Inclusive banking

Stalls put up by banks near the Common Entrance Test cell for engineering admission in Bangalore. Muslims in India have a disproportionately small presence in banking activity.-K. GOPINATHAN

MUSLIMS constitute over 15 per cent of the population in India but they hold only 12 per cent of the accounts in the 27 public sector banks as far as priority sector advances are concerned. The share of other minority communities, which form roughly 6 per cent of the population, is 8 per cent. This is the average for the period between March 31, 2001, and March 31, 2005. Statistics available for the same period with regard to priority sector lending by the 29 private sector banks reveal that Muslims held over 11 per cent of the accounts, while the other minorities held 10.5 per cent.

The figures become even more disappointing in the 44 minority-dominated districts in the country. Muslims, who form over 33 per cent of the population there, hold only 21 per cent of all public sector bank accounts, while other minorities, who form only 2 per cent of the population, hold 5 per cent of all accounts. In the private sector banks, Muslims hold over 20 per cent of all accounts, while other minorities hold 15 per cent.

These are figures painstakingly compiled by the Sachar Committee, which studied the socio-economic conditions of Muslims in India vis-a-vis other minority communities.

The committees report has established beyond doubt that a huge section of the Muslim population has been left out of the ambit of banking services for various reasons. In its chapter titled Access to bank credit, it has shown clearly that the access of Muslims to formal banking facilities is much lower than that of other minorities, and this is true for both private and public sector banks. In its detailed analysis, the committee has noted that the percentage share of accounts, total amount outstanding and amount outstanding per account of Muslims remains disappointing.

The committee has summed up its findings thus: The access of Muslims to bank credit, including priority sector advances, is low and inadequate. The average size of credit is also meagre and low compared with other socio-religious communities both in public sector and private sector banks. The position is similar with respect to finances from specialised institutions like the SIDBI and NABARD. Census 2001 data show that the percentage of households availing themselves of banking facilities is much lower in villages where the share of Muslim population is high. The financial exclusion of Muslims has far-reaching implications for their socio-economic and educational uplift.

This financial exclusion could be because of a certain mindset prevailing in the banking sector, which has categorised Muslims and Muslim-dominated areas as negative zones (this is documented in the Sachar report), and also for reasons of faith.

For the first time a debate over real economic issues concerning the Muslim community is taking place and a demand is gradually emerging that the government should take specific measures to introduce Shariah-compliant banking products so that a vast section of Muslims who fail to access banking services for reasons of faith can avail themselves of these services and improve their lot. The demand for what is popularly called Islamic banking, which is essentially interest-free banking, has started emerging from within the community. A forum of Muslim intellectuals, parliamentarians and bankers and Islamic scholars, called the Indian Centre for Islamic Finance (ICIF), is spearheading the demand, which is slowly taking the shape of a popular movement.

The fact that Muslims are being left out of the ambit of banking services has been spelt out in the Raghuram Rajan Committee report on financial sector reforms, which is considered the most comprehensive report of its kind so far.

In his report submitted to the Government of India in 2006, Raghuram Rajan, former chief economist of the International Monetary Fund (IMF), has observed that certain faiths prohibit the use of financial instrument that pays interest. 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.

What this actually means is that a vast section of the Muslim population in India simply does not approach banks because no interest-free banking product is available at present, and giving or receiving interest is prohibited in Islam.

If interest-free banking can be introduced in India, it will revolutionise the economic scenario, unleashing massive financial resources, which are at present lying dormant because of the non-availability of a suitable environment, says H. Abdur Raqeeb, convener of the national committee on Islamic banking of the ICIF. What, however, is interesting about this banking practice is that it is open to all, irrespective of faith, and in the present high-interest rate regime, if financing is available without the burden of the ever-increasing interest rates, it will be welcomed by all, advocates of the concept argue.

Obviously, the United Progressive Alliance (UPA) government did see some merit in this argument and is actively working on evolving such a model, in conjunction with the Reserve Bank of India. In the RBI, there is already a strong opinion in favour of allowing such a mechanism. A report published in the April-June 2005 issue of RBI Legal News and Views outlines the fact that interest-free banking is an attractive proposition gaining currency all over the world and so it was time India introduced it.

The report describes the existing situation in India in these words: It is reported that in India thousands of crores earned in interest is kept in suspended accounts as believers do not claim it. The assets controlled by Muslims are estimated to be $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 a handsome bulk of money in India owned by believers is lying idle, which, if invested in profit-sharing basis and utilised properly, can have a major impact on the Indian economy. The report further points out that such banking can be initiated in India through a single window in some banks.

The UPA government, in keeping with its policy of inclusive growth, took the initiative in 2005 and asked the RBI to explore ways to introduce Islamic banking in India.

The RBI appointed a committee headed by Anand Sinha, Chief General Manager, Department of Banking Operations and Development. The committee examined the issue in detail and came to the conclusion that in view of the current statutory and regulatory framework it would not be feasible for banks in India to undertake Islamic banking activities or for branches of Indian banks abroad to undertake Islamic banking outside India. It submitted its report in 2006.

In the wake of this report, there has been a growing demand from the Muslim community for amending the Banking Regulation Act. An ICIF delegation called on RBI Deputy Governor Dr K.C. Chakroborty on September 11, 2009, and submitted a memorandum demanding the introduction of Shariah-compliant banking practices in India, pointing out that if London, Singapore, Tokyo and Hong Kong can become the hub and home of Islamic finance and banking, why not Mumbai and Cochin [Kochi]?

It now appears that Islamic banking could become a reality. A senior RBI official told Frontline: Yes, we are taking a look at this proposal along with various other proposals. We are in the midst of consideration for bringing in comprehensive reforms in the financial sector and will consider all proposals in front of us. Significantly, the Indian Banks Association (IBA), the representative body of all public sector banks, has already expressed itself in favour of this concept.

At an international conference on participatory banking held in August 2007, former IBA Chairman M.B.N. Rao said, Islamic banking is an idea whose time has come. The IBA will study the concept, but will wait for the regulatory framework by the RBI to run it.

If Muslim parliamentarians and other Islamic banking scholars are to be believed, this regulatory framework is in the offing. Prime Minister Manmohan Singh personally favours this concept and has asked the Deputy Chairman of the Rajya Sabha, Rehman Khan, who has been advocating the concept, to mobilise other Members of Parliament in favour of Islamic banking and suggest measures for implementing it. Rehman Khan constituted a group of MPs, which reiterated that the Islamic banking concept could be introduced in India without cumbersome changes in the law. The group presented an alternative model to the Prime Minister as a test case before such full-fledged banking is started. This model, based on Tabung Haji of Malaysia, is basically about setting up an institution to manage the Hajj.

The committee, which was headed by Rehman Khan himself, suggested in its report submitted to the Prime Minister in January 2006 that an institution where Muslims can park their savings could be set up in India. The institution, in turn, would provide them services for performing the Hajj and invest the surplus money in other projects as per the rules laid down in the Shariah.

The committee also recommended that once such an institution was set up, the government should withdraw the Hajj subsidy, which in any case is not appreciated by devout Muslims as performing the Hajj with government dole is considered unIslamic.

Highlighting the benefits of such an institution, the report said: The present structure of the Hajj Committee will not permit to undertake this function. The proposal is to create an institution on the lines of Tabung Haji, which can mobilise the savings of prospective Hajj pilgrims and invest in projects and instruments which are permissible in Shariah. It can also invest in infrastructure for the Hajj travel, like purchasing or leasing aircraft, accommodation for pilgrims both in India and Saudi Arabia, negotiate and make long-term arrangement for chartering of aircraft at economical fares.

A measure of the interest shown by the Prime Minister towards this concept is evident from the fact that he constituted a committee of Secretaries, headed by the Cabinet Secretary, to look into the suggestions. This committee is yet to submit its report.

According to Rehman Khan, this institution can be set up as a test case and if it succeeds, then full-fledged Islamic banking can be introduced. He says Islamic banking has tremendous potential in India as even modest calculations show that the country has 180 million Muslims.

If the proposed institution targets even 10 per cent of the population it can reach over 15 million investors and, on an average, if saving per investor is around Rs.25,000, then it can aim to mobilise savings to the extent of over Rs.30,000 crore in the course of three to five years. This can change the face of the minority community in India. If a tiny country like Malaysia, which has a 15 million Muslim population, can try and succeed in this, why cant we? he says. He told Frontline that the majority of parliamentarians and even clerics with whom he had interacted had approved of the proposal and it was only a matter of time before the Prime Minister took it up with him.

At another level, a group of Lok Sabha members are mobilising MPs to seek their support in getting a Bill passed in the winter session of Parliament. Asaduddin Owaisi of the All-India Majlis-E-Ittehadul-Muslimeen (MIM) will bring in a private members Bill in this connection. I have spoken to a whole lot of people cutting across party lines and there is massive support for such a move, he told this correspondent. Why should we look at this from the prism of Islam, why not look at it as an alternative mode of banking for which there is a massive need, he said.

He said he was aware of the fact that in many savings accounts held by Muslims the interest money is lying defunct as receiving interest is considered haraam [forbidden] in the Shariah. Why should we not do something to mobilise this dormant resource? he asks, adding that Islamic banking has become a runaway success even in non-Islamic countries such as the United Kingdom and the United States and is functioning well in Malaysia, Singapore, Japan and Indonesia.

Abdul Rehman, a Dravida Munnetra Kazhagam (DMK) MP from Vellore and a former banker, says the issue must not be linked with Islam as essentially it is all about introducing interest-free banking (as in the case of mutual funds), which has additional benefits as it can cater to the specific needs of Muslims as well. This kind of banking is not at all religion-specific because non-Muslims constitute the majority of customers in such banks in other countries. What this can achieve, he says, is that it will save gullible Muslim customers who park their money with not-so-credible non-banking institutions. If the government gives the legislative sanction for such an institution, then Muslims will not only be able to put their savings in safe accounts but also be able to take loans for various purposes [based not on interest but on profit/risk sharing basis] and improve their socio-economic lot.

Though no specific amount can be pointed out for the country as a whole, yet it is a fact that thousands of crores of rupees is lying in suspended accounts in banks across India, unclaimed for reasons of faith. If only the government did something to unlock this money, the face of the minority community in India will change for ever, says Abdur Raqeeb. Facilitating such an institution will not only unlock dormant money in India but open the doors to massive investment from abroad as well, he says.

According to unconfirmed estimates, over $40 trillion from oil-rich Gulf countries is waiting to be invested in India post-9/11. Post-9/11 oil money has stopped being invested in the U.S. and is looking for a safe investment destination and India could well be that destination, given its safe economic scenario, huge market and good growth rate, says Abdur Raqeeb, quoting from a report by GRAIL Research, a U.S. market intelligence and data analysis provider. The report says that India has the potential of emerging a significant market for Islamic banking provided there is a favourable change in the regulatory environment and increased awareness among Muslims and India as a whole.

With parties such as the Communist Party of India (Marxist), the Samajwadi Party, the Rashtriya Janata Dal, the Nationalist Congress Party and the DMK having already expressed their support for Islamic banking, the concept could materialise earlier than imagined.