ISLAMIC BANKING,, believed to be an interest-free, participatory and ethical banking system, has been an emerging global paradigm of the banking system since the last quarter of the twentieth century. The essential feature of Islamic banking is the prohibition of taking and giving of interest in all form of banking and financial transaction. In place of an assured return on loan amount by the interest rate in the conventional banking system, the Islamic form of financing advocates the profit-loss sharing module. Taking a risk is the only provision that entitles one to profit, if there is no risk of loss then there is no assurance of profit to the depositor or the financer. The conceptual framework of Islamic banking is mainly developed by the Islamic economists of the Indian subcontinent; in particular, the complete non-interest banking module was developed for the first time in 1969 by Nejatullah Siddiqi though the business of Islamic banking flourished in West Asian countries, Iran, Malaysia and Indonesia.
The client network is now expanding beyond the conventional Muslim countries to European and other non-Muslim territories; in the UK, it is estimated that $18.4 billion business was done by the end of 2008. According to newest Global Islamic Finance Report 2011, the Islamic finance industry is valued at $1.14 trillion and is growing at a rate of 10 per cent. It was worth a mere $150 billion in the mid-1990s. Apart from Islamic banks, mainstream banks and financial institutions are opening Islamic product windows to woo Muslim consumers. For instance, HSBC has HSBC Amanah for its Islamic financial services. The governments of Iran, Pakistan and Indonesia have officially adapted to Islamic policies to run their banking and finance structure. And due to its cosmopolitan society, Malaysia follows the parallel Islamic system alongside conventional banking.
Banking without interest is a long term demand from Indian Muslims that has not been fulfilled so far due to the existing statutory and regulatory framework of Indian banking, which does not allow such an alternate system. Besides interest, a key point of contradiction is that conventional banks in India facilitate only intermediary services while banks have to be involved in trading and business activities in the Islamic banking system. Indian Muslims have seen several unsuccessful experiments in the unorganised sector and through the registration of NBFCS and cooperatives but the lack of government regulatory supervision has led to the failure of major interest-free banking initiatives.
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The non-availability of an interest-free banking option has distanced many Muslims from banking products and services. The Reserve Bank of India (RBI) data report for March 2010 indicates that banking participation in Muslim- concentrated districts is below the national average. They lack in banking access, infrastructure availability and low credit-deposit (CD) ratio. The results were based on an analysis of six districts, which were selected from various states, with fifty per cent or more Muslim share in the population. The detailed analysis is given in the table.
The Sachar Committee report of 2006 highlighted the numerous issues involved in Muslims accessing bank credit and the discrimination by scheduled commercial banks in facilitating credit and other services in Muslim-concentrated areas. Based on the recommendations of this report, the United Progressive Alliance government started the Prime Minister’s New 15 Point Programme for the welfare of minorities, and included the target of enhanced credit support to Muslims for economic activities.
The overall target was to provide 15 per cent priority sector lending to the minority community. But, the lending by public sector banks was 11.42 per cent, 13.14 per cent and 14.16 per cent as on March 31 of 2009, 2010 and 2011 respectively. The reason behind relative exclusion of Muslims from banking services, as pointed out by the Planning Commission-sponsored Raghuram Rajan committee on financial sector reforms in 2007, was that ‘the non-availability of interest-free banking products results in some Indians, including those in the economically disadvantaged strata of society, not being able to access banking products and services due to reasons of faith’.
Other eye-opening facts reported in the RBI study, with reference to a newspaper report, were that in India thousand of crores of rupees earned in interest are kept in suspended accounts, as Muslim believers do not claim it. The assets controlled by Muslims are estimated to be worth $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. Research reveals that bulk of the money in India owned by Muslim believers is lying idle, which, if invested in profit-sharing basis and if utilised properly, can have a major impact on the Indian economy.
INDIA CAN also attract foreign investment from Muslim countries by providing an alternative interest-free banking system. A majority of the non-resident Indians (NRIS) working in the Gulf region belong to the Muslim community. Approximately 45 per cent of the total foreign remittance to India, worth $24 billion, came from GCC (Gulf Cooperation Council) countries in the year 2010. Impressed with the potential of nri remittance, the first government-sponsored interest-free NBFC, Al Barakah Financial Services Ltd, began last year in Kerala with the partnership of the state, specifically the Kerala State Industrial Development Corporation (KSIDC). Barakah would be a unique company with an authorised share capital of Rs 1,000 crore and would perform on the principles of an Islamic financial institution. It will not operate as a bank and extend loans but will make direct investments into infrastructure projects not linked with pork, alcohol and other non-Halal products, after which profits would be shared in the form of dividends and not as interest. KSIDC has 11 per cent stake and the rest would be raised by NRIS and the state’s Muslim population. After the introduction of the Shariah index in the Bombay Stock Exchange (BSE), this is the second serious attempt to include the Indian Muslim in a mainstream financial setup.
Shafeeq Rahman is a professional researcher on India-centric socio economic and political databases
rahman.shafeeq@gmail.com
rahman.shafeeq@gmail.com
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