[In 1975 the Organization of Islamic Cooperation (OIC) on the name of Islam pooled financial resources to establish Islamic Development Bank (IDB) with objective to extend interest free finance for community development.]
The Government considers financial inclusion as means for inclusive growth; but according to Islamic belief the person dealing with interest shall be punished in hell (after death) against committing major sin. Amongst Muslims who have opened bank accounts, with intention to get rid of interest; many along with avoiding bank credits, keep aside the interest amount accrued over their deposits. Around 5% Muslims perhaps don’t care about interest and even try paying bribes to avail bank credits. Often they don’t intend to pay back their loans and thus damaging Muslim’s credibility. As a result banks are forced to mark Muslim concentrated areas as red zone and are reluctant to disburse bank credits in these areas.
Considering the share of Muslims in deposits (7.4%) and credits (4.7%) at banks, by 16th September 2016 we observe that Indian Muslims are losing finance worth Rs. 1,95,739.61 crores due to lower credit deposit ratio when compared with other religious communities. This loss pushes Muslims behind other communities. With 40% illiteracy and 31% headcounts living below poverty line, Indian Muslims are rather pulling Indian economy downwards. Thus to ensure developing Indian economy in a balanced way, we need to address the financial exclusion and economic plight among Indian Muslims.
Muslim workers play vital role in our economy. As much as 20.5% Muslim workers are engaged in manufacturing activities followed by 12.4% Hindu upper caste workers. Similarly 16.8% Muslims are in wholesale and retail trade again followed by 13.4% Hindu upper caste. Muslims in construction are 6.8% followed by 5.1% Hindu OBCs. In Transport, storage and communications 6.4% Muslim are there followed by 4.8% Hindu upper caste. But with higher financial exclusion, Indian Muslim workers are unable to convert their skills and resources into entrepreneurial assets. In absence of any corporate vision and support, 97% Muslim workers are engaged in unorganized sector. As much as 85.6% Muslim workers have to either work on own account; or are unpaid workers in family enterprises; otherwise treated as casual workers.
So far much has been done by RBI to ensure sector, region, caste and gender based financial inclusion. Still these initiatives could not help ensure financial inclusion of Muslims. Then last year taking inspirations from Hon. Prime Minister’s motivational remarks during 80th anniversary celebrations of the RBI, the Committee on Medium-term Path on Financial Inclusion was constituted with objective of working out a medium-term measurable action plan for financial inclusion. By December 2015, that committee submitted its final report comprising of ten chapters. The committee dealt about financial exclusion of Muslims and specifically marked separate chapter on interest free banking. The committee duly 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. The committee further recommended that in the event that interest-free banking is allowed in India, the extant regulatory guidelines in respect of capital and liquidity as applicable in the case of commercial banks would have to be made applicable to those as well.
By 29th August 2016, towards mainstreaming the community who have been somehow financially excluded for religious reasons (that preclude them from using banking products with an element of interest) RBI in its Annual Report 2016 (vide Section VI-25) proposed to explore the modalities of introducing interest-free banking products in India in consultation with the Government.
Once introduced in India, besides ensuring financial inclusion, interest free banking may also help raise tax revenues along with inducing interest free foreign capital to meet financial needs for our infrastructure development. This may further help reduce interest payments burden on public debts. Reduced debt burden can help India relax tax structures; ultimately reducing the cost of output and inflation level in the economy.
Under equity and lease based financial models, the poorer people can avail finance at no risk or cost, but certainly needs to prove strong business proposal along with attractive cash flow and attitude to draw investor’s attention. Such model does not allow investment into unsound and unethical proposals; thus insulates banks from piling NPAs. This model also safeguards banks from risks of monopolistic competitions to get higher shares in outstanding bank credits. Since cost plus finance, equity and lease based products are supposed to be executed through legal contracts only after verification of tangible assets, it discards the scope of frauds by way of manipulating financial documents.
Despite carrying various advantageous features the proposed interest free banking model in India do carry the risk of being called as Islamic Banking. Indian media has been using the term Islamic banking for interest free banking. There is need to check that interest free banking should not be called as Islamic banking because Islam does not encourage establishing any bank.
The only financial institution under Islamic Governance (Prophethood and Caliph Period) was Baitulmaal (public treasury) wherein the wealths were distributed instantly on the basis of need. During Prophethood the last receipt was tribute from Bahrain amounting eight lakh dirham which was distributed in just one sitting. Though the first Caliph earmarked a house for Baitulmaal where all money was kept on receipt. As all money was distributed immediately the treasury generally remained locked up. At the time of his death there was only one dirham in the Baitulmaal. The second caliph besides developing the Central Baitulmaal also opened Baitulmaal at state and headquarters levels. He also carried census during his caliphate; and provisioned salaries to Government employees, stipend to poor and needy people along with social security to unemployed and retirement pensions. It is responsibility of Islamic state to help the poor and ensure that no one should be left to seek loan on interest.
The Caliphs were just treated as custodian of Baitulmaal and not owner. To take anything from Baitulmaal, the Caliphs were required to take grant from Majlis E Shura (Advisory Council) constituted to look after the Baitulmaal. Baitulmaal was functioning well until the followers of Islam adopted Kingdom instead of Caliphate during 12th Century. Thereafter the Muslim empires considered Baitulmaal as kingdom’s treasury. After losing Baitulmaal, the Muslim kingdom lost hold over monetary system. This allowed non Muslim capitalists to promote conventional banking during 14th century that spread across the globe by 20th century.
During mid 20th century, Muslims felt the need to develop Interest free banking. So in 1957 few Muslims established Al Rajhi Bank. Today it is the largest interest free bank in the world. In 1975 the Organization of Islamic Cooperation (OIC) on the name of Islam pooled financial resources to establish Islamic Development Bank (IDB) with objective to extend interest free finance for community development. After IDB, the Muslim community found it easier to pool community financial resources on the name of Islam. So 1975 onwards, many Islamic banks emerged. First Dubai Islamic bank (1975), then Kuwait Finance House (1977), followed by Qatar Islamic Bank (1982), and Abu Dhabi Islamic Bank (1997) etc.. Since these banks are not promoting core Islamic financial prayers; rather working on Shariah guided commercial instruments like Murabaha (cost–plus finance), Mushraka (equity participation), Sukuk (Shariah guided bonds), Ijara (leasing) and Takaful (Shariah guided insurance) etc. they should not be called as Islamic banking, rather be called as Shariah bank or interest free bank.
Ethically no bank should be permitted to use the name of Islam for mobilizing public deposits. No bank can be established if people do not park their savings with them; whereas Islam does not encourage parking savings into banks. The holy Quran (104:1-3) clearly states “Who has gathered wealth and counted it, He thinks that his wealth will make him last forever! Nay! Verily, he will be thrown into the crushing Fire.” Further Islam strictly precludes interest and guides the humanity to spend excess of income to help the poor and needy. Al Quran (2:274-275) states that “Those who spend their wealth (in Allah’s Cause) by night and day, in secret and in public, they shall have their reward with their Lord. On them shall be no fear, nor shall they grieve. Those who eat Riba (usury) will not stand (on the Day of Resurrection) except like the standing of a person beaten by Shaitan (devil) leading him to insanity. That is because they say: "Trading is only like Riba," whereas Allah has permitted trading and forbidden Riba. So whosoever receives an admonition from his Lord and stops eating Riba shall not be punished for the past; his case is for Allah (to judge); but whoever returns (to Riba), such are the dwellers of the Fire - they will abide therein.”
Since the so called Islamic banks around the world are not promoting the core Islamic financial prayers like Zakat (taxes over surplus income) for public treasury, Qurbani (sacrificial), Qard E Hasna (Interest free loans), Waqf (devoting wealth for public welfare), Sadqah (alms), Infaq (spending for welfare), or Isaar (sacrificing from limited resources for the poorer and more needy) etc. they don’t deserve to be called as Islamic banks. Considerably the Shariah laws tend to change in accordance with human needs in different periods and circumstances. Since these banks are not promoting core Islamic financial prayers, rather doing commercial businesses under Shariah laws, they may be better termed as participatory banks or Shariah Banks or Interest-Free banks, but should not be called as Islamic banks.
In India we especially need to avoid calling Interest free banks as Islamic banks, otherwise we may put our socio – political environment into fire and may also miss the opportunity to ensure better financial inclusion along with putting curb on fiscal imbalances and inflations. Thus let interest free financial products introduced in India only as means for financial inclusion for inclusive growth; equally acceptable to all Indians irrespective of their religion and caste etc.
At present RBI needs Government’s consultancy to set modalities for introducing interest free financial products and services in existing banks. We hope that the Government would extend appropriate suggestions to the RBI for introducing interest free banking products in India. By doing so, we will help ensuring ‘Sabka Saath Sabka Vikas’ along with promoting financial inclusion and maintaining balances among active forces in our socio – economic environment.
[The above article was first published by Greater Kashmir.]