By Moin Qazi
The Reserve Bank of India (RBI) has decided not to pursue a proposal for the introduction of Islamic banking in the country. The central bank said the decision was taken after considering “the wider and equal opportunities” available to all citizens to access banking and financial services.
Reasons for consistent contention
In late 2008, a committee on Financial Sector Reforms, headed by former RBI governor Raghuram Rajan, had stressed on the need for a closer look at the issue of interest-free banking in the country.
“Certain faiths prohibit the use of financial instruments that pay 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,” the committee had said.
The Union minister for minority affairs Mukhtar Abbas Naqvi said, In India, the government will not allow Islamic banking, because India is a secular and democratic country. There are different government and scheduled banks and the existing banking system is for all.
One of the most contentious issues that have vexed the minds of Muslims is the concept of interest in the modern-day economy. The Islamic clerics (ulema) have exhibited an ambivalent stand on major issues concerning Islamic finance and on most occasions preferred to diplomatically deflect questions relating to it. Islamic finance is one of the greyest areas of both Islamic scholarship and practice and has attracted a very small pool of talented researchers. This is largely on account of the misplaced notions that discussions on Islamic finance are fraught with serious consequences and implications. People believe there are strong possibilities of one getting trapped in an act of heresy.
What does Islamic finance really dictate?
The Muslim economic life, along with their political and social norms, are regulated by a code known as shar??ah, (literally, the path leading to the watering place) It is a body of Quran-based guidance that governs, among other things, a Muslim’s economic and social life, dictating how believers should conduct themselves.
A careful reading of the Quran with respect to legal prescriptions) leaves no doubt that riba (any addition or interest) is haram (forbidden). Similarly, predetermined interest to depositors is also equally not approved by Islam. In Islam, capital is not capital in the conventional term; it is a potential capital which has to be channelised through businesses to generate additional income. Money cannot grow by itself. It has to be used entrepreneurially so that both the health of the economy and individual well-being are enhanced. The Federal Court of Pakistan, the highest judicial forum of Pakistan, has unequivocally declared the interest in any form, irrespective of the logic we use, is reprehensible.
In its most basic form, Islamic banking covers both savings and credit. Instead of being paid interest, depositors are considered shareholders and receive dividends when the bank turns a profit and lose money when it has a loss. Muslims are not allowed to pay or receive interest because the body of law of the Quran, called Sharia, prohibits them from making a guaranteed profit on capital. Islamic finance uses a risk-sharing model. A typical risk-sharing arrangement is like an equity finance whereby the parties share the risk as well as the reward of a contract. The risk is transferred from the financier or lender to the borrower, where the financier retains both the property rights claim to the principle and interest but also to any collateral.
There are several Muslim scholars who question how Islamic this approach is and whether it is an appropriate ethical alternative to mainstream investments. Or is it a creative way of transplanting Islamic finance into conventional finance by tweaking the rules?
Is the interpretation unanimous?
Although the accepted position in Islamic countries is very clear there are still several strands of conflict on the position in secular countries, particularly those which have seen a series of failures of Islamic financial institutions. In these countries, there is still no unanimity on the correct meaning of the term riba. Some prefer to translate it at as interest. There are others who believe that accepting the term as the modern equivalent of riba, particularly on account of modern finance having been cleansed of the element of usury and its coercive character, would amount to a very superficial interpretation of a term that has multiple layers that colour it. Riba, according to this school, has a sinister connotation and is actually meant to construe the coercive informal finance practices followed and pursued by rapacious moneylenders.
Many pragmatic Muslim bankers and financiers have argued that the Islamic injunction is aimed specifically against usury rather than interest. They say Prophet Muhammad was opposed to the loan-sharking techniques employed by money changers in the lawless markets of Mecca before the establishment of Islam. The liberalists say that there is nothing wrong with charging a reasonable price for the use of funds for a period of time. They argue that the Quranic prohibition applies to overcharging and usury, not money-market funds or interbank lending rates.
Business in public banks and Islamic institutions
Islam lays great emphasis on entrepreneurship and believes that investors should become stakeholders in businesses in order to create wealth. It also emphasises that the business ventures must be carried out in true Islamic ethos of honesty, piety and trust. Otherwise, the precious investment of the depositors would be doomed. From my own experience as a conventional banker for almost four decades, I can attest that conventional banking in India is humane and just, and not usurious and exploitative.
One unique feature of public banks in India is that they offer soft and subsidised loans to the poor, self-employed and farmers. Similarly, in case of defaulters, if a bank is convinced that the default is not willful and deliberate and is on account of genuine circumstances, the loan is restructured or waived and the loss is absorbed by the banks. Every year, thousands of crores of rupees are being written off by banks. Where recoveries have to be enforced, it is done in a dignified manner and after following proper legal procedures. Similarly, the operations of banks are monitored very stringently by the Reserve Bank of India and the interest of depositors; particularly the small depositors are well protected. In short, banks in India are playing a developmental role besides providing banking services. Instead of demonising banks without any evidence, the Shariah experts should build awareness of the status of public banks in India.
Working together to engage both sectors
One serious complaint against the prevalent model of Islamic banking is that interest is being charged in the garb of service fee. In fact loans from Islamic banks are much costlier than those from conventional financial institutions, particularly public banks. The defenders of the conventional banking, particularly the model followed by public and development banks, argue that they are far different from moneylending and various unethical practices of private sharks.
One issue that must engage us is that if Islamic banking is a viable alternative for us, how we can justify the collapse of so many Islamic financial institutions in India in recent times. We know full well that small investors have been duped in the past in a big way by hustlers claiming to offer Islamic financial services.
The protagonists of Islamic banking must offer a satisfactory explanation. The real problem is that we are not prepared for a reasoned debate and the issue acquires emotional overtones whenever it comes up for discussion. Confusion continues to prevail with sharp division of opinion. As a result, the common Muslim is in a fix as to what is the right course of action for him because of clarity on the issue.
The situation in India is much different. We do not live in an Islamic state. The spate of failures of Islamic banks in India has caused untold suffering to small depositors. There is no alternative except to transact with conventional banks. There are few reliable and authentic Islamic financial institutions but they have a very limited outreach.
Featured Image Credits: Albert Freeman on Visualhunt / CC BY-NC-SA