medical vans as part of its social initiative.

Question arises how does India, which is definitely not part of the Islamic World, is being considered by IDB to start its operations. The deciding factor has been its 180 million-strong Muslim population which have made it an attractive place for the IDB to set its shop here. Reserve Bank of India has already given a green signal to this proposal sometime back and paved the way for Sharia-compliant interest free or Islamic banking in the country. In fact, it was late December itself that a RBI committee on "Medium-Term Path for Financial Inclusion", headed by Deepak Mohanty, had even recommended that there should also be "interest free windows" in existing banks.

The main argument put forward by the committee was that globally, interest-free banking, which is also known as Islamic banking, has witnessed a significant increase, especially in the wake of the financial crisis. Islamic finance assets have seen a ten fold increase from a decade ago and today are estimated at around US Dollars 2 trillion. It had explained the 'central concept in interest-free banking and finance as justice', which is supposed to be achieved mainly through the 'sharing of risk.' Under it different stakeholders share profits and losses and charging interest is prohibited.

Explaining the key elements which give interest free banking a distinct identity, it had talked of the following :
(i)    Riba : The most important aspect of interest-free banking is the prohibition of interest;
(ii)   Haram/halal : A strict code of 'ethical investments' operates for interest-free financial activities. Such investment to give priority to the production of essential goods that satisfy the needs of the population, such as food, clothing, shelter, health and education;
(iii)  Ghrarar/maysir : Gambling in all forms is prohibited. Another feature condemned under interest-free banking is economic transactions involving elements of speculation;
(iv)  Zakat : This is the most important instrument for the redistribution of wealth in the form of a compulsory levy.

Remember till date interest-free banking has witnessed a lukewarm response in India. During UPA regime Reserve Bank of India had clearly declined to move further on the issue. In fact, in the year 2007, the RBI working group under the then executive director, Anand Sinha, had recommended that India must not permit Islamic banks to operate in the country. It had emphasised that current regulations do not permit the model. Although at internal level a debate was already on within the bank establishment about the prospects of such a scheme. One can have a look at a report published in the April-June 2005 issue of RBI Legal News and Views which outlines the fact that 'interest-free banking is an attractive proposition gaining currency all over the world and so it was time India introduced it.'

"...Research reveals that a handsome bulk of money in India owned by believers lying idle, which, if invested in profit-sharing basis and utilised properly, can have a major impact on the Indian economy." The report further points out that such banking can be initiated in India through a single window in some banks."
What have been those regulations which seemed to obstruct the establishment of Islamic banking.

The Banking Regulation Act (1949) has provision which clearly prohibits operation of banks on a profit-loss basis (5b); they also forbid what is known as murabaha, or, the buying, selling, or barter of goods (8), impede ijara, or, bars the holding of immovable property for a period greater than seven years (9), and requires the payment of interest (21).

The idea to start Islamic banking here received a fresh boost when the National Minorities Commission, then under the Chairmanship of Wajahat Habibullah, asked the finance ministry to take a relook at it. It is a different matter that RBI, then under the governorship of D Subbarao, again declined to move further on the issue once again underlining the fact that existing banking rules do not allow interest free banking. At the fag end of UPA II regime, scenario witnessed a change and RBI allowed a non-bank finance company in Kerala to start its operations in Sharia compliant mode. Looking back one also discovers that ‘The Raghuram Rajan Committee on Financial Sector Reform (2008)’ had also  considered interest-free banking.

It was the same period in which a petition was filed in the Kerala High Court challenging the operations of this finance company on the ground that a '[f]inancial services company set up with government participation which would follow the canon law of a particular religion is a clear instance of the state favouring a particular religion.' (Dr Subrahmaniam Swamy v. State of Kerala represented by Chief Secretary and others, W.P. (C) No. 35180 of 2009, High Court of Kerala, Ernakulam) A counter-affidavit was filed by T P Thomas Kutty, the then Deputy General Manager (Projects) of KSIDC which argued that the establishment of such an institution is 'aligned to industrial development in Kerala'. It also discussed that it is basically meant to target untapped Gulf money which could only be invested in a Shariah-compliant bank. Although the High Court initially stayed the government move broadly concurring with views of the petitioner, in its final decision it dismissed the petition and it "observed that although the institution was based on the principles of a religion, its motive was not to propagate the religion and the state's participation in it was purely based on commercial prospects." (The Times of India, February 4, 2011, p.1.)

As of now barring some rabid rightwing commentaries there is not much discussion in the mainstream media about introduction of 'faith based banking' here, and instead one witnesses purely economic arguments being put forward supposedly to justify this debatable move. It is being argued how leading multinational banks are also engaged in tapping this 'market' and introducing products suitable for Islamic banking or how worldwide it is growing at a faster rate vis-a-vis standard banks. Sample this report which appeared in a publication :
….a 2014 study by Ernst and Young found that assets under management by Islamic banks grew at an annual rate of 17 percent between 2008 and 2012 three times as fast as those under management by standard commercial banks.

Would it suffice if the debate continues in similar fashion, where rabid rightwingers—who have no qualms equating Islam with terror, challenge it on similar grounds—or at the other end of the spectrum economists singing paens to its advantages of attracting hitherto untapped funds? Perhaps there has to be a third way to look at the whole phenomenon.

And it should begin by raising broadly three categories of questions :
—   how did Ulemas or Islamic scholars of yore looked at introduction of modern banking,
—   how countries which call themselves Islamic look at this proposition, are they ready to convert their modern banking system into Islamic Banking or have kept their efforts at a symbolic level only,
—   whether this move would prove really beneficial for those Muslims who are financially excluded or would it pave the way for their further pauperisation.

It is important to note that the very idea of Islamic banking and promoting it as a parallel to conventional banking—which is being portrayed as un-lslamic—and which has caught the imagination of a section of god fearing Muslims, is a clear manifestation of shifts in Muslim politics the world over. One can look at the debates in colonial India between Muslim scholars when modern banking was being introduced and a section of the ulemas who objected to it on the basis of their understanding of Islamic principles. In his important intervention on the subject Ather Farouqui says (Islamic Banking in India at the Service of Pan-lslamists, MAINSTREAM, VOL L, NO II,MARCH 3, 2012),

According to eminent Muslim thinkers of the twentieth century including Maulana Shibli Nomani and Allama Iqbal, bank 'interest' is a profit on investment or charge on capital and when it is not exploitative, it is not riba.

He also quotes a
…a letter dated January 17, 1932 to Khwaja Abdur Raheem, Allama Iqbal writes, "Interest in every form is prohibited. But this is so in an ideal society. Fatwa of Shah Abdul Azeez is that to draw bank interest is permissible." [BA Dar (ed.), Anwaare Iqbal (Karachi: 1967), p. 245 (publication house not known)]

A major exception to the unfolding discourse seemed to be Maulana Abul Ala Maududi (1903-79), founder of Jamaat-e-lslami. For him shariah-compliant financial practices were part of the larger project of Islamism who sought to overwhelm every aspect of the state and society by the medieval norms enshrined in shariah law. The idea had not many takers till late sixties or early seventies which received a boost by Saudi oil wealth in the 1970s. According to Sadanand Dhume,
‘‘Maududi envisioned Islamic finance as accomplishing three goals: minimising Muslim interaction with non-Muslims, deepening the transnational identity of the community of believers, or ummah, and injecting Islam into every aspect of daily life. Over the years, Islamist groups worldwide, including the Muslim Brotherhood in the Arab world and the Jainaat-e-lslami in the Indian subcontinent, have worked tirelessly to advance these objectives. It's no coincidence that Islamic finance has grown along with a broader swing in the Muslim world away from secularism and toward literalist interpretations of Islam’’.

Dhume's article which was written when SBI had initiated a Sharia compliant fund, (end of 2014) also poses few basic questions which cannot be brushed aside easily. He asks,
‘‘Should state-owned institutions in an avowedly secular republic advance Islamist political goals? Is India better served by integrating its 150-million strong Muslim population into the financial mainstream, or by ghettoising it in the economic equivalents of Ahmedabad's Juhapura or Thane's Bhiwandi? Does the new fund inch India closer toward accepting Islamic banking, which it has so far avoided?'

Faruoqui's article also discusses experience of Islamic countries. According to him in Saudi Arabia banks, are involved in charging and paying interest. The only difference from other modern/conventional banking is that they ‘employ semantics’ and instead of using the term interest use the terms profit-loss sharing. Looking at the fact that it is an oil-rich economy, banks there rarely face losses and the depositors 'share the profits' which is not considered 'riba' (usury).
The most interesting case vis-a-vis Islamic banking pertains to Pakistan. Here few years back Islamists demanded to overhaul the conventional/modern banking system for an end to the interest paying system. The Federal Shariat Court also ruled in their favour but the government did not take it up in the legislature. When the matter went to Supreme Court, it has set aside the judgement and the matter is still pending.

Ather Farouqui writes :
‘‘Even in an Islamic state such as Pakistan, therefore, interest-free banking has till date been unsuccessful largely due to the lacunae in the existing system but also as a result of the dichotomy between overemphasis on religious principles while trying to find one's place in a globalised market economy’’.

Providing details of judicial intervention he further narrates that Pakistan's Supreme Court in a judgement (PLD 2000 SC 225) held that the country's current interest-based system needs to be replaced with one that is Shariah compliant, but when a review petition was filed (PLD 2002 SC 801) this judgement was suspended and the court forwarded it to the Federal Shariat Court for reconsideration, which is still pending there. And challenge to deal with the issue is not theological, it is pure economic. Unlike Saudi Arabia, Pakistan, is not oil-rich and is dependent on international aid like its many other third-world counter-parts. And thus the Ulemas may cry hoarse about replacing an interest-based economy with a Shariah compliant one but for Pakistan to remain part of international financial system, it will have to service the debts from time to time and it cannot be done if its economy fully switches to interest free regime. Justice Wajihuddin Ahmed clearly spelled it out in PLD 2000 SC 780-1: (Excerpted from Islamic Banking in India at the Service of Pan-lslamists MAINSTREAM, VOL L, NO 11, MARCH 3, 2012)

Last but not the least one also needs to look at the claim that Islamic banking would augment financial inclusion of those (Muslims) who have remained aloof from conventional banking system for various reasons. True that a huge section of the Muslim population has been left out of the ambit of banking services. Sachar Commission had rightly noted,
"The access of Muslims to bank credit, including priority sector advances, is low and inadequate. The average size of credit is also meagre and low compared with other socio-religious communities both in public sector and private sector banks. The position is similar with respect to finances from specialised institutions like the SIDBI and NABARD. Census 2001 data show that the percentage of households availing themselves of banking facilities is much lower in villages where the share of Muslim population is high…. The financial exclusion of Muslims has far-reaching implications for their socio-economic and educational uplift."

This financial exclusion could be considered a culmination of various factors. It has to do with the fact that majority of the population is poor and engaged in informal sector, it is also because of a certain mindset prevailing in the banking sector, which has categorised Muslims and Muslim dominated areas as "negative zones" (which is documented in the Sachar report), and also for reason of faith.

It is worth noting that because of educational backwardness of a large number of Indian Muslims—the stranglehold of Islamist thinking even among a section of the educated ones, this particular issue of bank interest has become a live issue among the community. A measure of it can be had from a report of the Reserve Bank of India itself (April-June 2005 issue of RBI Legal News and Views) which has rather prompted it to revisit its earlier policy of not having anything to do with Islamic or interest free banking :
"It is reported that in India thousands of crores earned in interest is kept in suspended accounts as believers do not claim it. The assets controlled by Muslims are estimated to be $1.5 trillion and growing at 15 per cent a year. In Kerala alone, it is reported that this money could be above Rs 40,000 crore".

An important fallout of this thinking is that number of 'Islamic banking' organisations have come up in areas where population is predominantly Muslim where unscrupulous elements—who are able to derive support from a section of the clergy—are able to hoodwink the ordinary Muslim masses in very many ways. The simplest way in which they do is they gather monies from gullible masses, invest a significant portion of the same in conventional commercial banks, and use the interest for personal aggrandisement and return the money back to the investors when needed or demanded without any addition.

'Milli Gazette' had time and again reported activities of another type of fraudsters who had robbod ordinary Muslims of their precious savings under the name of 'Islamic investment'.
Delhi-based Al-Falah investment group downed its shutters in the densely Muslim populated area of Okhla and left investors high and dry. It is not the first instance when a non-banking investment company collecting millions of rupees in the name of Islamic and halal investment schemes has bolted with no trace. ...According a brochure of the company, Al-Fahad worked on the principle of participation in profits. The amount invested by people, a group or trust in different schemes was to be utilized to finance various profitable ventures. The profit so earned was to be shared among investors and the company (in the ratio of 80:20)...

Four years later it reported about another incident : "Islamic" fraud is back. New "al-Falah" on the prowl.
While a sizable number of Muslim investors are still recuperating from the scars inflicted by Al-Falah brand of "Islamic" financial sharks, there is now another "al-" brand of companies claiming to be an associate of a multinational Islamic finance group. Unlike Al-Falah this group has adopted another route for harassing poor Muslims.

The company is AI-Barr Finance House (formerly known as Al Baraka Finance House Limited) headquar-tered at Mumbai and branches in Andheri, Azamgarh, Aligarh, Bhiwandi, Chennai, New Delhi and Kanpur according to their website. ….Al-Barr's modus operandi is that it would approach local traders with an option to finance their business in Islam-permitted methods. People are told they will get rid of the cumbersome and time-consuming procedures normally adopted in conventional finances. In the name of helping them -"avoid" the blight of riba and reap Barakah here and in the Hereafter, victims end up paying more than 50 percent interest in the disguise of "Islamically" permissible Murabahah....

Perhaps one needs to revisit the claim that Islamic Banking would prove to be an antidote to financial exclusion of Muslims from conventional banking. As the above examples—which have been randomly selected—demonstrate, there is a greater possibility that it can rather become a new vehicle for further squeezing them of interest (from their hard earned money) or in worst cases of the money itself.

To conclude, the not so silent introduction of Islamic Banking in India has once again exposed BJP's double standards.

There was a time when BJP attacked Congress for its tendency to equate secularism with pandering to the concerns of the most orthodox elements among Muslims. It had even coined a term for it : 'appeasement'. If one tries to reach the kernel of the argument regarding Islamic banking, one can similarly see that at its heart and stripped of financial complexities, this is what it represents. And today BJP is going gaga over it and in fact it has no qualms in becoming a pall bearer of Maududi's worldview, rather vindicating the oft repeated dictum that fundamentalisms of various kinds feed on each other.

Vol. 49, No.7, Aug 21 - 27, 2016