By: – Syed Zahid Ahmad
In 2006 the RBI’s Working Group to examine the financial products used in Islamic banking stated 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’. RBI officials despite being financial professionals took ten years to apprehend and recommend Islamic banking windows for financial inclusion. Besides Deepak Mohanty Committee and Inter Departmental Group, the Central Board of RBI was convinced that Islamic banking would help attaining financial inclusion in India. But the way State Finance Minister declined RBI’s proposal; it seems only mysticism induced political boycott for Islamic banking in India.
Government declared RBI’s proposal of Islamic Banking as irrelevant
It was often asked that if countries like UK, France and Switzerland can adopt Islamic banking, why India can’t go for it? Answer is that unlike these countries India experienced worst riots among religious communities during partition to get political independence. Unlike these countries India is still unable to resolve conflicts over issues like Babri Masjid Ram Janm Bhoomi. Considering socio – political sensitivity over religious issues amidst few incidences of religious intolerances in recent past, it was never easy for the Government to approve RBI’s proposal about Islamic banking in India. Thus on 9th December 2016 the State Finance Minister Shri Santosh Gangwar stated 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.
Islam basically guides the humanity for fair transactions
According to level of economic development, the model of banking and finance for particular economy may differ from others. Historically the models of banking and finance have changed drastically. Had Islam prescribed any banking model in 7th century that might have found irrelevant for people of 21st Century? Since Islam is a Godly defined art of living meant for all; instead of prescribing any banking model for a particular economy, through ethical principles guides the humanity to transact fairly by all human beings. According to Islamic teachings accumulation of wealth through interest or by any unethical practice is prohibited; wealth should not be hoarded with misery; nor should circulate among the richer 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. Islamic teachings are so secular that even in practice like Zakat (specific financial prayer) fractional amount is provisioned for non Muslims. So, Islam is not meant for religion based banking and finance rather guiding the humanity to deal fairly while transacting each others.
Islam not guide for religious banking model
Considerably the model of Islamic banking prevalent today was not there at time of Prophet Muhammad ﷺ, or during his companions; nor it can be proved as established in light of any specific Ayat from the holy Quran or sayings of Prophet Muhammad ﷺ. It was only 1950s when some bankers realizing the need of interest-free finance, presented Islamic banking model with collection of Shariah compliant financial products. These products were retrieved through tailoring Shariah compliant transactional behavior. Nevertheless it should be noted that Saudi Arabia despite holding 32% asset of so called global Islamic banking asset does not have any commercial bank on the name of Islam. After observing upsurge trend in Islamic banking around the world, Muslims in India with limited financial skill instead of asking for equity based products started appealing for Islamic banking in India. To assist them global Islamic banking professional presented their viewpoints before the RBI to convince that this model has higher prospects in India; but were certainly not capable to understand the socio-political sensitivity about Islamic banking in India. It led a politically controversial proposal of Islamic banking windows for financial inclusion of Muslims which was declined without being discussed in the Parliament.
Calling Interest – free banking as Islamic Banking is a mistake
Considering the socio political fabric of India where Hindus are in majority, it is better to understand that interest is not forbidden for Muslims only, but also for other communities like Christians and Jews etc.. Interest is also not admired in Hindu and Budhist 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 Hindus Upper Castes and Buddhists should also refrain from dealing with interest. In short prohibition of interest should not be called as Islamic Banking. It may rather be counted as ethical issue mentioned in almost all religions and not only in Islam.
Islam is not against secular fabric of Indian Finance
Indian capital market is largely Shariah compliant without any mystical practices in the stock market. Notably more non Muslims are users of Shariah index compared to Muslims. Similarly if we resolve to design and adopt micro equity products under banking network so as to financially support 50 millions micro and tiny establishments who are otherwise deprived of capital support, we can help India develop one of the best banking models. Besides allowing India to attain a better growth trajectory micro equity products may also allow religious Muslims to access required finance for economic development. Indian banking needs to explore potential for portfolio management, mutual funds and equity financing (direct as well as through venture capital). Equity financing could be for listed / unlisted but registered (under MCA) companies. There could be simple equity finance or diminishing equity finance to allow poor people accumulate capital.
Challenges for Micro Equity Finance in India
Still in India majority of micro establishments are not eligible to approach banks or stock markets for equity finance. Considering the limitation to finance less than 30% of paid up capitals through equity investments, and very little experience in dealing with micro enterprises, it may be better option for banks to invest in financial institutions or cooperatives who have better reach to poor and needy customers seeking micro equity. Further considerably the fact that just 12.3% bank’s NPAs (including write offs and restructured loans) are through micro industries against 55.2% NPAs by medium and large industries; banks may also like to reach more of micro and tiny establishments through MFI or cooperatives.
Micro Equity Finance may also help creating a more transparent economy
We need strategic plan to boost financial inclusion for inclusive growth so that required capital should flow to poor and deprived communities in our economy. To attain required CRAR as par Basel –III standard Indian banks also need to raise capital resources. This would only be possible if banks succeed to reduce their NPAs and increase returns over investments without exploiting their borrowers. If equity financing is linked with digital payment system it may help creating transparency. The transparency in commercial transaction will help countering corruptions. It may enable us propose that ‘X’ amount of equity would promote ‘Y’ amount of value addition after ‘C’ level of consumption and ‘I’ amount of capital accumulation. This proposition is not possible under debt finance, however it is very much possible under equity finance.
Islam is a secular religion based on Godly prescribed guidelines to make a justified economy to live in. Islam has not prescribed any particular model of banking; but set principles to do transactions without exploiting anyone. The financial products based on equity can be introduced as pilot project in India without any legal problem. There is huge untapped market for micro equity finance in India where around 50 millions micro and tiny enterprises are deprived of finance from formal financial sources including banks and stock markets. Micro equity finance may not just enable millions of unorganized sector enterprises, but also enable us to know how much value addition is done through micro equity extended to micro enterprises. Through micro equity finance we may also be able to make better estimate for capital formation in our economy. This product can better support digital monetary transactions and may also be supportive to launch transactional tax in future. Ultimately micro equity finance can not only support the poor workers engaged as own account workers in the unorganized sector, but also enable millions of Muslims deal freely along with maintaining secular fabric of Indian finance.
Syed Zahid Ahmed can be reached on – email@example.com)