By H ABDUR RAQEEB (General Secretary, Indian Centre for Islamic Finance (ICIF)
ISLAMIC BANKING has emerged as a viable and possible alternative to conventional banking after the financial Tsunami of 2008 in the west particularly the sub-prime housing mortgage crisis in USA. WHY ?
Soon after the financial tsunami in the West .Mr Klaus Schwabb, Executive Chairman of World Economic Forum declared in 2009: “Today we have reached a tipping point, which leaves us only one choice- change or face continued decline and misery.”
The change envisaged by Mr Klauss is the introduction of an alternative finance and banking system based on Equity, Justice and fair play instead of debt financing and toxic products used in sub-prime mortgage.
Gordon Brown, former Prime Minister of Britain was specific when he said at the G20 meet: It is time for a value based market which is premised on a shared global ethics. A market with morals is possible based on demanding responsibility from all and fairness to all”.
The Vatican offered Islamic finance principles to Western banks as a solution for worldwide economic crisis. “The ethical principles on which Islamic finance is based may bring banks closer to their clients and to the true spirit which should mark every financial service,”
Chief Justice of England Lord Philip said that Islamic legal principles could be employed to deal with family and marital arguments and to regularize finance
Mr Vaidiyanathan, Professor of Finance, Indian Institute of Management, Bangalore commented: “The country should call for an alternative global financial architecture, which is built on the real economy and not on the paper economy.”
Even after forty years of nationalization of the banks, 60% of the people do not have access to formal banking services and only 5.2% of the villages have bank branches. Marginal farmers, petty traders, land less labours, self- employed and unorganized sector enterprise, ethnic minority and women-AAM AADMI of the country continue to form “the financially excluded class”.
India is prospering, but Indians are not. 20 richest Indians earn as much as what 30 crore poorest people are earning, writes Bimal Jalan, former RBI Governor. While GDP growth is nearly 9%, AamAadmi, the 860 million marginalized Indians earn only Rs 20 per day. The system has created two sections in our societies: super rich and super poor
In this scenario when farmers committed suicides, father of Green revolution, Dr MS Swaminathan suggested that Islamic banking may be solution to farmer suicide crisis in Vidharba. Speaking at Karuna Award Function at Chennai he said “Islamic banking may be the solution to farmer suicide crisis in Vidarbha”. “Even yesterday we heard news about 30 farmers who committed suicide in Vidarbha. Islamic banking, which propagates zero interest lending, could hold the key to solving this crisis” he said.
Recently Government of Madhya Pradesh has passed the scheme for zero interest loans to farmers with retro April 2012 and BJP then National President Nitin Gadkari has said that if BJP is voted to power it will be implemented throughout the country.
Successful stories of Grameen Bank system by Prof Mohammed Younus in Bangladesh provided a great boost to microfinance world over and in India several institutions came up to help petty traders, landless labourers and women, following his example.
What is the condition of these Microfinance institutions in India?
The pathetic situation of the topmost microfinance institution- SKS Finance has been researched and recorded in a recent article of the Hindu titled Small loans add up to lethal debts-“More than 200 poor, debt-ridden residents of Andhra Pradesh killed themselves in late 2010, according to media reports compiled by the State government.Incidents like woman drank pesticide and died a day after a loan agent told her to prostitute her daughters to pay off her debt. One agent blocked a woman from bringing her young son, weak with diarrhoea, to the hospital, demanding payment first”.
Now RBI has come out with strict guidelines enforcing the Malegam Committee Recommendations. Andhra Pradesh government has announced to introduce interest-free loans for women in self help groups, with an outlay of Rs 1,400 crore from next financial year.
- RBI Working Group on Islamic Banking
In 2005, RBI constituted a working group under Mr.Anand Sinha, then Executive Director, RBI to examine “financial instruments used in Islamic Banking”. The report mentions that if the banks in India are to be allowed to do Islamic banking; appropriate amendments have to be made in the Banking Regulation Act. Interestingly the report under the caption Overview of the philosophy and basic principles of Islamic Banking mentions that in addition to non acceptance of interest based transactions, the fundamental tenet is that of fairness. It envisages ethical practices, contributions towards a more equitable distribution of income and wealth and active participation in achieving the goals and objectives of an Islamic economy.
Anand Sinha Committee report was indeed a fair report but contracts which are used by modern Islamic financial institutions like Accounting and Auditing Organization for Islamic Finance Institutions(AAOIFI) and Islamic Financial Services Board (IFSB) and also The Working Group Report prepared by other Modern, Secular and Industrialised Countries who accommodated Islamic finance in their system like Financial Services Authority (FSA) of UK and Monetary Authority (MAS) of Singapore & HM Treasury have not been taken into consideration.
In an article titled “Islamic Banking- Banking for a change” by BinduVasu, Legal Advisor of RBI in “RBI legal Views and News Journal” concludes: “As an initiative towards introduction of Islamic Banking in India a single window can be set up in some banks like State Bank of India to do Islamic Banking. This can tap the unused money lying idle that can be utilized for the economic and social benefit of the nation”
Prime Minister Manmohan Singh has himself announced in Kuala Lampur in 2010 that he would ask RBI to look into the successful model of Islamic Finance in Malaysia.
- Report of Committee on Financial Sector Reforms of the Planning Commission
In 2008, The Planning commission constituted a High level Committee called Committee on Financial Sector Reforms (CFSR) under Dr Raghuram Rajan, former IMF Chief Economist and the present RBI Governor which recommended interest free finance to be introduced in the main Banking sector with the objective of inclusion and growth through innovation.
“Another area that falls broadly in the ambit of financial infrastructure for inclusion is the provision of interest-free banking. Certain faiths prohibit the use of financial instruments that pay interest. The non-availability of interest-free banking products (where the return to the investor is tied to the bearing of risk, in accordance with the principles of that faith) 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. This non-availability also denies India access to substantial sources of savings from other countries in the region
While interest-free banking is provided in a limited manner through NBFCs and cooperatives, the Committee recommends that measures be taken to permit the delivery of interest-free finance on a larger scale, including through the banking system. This is in consonance with the objectives of inclusion and growth through innovation. The Committee believes that it would be possible, through appropriate measures, to create a framework for such products without any adverse systemic risk impact.”
China for Islamic Finance & Banking
Hong Kong has reviewed its plans for financial services. According to its Secretary for Financial Services and the Treasury, Professor K C Chan , it has tabled a plan at the legislative Council (LegCo) supporting China’s National 12th Five Year plan through the Mainland and Hong Kong by closer Economic Partnership Arrangement.
He also said that to strengthen further competitiveness of the asset management industry, the government will, for example, enter into more comprehensive agreements for the avoidance of double taxation, and continue to develop an Islamic financial platform, modernize the Trustee Ordinance and step up overseas promotion.
Should our great country India also do the same as China to attract GCC investments by opening up the market for Islamic Finance to develop infrastructure to compete China?
In Kerala, Left Democratic Front Government under the former Finance Minister Mr.Thomas Isaac initiated a Rs1000 crore Non-Banking Financial Company (NBFC) named Al Barakah Financial Services Ltd based on Shariah principles. This NBFC was with 11% share of Kerala State Industrial Development Corporation-KSIDC, a Kerala State government institution along with 89% share of the public mostly from NRI of Kerala. This initiative was taken after conducting a feasibility report by Ernst & Young. Dr Subramanian Swamy filed a petition in the Kerala High court arguing that it is against the secular constitution of the country mandate contained under Article 27 which categorically says that freedom as to payment of taxes for promotion of any particular religion, no person shall be compelled to pay any taxes, the proceeds of which are specifically appropriated in payment of expenses for the promotion or maintenance of any particular religion or religious denomination”
A landmark and historic Judgement was pronounced by the high court of Kerala chaired by the Chief Justice Mr L Chelmeswar and Justice P R Ramachandra Menon. The respondents were not only State of Kerala, and KSIDC and newly formed Al Barakah Financial Services Ltd but also Union of India represented by Finance Ministry and Reserve Bank of India. Indian Centre for Islamic Finance (ICIF) was also a respondent.
Dr Subramaniam Swamy was party in person and argued forcefully and on the other side Advocate General of Kerala, Senior Advocate Mr Nageshwara Rao and Dr Rajeev Dhavan debated the contentions of Dr Swamy and dealt with various constitutional and legal aspects and finally Dr Swamy’s petitions against the said NBFC was dismissed. The judgement also defined what Shariah is and quoted a very substantial portion from the book by Mr HAR Gibbs, the famous historian.
The Judgement made the significant observation
“no specific prohibition contained in any statue which makes it impermissible to carry on the Islamic Banking”.
VK Krishna Iyer, doyen of Indian judiciary was forthright when he said inaugurating the International Conference on Islamic Finance “I welcome Islamic finance in India, Islamic finance has proven successful in poverty alleviation and promoting sustainable growth in many countries, including the United States, and it is very relevant in our country where 20 million people are starving, Those who support humanism should welcome Islamic banking and finance in India, Iyer criticized those who oppose Islamic finance on religious grounds. “The interest-free Islamic finance is a better option for countries like India. People may doubt whether this system can survive without taking interest. But I can tell you that a system that supports social development will never fail “
Islamic Banking is for all
Boston Consulting Group (BCG) a leading financial and management consultant Group of the world and Knowledge partner of FICCI-IBA (Federation of Indian Chambers of Commerce and Industries – Indian Banks Association) conference of every year has come out with an article on Islamic Banking-Can you afford to ignore it? BCG says: “What is more, Islamic banking is not just for Muslims nor is it in any way arcane or esoteric. At its core it is banking that follows a stringent set of principles, aims to be socially and ethically responsible, and embraces high transparency and shared risk. Successful marketing campaign targeted at Non- Muslims emphasise just such characteristics. Indeed some pundits have drawn an analogy between Islamic banking products and various types of cuisine that are prepared under strict faith based guidelines- but are nonetheless appealing to the general population”.
Mr R Seetharaman , CEO, Doha Bank said “ I recommend considering the shariah based banking systems and shariah compliant products that would greatly protect the interests of entrepreneur and the banks. Equity based finance in an ethical banking model has proved its advantages over interest-based lending in the region’s experience and can be considered for emulation in India also.”
Thus it is proved that India needs Islamic finance & banking for inclusive growth of the Indians as a whole and for the infrastructure development of the country and to compete in development with China.
Principles of Islamic Finance and banking
The most important principles on which the modern Islamic finance framework rests on:
- Prohibition of the payment or receipt of interest: Money itself is considered to have no intrinsic value-it is merely a store of wealth and medium of exchange.
- Prohibition of uncertainty or speculation: Everybody participating in a financial transaction must be adequately informed and not cheated or misled. Derivatives and debt financing is prohibited.
- Prohibition of financing certain economic sectors: Investment is forbidden in what are considered to be socially detrimental activities like gambling, pornography, alcohol, armaments, etc.
- Risk Sharing & Asset-backing principle: The investor and investee must share the risk of all financial transactions and financial transactions should be unpinned by an identifiable and tangible underlying asset.
Characteristics of Islamic Finance
1 ) Circulation of Wealth:
The wealth produced in a society must be distributed in a just and fair manner, so that it may not be concentrated in the hands of a few people.
2) Real Economy not Financial Engineering :
Islamic Finance insists on Real Economy where there is a physical presence for what is traded,manufactured , leased and sold . It Prohibits Speculative trading practices beautifully termed as Financial Engineering consisting only of tradable paper with financial values that rise and fall based upon the value with no backing of Real Assets.
The financial tsunami of 2008 and the recent Euro zone financial crisis has proved that the world needs alternative financial system based on ethical values and socially responsible investment mechanism that calls for equity finance instead of debt finance and derivatives. As both the market and Marxist financial systems have failed to satisfy the masses throughout the world as Occupy Wall Street movement had demonstrated, and is looking for a viable alternative and wish to experiment with Islamic finance which is growing at the rate of 15% every year.
India Needs alternative finance and banking in terms of Islamic finance and banking for inclusive growth of the marginalized and the minorities- the AAM AADMI of the country and also for the infrastructure development to reach a growth rate of 8-10%.
It is therefore urged that in our country, Government of India – Finance Ministry & RBI should re examine its stand on Islamic Finance and create an attractive environment for Islamic Finance investors to participate in the market as undertaken by Modern, Secular & industrialized countries.
The writer can be contacted at firstname.lastname@example.org