In India, there is an unmet market need for such products. Why can’t it come in the category of another financial product aimed at a niche audience?
There is an air of finality and inevitability to the Reserve Bank of India’s (RBI) recent decision to rule out introducing Islamic banking in India. It appears that just the presence of the word “Islamic” is reason enough to surmise that the Modi government – and ideological parent Rashtriya Swayamsevak Sangh (RSS) – will not be comfortable with the idea of serving up interest-free products guided by Sharia law for Indian banking consumers.
That is a pity, because millions of Indian consumers will be shortchanged.
The RBI – an autonomous body – has been taciturn about the reasons behind its decision. Islamic banking is basically a form of finance that rules out receipt and payment of interest and fees. The rules forbid profiting from money lending. So, for instance, Islamic banks buy properties for clients, and then sell them back at a profit, allowing clients to pay back installments. Another route is structuring profit-sharing agreements between the borrower and the bank. Leases and hire purchase are allowed. Guided by the Quran, Islamic banking also does not allow money to be invested in speculative, “non-productive” investments, like gambling, liquor, tobacco and weapons.
While Islamic-friendly products can be found in India’s non-banking finance companies – cooperative societies and chit funds – these are not regulated by the central bank. Recently, cooperative banks with Islamic banking products were set up in Kerala (Cherman Financial Services Ltd) and Maharashtra (Lokmangal Cooperative Bank). There are just a handful of ethical mutual funds in this space and a Shariah-compliant stock index, the BSE TASIS Shariah 50. So, products (a very small number, no doubt) exist to meet the market need in India.
On the face of it, there are two reasons cited by government to disallow Islamic banking. One, there are other vehicles of financial inclusion, like Jan Dhan accounts. So, the argument goes, why should a “secular” banking system tailor-make financial products aimed at one particular community? The second argument meted out is that enabling Islamic banking would require changing laws, rewriting the RBI’s holy books as it were, since interest is the sine qua non of banking. That requires legislative support, which brings us back to the BJP.
The third underlying – and unstated – objection is the fear that Islamic finance will be used to fund terror, or channel terror money. The simple way of looking at this is that Islamic banking is misunderstood. But the reality is a growing suspicion about, among other things, the committee of experts (the Sharia boards and committees) who oversee such banking decisions in the name of faith.
The fact is for some time now representatives of Indian Muslim community – some 180 million strong – have been pushing for such banking products. Globally, it is a $2-trillion industry growing at a double-digit rate. While West Asia and Muslim countries take up a large part of this pie, developed banking systems have also opened up windows to allow such products. In recent years, banking and related Sharia-compliant services have been among the fastest-growing segments of finance in the West. London is a big hub of Islamic banking. Germany and US have limited offerings, but they can be found. According to the BBC, in recent years, banks in Hong Kong, Luxembourg, South Africa and the UK have issued Islamic bonds.
In India, there is an unmet market need for such products. Fewer Muslims in India operate a bank account compared to other religions. At 7.4%, the Muslim community’s share of bank deposits and loans is lower than the national average. Because their religion does not allow them to invest in interest-bearing products, Muslims end up keeping money at home or running the risk of loan sharks and fly-by-night operators that use the cover of NBFCs to hoodwink consumers. Money coming in as remittances from West Asia is also not making it into the banking system.
The Indian financial system is far from secular – the widespread use of the Hindu Undivided Family (HUF), for one, shows that, after all, finance has to be structured around the needs of communities. The legislative changes too are not insurmountable. Some would argue it’s all about coming up with new methods to serve up interest in another garb. For example, current accounts are not interest bearing. Similarly, there’s no harm in experimenting with a window within the existing financial system, as most of the Western world has done. Clearly, the political will is missing.
In any case, when the definition of money and banking is rapidly changing in this age of mobile wallets and booming bitcoins, why can’t Islamic banking come in the category of another product aimed at a niche audience? Painting Islamic banking as antiquated, a financial system from the Middle Ages, as many have done, is driven more by wariness against Islam in the West and, in recent years, in India.
It is hardly a regressive financial system. As David Graeber points out in his brilliant book Debt: The First 5,000 Years, Islam had a positive view towards commerce. As he writes:
“…No Islamic thinker ever treated the honest pursuit of profit as itself intrinsically immoral or inimical to faith. Neither did the prohibitions against usury mitigate against any sense of commerce, or even the development of complex credit instruments.”
At the heart of the economic philosophy is an aversion to price fixing – you see, markets were designed by God to regulate themselves. In fact, the underlying thought resembles in some way Adam Smith’s “invisible hand”. Graeber highlights the interesting fact that Smith used thoughts that were prevalent in medieval Persia. Both Ghazali (1058-1111 AD) and Tusi (1201-1274 AD) use the same argument: no one has seen two dogs exchanging bones.
Consider how Ghazali articulates his view about money: “A thing can be exactly linked to other things if it has no particular special form or feature of its own – for example, a mirror that has no color can reflect all colors. The same is the case with money – it has no purpose of its own, but it serves as a medium for the purpose of exchanging goods.” Taking this thought to its logical conclusion means lending money at interest is wrong – by doing so, money is being used as “an end in itself”.
Clearly, the Indian financial establishment has sensed the need for Islamic banking. Earlier RBI governors and the UPA government had seriously considered the idea of introducing such products in India in a phased manner. Now, the most recent push – by former RBI governor Raghuram Rajan in November 2016 – has been snuffed out. What is all the more disquieting is the quiet acceptance of this discriminatory move by the government that purports to speak for the Hindus.
Who will speak for those parked deep inside India’s financial ghettos?
Sunit Arora is a Delhi-based journalist and former managing editor at Outlook magazine.