Islamic Finance in India
Conventional
Banking is a part of the financial system. It is not a complete financial system
but when we talk about Islamic Banking we wish that all Shariah permissible
financial activities should be carried out by a bank.
The basic difference between profitable mode of investment in banking and Islamic finance is that trading is prohibited for the former and it is must for the later.
There
are some reasons for this prohibitions. There was a time when banking in
combination of trading was practiced by bankers who happened to be merchants
also. During the economic disaster of 1929-32 this combination of banking with
trading proved to be fatal for a number of banks. Since then banking laws, over
the world were amended to restrict banking activities to risk-free interest base
lending. As such trading is now strictly prohibited for a bank. Instead of
ignoring this historical fact we should take a lesson from it.
In
case of Islamic finance any kind of involvement in interest base lending is
strictly prohibited. Therefore for an Islamic financial institution trading is
the only option for making profitable investment.
In
view of the above clash of fundamentals of the two Islamic banking is not
possible without bringing about a drastic change in the legal framework and the
same is not expected in a secular and pluralistic society like India. To achieve
our goals we should think in terms of Islamic financial system of which banking
forms an important part. We should not insist on combination of trading with the
banking when both the ends can be achieved separately.
In
the presence of such a clash of fundamentals where a trade-off is not possible
Islamic banking shall remain restricted up to the activities which do not
violate banking law such as mobilizing deposits in current accounts, making
interest-free advances on actual service charge basis, collection of bills and
cheques, safe deposits vaults, transfer of funds, agency services like payment
of bills, payment of pension, collection of taxes etc. But the viability of
Islamic bank on above fee based income where minimum capital requirement is Rs.
100cr and mobilization of minimum deposits of Rs. 1000cr within a year of its
establishment looks doubtful.
Under
the circumstances as explained above we may propose following alternatives:
In
view of strong prohibition against any kind of involvement in interest, in
Islam, a pious Muslim is reluctant to keep his savings even in current account
with a bank which would utilize his funds for earning interest. In order to make
deposits in current account fully compatible with Shariah we may suggest that
deposits moblized from Muslims in current accounts by a bank should be utilized
in making interest-free loans preferably to Muslims and the government. Deposits
in these accounts should be treated by the dealing bank as government business
like PPF. Since quarterly turn-over in comparison of balance outstanding is
deemed to be quiet high, the turn-over commission for dealing this type of
business may be separately negotiated by the government with the dealing banks.
The necessary liquidity reserve as is applicable to the conventional bank
deposits in terms of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR)
may be kept in government account as interest-free loan. Rest of the
amount may be disbursed to public in general and Muslims in particular as
interest free loans. The cost of operations for deposits and advances may be
shared by government and borrowers proportionately.
Interest-free
loans to the individuals may be made against sufficient collateral / personal
guarantee. Post dated cheques may also be taken according to repayment schedule.
The
loans to the public may be covered under state governments recovery act wherever
applicable. All the dues should be treated as government dues and preference
should be given in the matter of hearing in recovery suits as also in case of
action taken against bouncing of cheques.
In the light of the experience of the banks in the matter of defaults in such type of loans, sufficient provision should made by creating a benevolent fund contributed by the government and the borrowers proportionately.
As
regards the mobilization of savings for investment on profit or loss sharing (PLS)
basis, a number of opportunities are available out side the banking sector. The
format of private fund manager suits most to this type of business. Existing
public and private mutual funds may also adopt Islamic financial practices
subject to relaxation in the rules governing their business. The funds can
easily, be mobilized in the form of securities like units issued by the fund
manager for various schemes tailored to suit the requirement of investors.
Collection of funds may also be made in lump sum are in recurring installments
(under systematic investment plan). Similarly the repayment of principal +-
Profit or Loss (PL) may be made in lump sum are installment (under systematic
withdrawal plan). Proposal can be made to government for extending the status of
mutual funds to the business of fund managers. Mutual funds should be allowed to
access commodity exchange, foreign exchange financing of government projects and
public and private industrial and housing projects.
In
the matter of PLS financing efficient deployment rather mobilization of funds is
a difficult task. To overcome this difficulty suggestions can be made to
government for financing their different projects through Islamic modes under
its recent policy “Public-Private-Partnership (PPP)”. Various government
projects can be financed through Musharaka, Murabaha, Istisna, Ijarah modes in a
win-win situation. Crop loan to farmers and purchase of farm products at minimum
support price (MSP) minus return on funds under administrative price mechanism (APM)
can be made through Salam. Similarly food credit to the government can be made
available on cost + mark-up basis through Murabaha.
To
encourage Islamic financial system involvement of representative of experts of
Islamic finance, investors, fund manager including public and private mutual
funds, banks, farmers, industrialists and specialized project financing
institutions seems to be inevitable. Wide discussions among all the perspective
parties with regard to their requirements, expectations and constraints in the
matter of mobilization of funds and their efficient deployment to exploit all
the opportunities in different markets like capital market, commodity exchange,
foreign exchange and government projects should be held before submitting a
concrete proposal to the government for establishment and development of Islamic
financial system.
Joint Director (Hony.)
Islamic
Banking Finance & Economics
Institute of Objective Studies
New
Delhi, India.