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Islamic Finance


The judgment of Kerala High Court dated 3rd February, 2011, dismissing the writ petition of Dr. Subrahmaniam Swami, a former minister of Union of India, who had requested the HC to quash the order of the State Government of Kerala dated 14.10.2009, has raised very important and interesting issues. The said order of the state government that the petitioner sought to be quashed related to registration of a company with a contribution of Rs. 110 Lakhs (11% of the initial paid up Share Capital) by Kerala Industrial Development Corporation (KSIDC) for attracting investments ‘as per the Shari’ah of the Muslim Community.’
By the time this appeal was filed by the petitioner, a company named Al Barakah Financial Services Limited was formed with a share capital of Rs.1000 crores under the Companies Act. [This company has been referred to as the 6th respondent in the HC judgment] The promoters of the company comprised 8 private persons: 6 Muslims and 2 Hindus. An advertisement for filling up the posts of CEO, CS, etc. was released by KSIDC wherein it was stated that the CEO will report to the Board of Directors and the Shari’ah Advisory Board.
The objections of the petitioner, inter alia, were on the state government’s stated intent of participating in a venture ‘promoting an interest-free entity that follows Shari’ah principles’ and an officer appointed by a government’s wholly owned enterprise, KSIDC, reporting to Shari’ah Advisory Board. With the quashing of the petition, these objections are set aside and door for involvement of government entities in Shari’ah-compliant activities have opened and legality of a private institution like Shari’ah Advisory Board is established.
The judgement says that Shari’ah is the legal system based on the Qur’ān and teachings of Prophet Muhammad (peace and blessings of Allah be to him). In order to elaborate this point, the learned judge has quoted H A R Gibb. Excerpts of the quotations are as under:
Law in the eyes of Muslim Scholars was not in fact an independent or empirical study. It was the practical aspect of religious and social doctrine preached by Mohammed…
“The connexion between law and religion thus established by Mohammed and adopted by his followers persisted throughout all later centuries… As in all Semitic religions, law is thought of, not as a product of human intelligence and adaptation to human changing social needs and ideals, but of divine inspiration hence immutable. For Muslims its proof-texts were to be found in the Koran and Prophetic Traditions; and on this assumption the jurists and theologians of the second century elaborated a structure of law that is, from the point of view of logical perfection, one of he most brilliant essays of human reasoning...
“The Koran and the Tradition are not, as it is often said, the basis of Islamic legal speculation, but only its sources. The real foundation is to be sought in the attitude of mind which determined the methods of utilizing these sources. The first question, then, is not ‘What is laid down in the Koran and the Hadith?’, but ‘Why are the Koran and the Hadith as a source of law?’, and the second is ‘How are their prescriptions to be understood and applied?’…
“…Absolute good and evil can therefore be known to men only through a divine revelation mediated through Prophets. By divine providence there has been a succession of such Prophets ever since, by the creation of Adam (who was the first of them), mankind has existed on this earth. The revelations accorded to these Prophets were all identical in principle, but formed a gradually developing series adapted to the stages of man’s development. Each in turn expanded, modified, and abrogated the preceding revelations. The Koran is the final revelation and therefore contains the final and most perfect solutions of all questions of belief and conduct.”                                    
[Paragraph 39 of the Judgment]
The judgment says that “the respondents made an emphatic statement at the Bar that they are bound to follow each and every prescription of law of this country. In addition they also intend to observe certain principles of Shari’ah… the respondents propose to carry on the business of a ‘non-banking financial institution’ in accordance with the laws of the land and in addition follow some principles of Shari’ah in carrying on such business.”
Paragraphs 43, 44 and 45 of the Kerala High Court judgment discusses the bases of legal conducts of persons and the manners on which these should be judged. We copy those deliberations in the following:
“43. Every legal system has some basis in some religion or religious beliefs. For example, all legal systems known to a civilized world disapprove activities such as theft, causing harm to fellow human beings, licentiousness, etc. It is also equally true that no major religion known to humanity approves any one of the above activities. Therefore, to categorize laws which disapprove or prohibit such activities as non-secular merely because the prescription of such taws also coincides with certain religious beliefs and avoid such state action that it should be non-secular would not be conducive to the promotion of an orderly society either secular or non-secular. If the purposes of the state are to be classified as “non-secular” simply because the mandate of the law made by the state coincided with the beliefs of a religion or originated in a religion, virtually no law can be made. In our opinion it is for the above mentioned reason both Articles 25 and 26 open with the clause:
“subject to public order, morality and health…..”
The makers of the Constitution realised that there can always be claims that either a belief or conduct based on a belief is a part of the fundamental right ‘to practise and profess a religion’. If such a right were to be absolute most of the modern law would be offending the fundamental right to practise some religion or the other. The same principle in our opinion should apply in deciding the questionwhether the association of the state with any activity is to be classified as aimed at a non-secular purpose or promoting a religion.
“44. It is not in dispute that whatever the basis of Shari’ah, the principles of Shari’ah are meant to regulate the conduct of human beings adhering to the said system of law. Such an adherence may be with a view to either secure the establishment of an orderly society and maintain the same or to secure the divine approval for the human conduct or both. Whatever be the motive of the adherent, so long as the belief results in regulating the interaction between human beings, in our opinion, it is required to be treated as a secular aspect of a religious belief.
“45. Looked at from the above angle, when the Respondents propose to carry on the business of the 6th respondent Company in a Shari’ah compliant manner in addition to complying with the law of this country, that cannot be condemned as either promoting a religion or aiding a religion.” 
The HC judgment has discussed many other interesting and useful aspects, including a debate on nature of secularism as contained in the Indian Constitution and its basic difference from that contained in the Constitution of the USA. Indian Constitution makes a substantial departure from the American Constitution as the former does not enact a general prohibition of legislation in respect of “establishment of religion”. The theory of “wall of separation” between Church and State is not consistent with the Indian Constitution. “Our Constitution does not create an absolute embargo on the State’s association with every and any religious activity; nor does the Constitution permit the establishment of a theocratic State, the Judgment argues [Paragraph 26]. It further says, “The Constitution expressly recognises that there can be secular activities associated with a religious practice, such as economic, financial and political activities associated with religious practice. [Paragraph 28]
The HC judgement has avoided any discussion of the suitability or otherwise of interest-free and/or Shari’ah-complying banking or non-banking financial business on the logic that that is the domain of the regulatory authority in those areas, the Reserve Bank of India. Let the company apply for registration with and permission of Reserve Bank of India and let the RBI decide on merits. Any deliberation by the Courts of law at this stage would be both pre-emptive and, perhaps, uncalled for.
A counter affidavit filed by the Union of India has been discussed wherein it was said that “Government of India have always maintained that in the current statutory and regulatory framework, it is not legally feasible for banks in India to undertake Islamic Banking activities in India or for branches of Indian Banks abroad to undertake Islamic Banking outside India. This has been the stance of the Government of India even while giving reply to questions in the Parliament as well as in response to various VlP correspondences on the subject.” The Judgment, after describing the arguments and counter arguments, has clearly stated its position as under:
“We do not propose to deal with this question any further for the reason that whether the 6th respondent company can carry on the business such as the one proposed by the Union of India or whether such a business is prohibited by any statute are questions which in our opinion are primarily to be dealt with by the Reserve Bank of India. The Reserve Bank of India is yet to examine this question and we do not propose to preempt such an examination. We are also conscious of the fact, assuming for any reason, that there is some provision in law which either seeks to regulate or prohibits such an activity of the 6th respondent, the right of the 6th respondent or its shareholders to question the constitutionality of such a regulation or prohibition cannot be ignored or jeopardised.”

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