Shariah-compliant banking

Well worth a try

Print edition : February 03, 2017

Muslim women outisde a bank in the Daryaganj area in New Delhi on November 16. Photo: R.V. Moorthy

The hardship faced by the Muslim community in the wake of demonetisation has given rise to demands for Shariah-compliant banking instruments.

POOR and middle-class people, cutting across caste, class and community, were hit hard by the Narendra Modi government’s demonetisation decision, but the Muslim community was the worst affected. This was mainly because of its low participation in banking activities, abysmal poverty, and low literacy levels. Predictably, the demonetisation experience has added fuel to the demand for Shariah-compliant banking instruments for this huge section of the population.

A few test cases from Vellore district in Tamil Nadu are illustrative. The survey was done by the Indian Centre for Islamic Finance, an organisation that has been spearheading the demand for Shariah-compliant banking instruments:

Khuddus, aged around 65, who buys old scrap materials from homes in the fort area of Vellore town and sells them to traders for some margin or commission, saw his daily earnings dip to Rs.20-30 from Rs.400-500.

Irfaan (40) of Kasturi Market in nearby Arcot town, who used to sell fruits and vegetables for a commission, saw his daily earnings plummet to a measly Rs.50-60 a day.

Iqbal (45), a meat seller of Ranipet town in the district, saw his daily earnings disappear in the first week of demonetisation. It revived in the subsequent weeks to a few hundreds but the payment was on credit. Like the others, he is struggling to meet even the basic needs of his family.

A Muslim woman aged 60, who is single and is surviving on government pension, stood in a queue every day in the first week of demonetisation to withdraw her measly pension amount but to no avail. She managed to withdraw some money only in the second week.

The survey also included people from Varanasi engaged in making Benarasi sarees, those from the brass industry in Moradabad and the glass industry in Firozabad, the lockmakers of Aligarh and the chikan and zardozi craft workers from Lucknow: their earnings had totally disappeared and their savings, which they mostly kept at home in the form of Rs.500 or Rs.1,000 notes, had become invalid.

Shafeeq Rahman, a Delhi-based researcher on issues relating to Muslims, said Muslims suffered more for reasons of faith as many of them did not have bank accounts as Islam prohibits accrual of interest on savings. Only 63 per cent of Muslims, he says, have bank accounts compared with the national average of 78 per cent and a measly 9 per cent have post office accounts as against the national average of 14 per cent. This means that 37 per cent of the Muslim population remains outside the banking system and was taken unawares by the note ban.

According to Rahman, Muslims also suffered more because of their low literacy levels (the literacy level of Muslims, at 69 per cent, is lower than the national average of 73) and low incomes: 63 per cent of them earned less than Rs.1.20 lakh annually and only 6 per cent earned Rs.3 lakh or more. He said that of the 55 deaths following the demonetisation decision in November, 12 were in the Muslim community. His study also revealed that Muslims largely remained engaged in small-scale business activities or were self-employed, mostly in the unorganised sector with no accounting or auditing of their earnings, and hence with low participation in banking activities. And hence, they were the ones who faced the biggest blow in the wake of demonetisation.

H. Abdur Raqeeb, general secretary of the Indian Centre for Islamic Finance and convener of the committee on Islamic banking in India, said it was time Prime Minister Narendra Modi revisited the issue of Islamic banking. “If the Prime Minister is really keen on achieving his ‘digital India’ vision along with a cashless economy in his bid to rid the country of corruption, he should pay heed to the plight of Muslims in this country and do something about it,” he said. According to him, Islamic banking is wrongly understood as solely for Muslims and hence opposed by some sections. He said it was an ethical way of investment in which countries across the world have evinced interest. “The United Kingdom, Hong Kong, Singapore and France have incorporated Islamic banking in their banking system. Why can’t India do so?” he asked. According to him, when Shariah-compliant mutual funds and stocks were operational in India, it was inexplicable why the government could not provide some such instrument in the banking system so that Muslims could become a part of the mainstream banking system.

“Shariah compliance simply means interest-free investment; also the money should not be invested in stocks or funds that deal with tobacco, alcohol or gambling. This is just another way of doing transactions, and attributing any communal angle to the exercise is not correct,” he said.

In fact, owing to the consistent campaign by his organisation and Modi’s insistence on financial inclusion, the Reserve Bank of India set up a committee called the “Committee on Medium-term Path on Financial Inclusion” in July 2015, which was chaired by the then RBI Governor, Raghuram Rajan. The committee, in its report submitted to the government on December 28, 2015, categorically stated that “exclusion based on beliefs can be explored by delivering simple interest-free financial products through a separate window in conventional banks”.

Delineating interest-free banking, the report explained: “The central concept in interest-free banking and finance is justice, which is achieved mainly through the sharing of risks. Stakeholders are supposed to share profits and losses, charging interest is prohibited... a strict code of ethical investment operates for interest-free financial activities.” The report gave a comprehensive list of nine financial products that could be offered for this sort of financial activity, saying that while this sort of financial activity had gained momentum in other parts of the world, including some Asian countries, the interest shown by India was inexplicably lukewarm. It said this resulted in the non-availability of banking products to a large section of society, which, for reasons of faith, remained unable to access banking services and as such faced financial exclusion.

The committee recommended that “commercial banks in India may be enabled to open specialised interest-free windows with simple products like demand deposits, agency and participation securities on their liability side and to offer products based on cost-plus financing and deferred payment, deferred delivery contracts on the asset side”.

In view of this unambiguous recommendation and the subsequent move towards a cashless economy, it is expected that the Prime Minister will revisit the idea and take some measures and will not succumb to pressures from communal elements in his dispensation as he had done in the past.

Shariah-compliant mutual fund

In December 2014, the Narendra Modi-led National Democratic Alliance (NDA) government took a path-breaking decision to start an Islamic banking window in State Bank of India. The government announced in November 2014 that a Shariah-compliant mutual fund would be made available through SBI Mutual Fund. Called Shariah Equity Fund (an open-ended equity fund), the fund offer was to open on December 1, 2014, and close on December 15, 2014. It would have been a joint venture between SBI and AMUNDI. But leaders such as Subramanian Swamy opposed it, and the move was stalled. Subramanian Swamy wrote a letter to the Prime Minister ( Frontline has a copy of the letter) demanding that the idea be abandoned immediately. Opposing the move and openly attacking Raghuram Rajan, the Bharatiya Janata Party leader said that encouraging Shariah-compliant financial institution would be “politically and economically disastrous for the country”. He urged the Prime Minister to intervene immediately, saying: “I trust you will ensure that the dubious funds in West Asia do not enter our country through legally baptised channels of Shariah-compliant financial institutions.” Following this letter, SBI Mutual Fund withdrew the fund offer. In prominent advertisements in leading dailies, it announced “that it has been decided to defer the launch of new fund offer of SBI Shariah Equity Fund”. No reasons were given, no explanations offered.

Raqeeb hopes the Prime Minister will rise above sectarian mentalities and take steps to usher in financial inclusion in the true sense of the word. “If the country can have Shariah-compliant stocks, which are held by companies such as Reliance and Tatas, if ICICI Bank and Kotak can have Islamic banking in the Gulf, then why can't we have Islamic banking in India?” he asked.

According to Raqeeb, of the 6,000 Bombay Stock Exchange-listed companies, roughly 4,200 are Shariah-compliant, mainly in the software, pharmaceutical and automobile ancillaries. He said the BSE had a Shariah-compliant index, BSE TASIS Sharia 50 Index, which included companies such as Reliance Ind, Bharti Airtel and Tata Tele.

Islamic banking is an idea whose time has come. Ethical financial activities is a concept which even the Rashtriya Swayamsewak Sangh swears by.