Interview: Shariq Nisar

‘Islamic banking will help develop entrepreneurship’

Print edition : February 03, 2017

Shariq Nisar. Photo: By Special Arrangement

Interview with Shariq Nisar, professor at Rizvi Institute of Management Studies and Research.

IN parts of western and central Uttar Pradesh, some right-wing activists have read a communal tinge into the Narendra Modi government’s demonetisation decision, which, they argue, has hurt the Muslim community very badly. A section of the community does not hold bank accounts and is in the habit of stashing away money as accrual of interest on savings is prohibited in Islam. Although there are no statistics to support the argument, many people believe that had a profit-and-loss sharing banking system, popularly called Islamic banking, been followed, Muslims, especially the poorer sections of the community, would not have been hit so hard.

Dr Shariq Nisar, a professor at Rizvi Institute of Management Studies and Research, Mumbai, and former senior visiting fellow at Harvard Law School, United States, thinks Islamic banking is a viable option whose time has come. He has been advocating this kind of banking for the past 15 years. A financial expert and activist, Nisar recently addressed a seminar on “Demonetisation and its Impact on Society”. He took questions from Frontline before his talk. Excerpts:

There is a school of thought that looks at demonetisation through a communal prism, gloating over the inconvenience it has caused to the Muslim community.

Many people have been happy not because they did not face any inconvenience but because they thought others were more inconvenienced. Many upper- and middle-class people [who mostly pay income tax] were happy because they thought politicians and bureaucrats, who had become filthy rich, were the main sufferers because of demonetisation. There was also the impression spread through social and other media channels that it is terrorists and their backers who have suffered. Some said the Prime Minster’s action was to target Muslims and their so-called shadow economy.

I don’t subscribe to the views that this action [demonetisation] had any particular community in mind. But, yes, I have no doubt that Muslims have been particularly affected by this decision and that is because a whole segment of the informal economy has been affected, of which Muslims are a substantial part.

I see some trends emerging from this. We can force people to deposit their savings with banks but we have not been able to impress upon banks to find ways to finance the general public and entrepreneurs. Only 8 to 10 per cent of the people have been able to borrow from the savings channelised in the banking system from across the country.

Could you elaborate on the impact of demonetisation, especially on Muslims? Since many of them do not maintain bank accounts, they are said to have been affected more than others by “notebandi” (note ban).

Notebandi has affected the whole Indian economy, especially the informal sector, which accounts for 90 per cent of the workforce. Since Muslims’ proportion in the informal sector is relatively high, they are obviously more affected. It is now becoming clear that the decision on notebandi did not foresee the possible adverse consequences for a huge section of the population.

No doubt Muslims have been badly affected, but it should be seen in the context of our economic structure. According to latest government data, 80 per cent of the country’s households have no regular wage earner or salaried person. It means 80 per cent of the households are dependent on informal work for livelihood. Muslims in great numbers are part of this informal segment. Various manufacturing units in north India—the saree industry of Mau and Varanasi, the carpet industry of Bhadohi, brassware of Moradabad, the lock industry of Aligarh, and other manufacturing units in Firozabad, Agra, Khurja, Bareilly, Meerut, and Saharanpur—have a disproportionately large number of Muslim workers, artisans and craftsmen. Their livelihood has been affected as these are 100 per cent cash works. Cash crunch has ruined these families. One might argue that demonetisation would eventually increase minimum wages and compensate for the short-term loss suffered by these people. But this is unlikely to happen because an increase in wages will make businesses uncompetitive.

Manufacturing has almost stopped at most places. It is not seen now because stocks are coming from godowns, but we will know the real impact as we go along. However, it is not that only workers are affected, business owners, too, have been affected but they are relatively better off to withstand such a crisis.

I don’t think not having a bank account has as much an impact as not getting work in view of the cash crunch. After all, despite half the population of the country having no bank account, almost the entire amount of money that was derecognised has come back into the banking system. This is proof of the government’s lack of imagination. It is reported that the government was expecting a windfall gain. I wish it had trusted its own findings that not more than 5-6 per cent of black money is kept in cash form; adjusting that much cash was not a challenging task, although it came at some cost. I believe much of that money is already withdrawn from the banking system and re-hoarded in the form of new currency.

More than 60 per cent of Muslims do not earn more than Rs.10,000 a month. And only 6 per cent are in the taxpaying bracket. It is argued that it is the weaker section that is the worst hit by demonetisation. Are weaker sections in the Muslim community far worse off than their counterparts in other religions?

Fewer than 4 per cent of the people pay tax in India. Accordingly, Muslims’ proportion among taxpayers is better in comparison with other communities. Yes, it is the weaker section that has suffered the most. Almost all the banned notes have returned to the banking system, but what about those who lost their daily earnings for shortage of cash or had to spend a huge amount of their productive time in queues to withdraw cash to meet their contingencies? I don’t see this as a Muslim issue but an issue between the rich, affluent, resourceful people of this country and those who are poor and vulnerable. There are no two opinions that the poor and vulnerable have suffered the most.

In the wake of the demonetisation crisis, is Islamic banking an idea whose time has come? More so because Muslims are among the worst sufferers of demonetisation as many of them do not keep their savings in banks to avoid accumulating “riba”? What are the tools necessary to carry it forward?

Muslims refrain from using the current banking system because it works on the basis of interest-based dealings, which is prohibited in Islam. Many secular and democratic countries have taken actions to address this issue. The Reserve Bank of India [RBI], too, has been thinking positively on this, but it is mainly dependent on political leadership to take the call. It is unfortunate that the Muslim community, while being forced to move towards the formal economy, is denied an opportunity to choose financial products that suit its ethical and religious concerns. It is like someone is interested in equity and we tell them we will give them only debt.

I look at Islamic banking beyond the community, as a business concept that seeks to generate wealth through sharing of risk and reward. It does not believe in lending money and earning profit out of it. Our current banking system is modelled in such a way that it finances those who are already rich. Only the risks are shared with the general public when the banks need to be recapitalised. Islamic banking is more suitable to develop entrepreneurship and it will help curb concentration of wealth in the hands of a few.

We need to keep in mind that Islamic banking is known by different names in different countries. For example, Saudi Arabia, Turkey, Oman and Kuwait do not allow the name “Islamic” to be used. On the other hand, the United Kingdom and Singapore prefer to call it “Islamic” to attract customers. In Sri Lanka, Islamic banking was termed “PLS” [profit and loss sharing] when the regulator allowed it in that country. Similarly, in India regulators prefer to call it “interest-free banking” as the raison d’etre of Islamic banking is prohibition of interest.

Some people who wish to evoke passions find the term “Islamic” more suitable for their purpose. People could be easily mobilised in favour of or against it.

The main idea behind the concept of Islamic banking is that the capital provider must also share the risk along with the entrepreneur, otherwise it becomes unfair for entrepreneurs to endure both the enterprise and capital risk.

One must not forget that the system of interest has indebted the entire global population and is the main reason for concentration of wealth in the hands of a few. Globally, there are five dozen people who own 50 per cent of the wealth. In India, 1 per cent of the people have nearly 59 per cent of the country’s wealth. How come we have reached such a pass? It is because our financial system allows capitalists to earn without bearing any risk, and this comes at the cost of entrepreneurship and employment, which leads to disproportionate distribution of wealth in society. Today, the debt owed by all countries is more than 300 per cent of the entire world gross domestic product [GDP], and this will lead to even greater concentration of wealth in the years to come. Today, the most important economic problem is not the lack of produce but lack of proper distribution of wealth and that problem cannot be solved without proper and fair distribution of risk in society. Islamic banking is a promise in that direction.

How viable can it be in a secular country? There is a criticism that it can lead to an alternative banking system, ultimately causing havoc to the existing system. Do you agree with this?

Viability of this should not be seen in the nomenclature used to identify it. It can be known by any name that is acceptable to the public. The term Islamic banking was coined in the 1970s. It does not mean that Islamic banking was not practised throughout Islamic history. It is high time the concept of risk and reward sharing was introduced in our economy, otherwise our whole economic fabric will be destroyed to produce a few billionaires.

It is childish to believe that the introduction of Islamic banking will lead to alternative banking. In fact, it will bring Islamic banking into the mainstream where the mainstream financial players will offer products and services with the approval, guidance and full monitoring of the regulators. Not allowing Islamic banking [especially when it is already approved and practised in more than 75 countries] may actually lead to the emergence of a parallel economy on the pretext that the government is biased against a particular community and, therefore, not providing an opportunity to its people. We must not forget that Islamically oriented products are already approved by the capital market regulator [Securities and Exchange Board of India] and people of various faiths have widely subscribed to them. In fact, more non-Muslims in India have invested in Shariah-compliant products than Muslims. We should also not forget that not allowing this business will only come at the cost of business opportunities to our own financial institutions. After all, why do multinational financial institutions such as HSBC, Citi, Deutsche, and BNP Paribas have Islamic banking subsidiaries and windows? Because they do not want to miss business opportunities. They are doing Islamic finance business across the world. In the globalised world, restricting the business of financial institutions is bad economics.

A decade ago, Dr Raghuram Rajan, who was RBI Governor until a few months ago, headed a committee set up by the Planning Commission on financial sector reforms. The committee had recommended Islamic banking.

Yes, the committee addressed two important concerns. One, it acknowledged that Islamic banking was already practised in India under different formats and expressed the view that a formal approval of this concept would help improve financial inclusion. The committee also noted that introduction of interest-free banking would not bring any systemic risk to the Indian financial system. This was an important statement in view of the concern raised by certain sections about Islamic banking.

The RBI Act and the Banking Regulation Services Act prohibit setting up of Islamic banks. Only an Act of Parliament can allow Islamic banking, which is not likely with the current dispensation at the Centre. Is there a way out?

No Act or regulation prohibits Islamic banking in the country. This was [and may be is] the view of the RBI when it was added as an additional respondent in the public interest litigation petition filed by Dr Subramanian Swamy against the Kerala government-promoted Islamic finance through a non-banking financial company [NBFC], Al-Baraka Financial Services Limited. The Kerala High Court, after hearing all the arguments, rejected the PIL filed against the company. The company is functioning as Islamic Finance NBFC with the approval and guidance of the RBI.

The Deepak Mohanty Committee has recommended the introduction of interest-free banking and has also identified products that will work under existing regulations. It has also highlighted areas where Islamic banking principles cannot be accommodated under existing regulations. But I agree that introduction of Islamic, or interest-free, banking, is a political decision, without which the RBI will not proceed. I also agree that it is unlikely that the government will do something for a political segment that does not vote for it. The current dispensation [at the Centre] will not do anything to upset its core constituency.

Is it not necessary to tell the masses that Islamic banking can be used by people of all faiths in a secular country like India?

Yes, you are absolutely right. It is actually a fact that across the globe, people of various faiths have chosen to use Islamic banking facilities and services mainly because they do not see it as a product for a particular community. Rather, they look at its features and use it if it is found suitable. Even in India, Shariah indices are offered and managed by both the National Stock Exchange and the Bombay Stock Exchange. Many investors, wealth managers, brokers, and mutual funds use these indices for managing investments. Indian Shariah-compliant mutual fund schemes [approved by the SEBI] have more non-Muslim investors than Muslims. These are all financial products and the regulators make sure that they are not offered exclusively to any particular group or community.