The Kerala High Court’s stay on the proceedings of the newly-formed company based on Islamic banking principles by Kerala State Industrial Development Corporation (KSIDC), on a writ petition by one Dr Subramaniam Swamy, is a blessing in disguise. It will definitely give an opportunity to the vast majority of our countrymen, Muslims included, to learn about the progress of Islamic finance and banking after the current financial tsunami in the West, and as a possible alternative to the highly exploitative, as well as speculative, conventional financial system.
Al Barakah Financial Services Ltd (ABFSL) by KSIDC is only a non-banking financial company (NBFC) under RBI Act (2) of 1934, and is registered under the Company’s Act, 1956. It is not a banking activity as per Section 5 of the Banking Regulation, 1949, which has to be amended if the Islamic banking option has to be accommodated.
The apprehension that this company being based on Shari’ah laws would be beneficial to only Muslims and exclude the vast majority of the Indian population is ill-founded.
Two of the director-promoters of Al Barakah are CK Menon, Chairman of Behzad Group, and PNC Menon, Chairman of Sobha Group. Even Ernst & Young, in a feasibility report, mentions in the target customer segment that it will provide financial services not only for Muslims but for all other communities as well. KSIDC has promoted this venture targeting the investments of a large number of Gulf Muslim NRIs and HNIs who are not depositing their savings in conventional banks because of non-availability of interest-free option.
After the successful launch of Al Barakah, the Kerala government was to issue sukuks (Islamic bonds) based on assets for future mega infrastructural projects. Investors in the Middle East after 9/11 are looking towards India for safer investments on long-term infrastructural projects based on Shari’ah guidelines and, according to experts, trillions of dollars are awaiting to be invested if this option is provided. Last year, Prime Minister Manmohan Singh also spoke of the marriage between the finance of oil-rich Qatar and skill and opportunities of India.
Islamic finance prohibits usury, the collection and payments of interest and trading in financial risk. It has a moral compass and prohibits investments in businesses that are considered unlawful, like alcohol, vulgar entertainment, environmental degradation and weapons of mass destruction. Risk and reward characteristics of this system are unique due to the nature of profit and loss-sharing arrangements. It treats depositors as investors distributing profits or losses from ventures according to shared risk taken by the parties. It provides ethical solutions for preventing financial crisis due to its reliance on mostly real asset-backed transactions, avoidance of sub-prime securities and avoidance of financial leverage from hybrid products like derivatives and associated creative accounting.
Islamic finance is also less prone to inflation and less vulnerable to gambling like speculation, both of which are fuelled by the presence of huge quantities of debt instruments and derivatives in the market. It stimulates real sectors in the economy instead of financial engineering, performs the critical function of mobilising savings and intermediates them for investment to generate growth and alleviate poverty among the excluded and unbankable segments of the poor and low income groups, thereby enabling them to participate and benefit from economic growth.
Islamic banking is an alternative system based on equity and justice and socially responsible investment, largely insulated from subprime crisis and is welcomed by all communities. As many as 40% customers in Malaysian Islamic Banks are Chinese and in UK, Islamic banks, 20% customers are Christians, Hindus and Sikhs.
Internationally, Islamic banking is one of the fastest-growing segments in financial services, holding assets of $1.4 trillion. About 70 countries, including UK, USA, Japan, Singapore and France, have amended banking regulations to provide a level playing field for Islamic banking along with the conventional system.
The high-level committee on financial sector reforms of Dr Raghuram Rajan, former IMF chief economist, has recommended interest-free finance on a larger scale, including through banks, with the objectives of inclusion and growth through innovation.
India has the potential of an emerging market for Islamic banking, provided there is the political will, favourable change in the regulatory environment and increased awareness among Muslims and India as a whole. The option of the nomenclature to term it interest-free, non-interest, alternate banking can also be considered, provided these are Shari’ah compliant.
It is high time that an amendment in the Banking Regulations, 1949, is enacted in the Parliament and enforced by the RBI. Different models are available from UK, Singapore, Japan and Malaysia. The regulators can choose one feasible to the Indian situation.
In a detailed discussion with the ICIF delegation, Dr Chakrabarty, Deputy Governor, RBI, said the RBI has launched special programmes to increase the reach of the banking to the people. In this context, interest-free banking will be welcomed as well, but for that the GOI should take a decision. Subsequently, in a meeting with FM Pranab Mukherjee, a detailed memorandum was submitted to accommodate Islamic banking in conventional regulations. Recently, a delegation of MPs under the chairmanship of Deputy Chairman of Rajya Sabha, Rahman Khan, met PM Manmohan Singh, who assured them he would discuss the proposal of Islamic banking with the Finance Minister.
It is expected the Finance Minister would incorporate the proposal of interest-free banking in the forthcoming budget speech. This will be a major step for inclusion of the minorities and marginalised segments of the country, as well as attracting investors from the Middle East to continue a growth rate of 8-10% and provide a roadmap for our march towards a developed country in the decades to come.
[The writer is General Secretary, Indian Centre for Islamic Finance (ICIF)]
