In Need of Islamic Bank

Islamic banks would not only bring financial inclusion in Indian banking system, it would help our economy to tap the $3 lakh crore Islamic finance markets globally

By Chandan Kumar

The Reserve Bank of India (RBI) and the Government of India (GoI) are exploring introduction of interest-free banking, also known as Islamic Banking, to financially include sections of the society that remains excluded due to religious reasons.

“Some sections of Indian society have remained financially excluded for religious reasons that preclude them from using banking products with an element of interest. Towards mainstreaming these excluded sections, it is proposed to explore the modalities of introducing interest- free banking products in the country in consultation with the government,” RBI said in its annual report for 2015-16. Islamic or Sharia banking is a finance system based on the principles of not charging interest, which is prohibited under Islam.

During Indian Prime Minister Narendra Modi’s visit to the UAE in April 2016, India’s EXIM Bank had signed a Memorandum of Understanding (MoU) with Jeddah-based Islamic Development Bank (IDB) for a $100 million line-of-credit to facilitate exports to IDB’s member countries.

The IDB had also signed a $55-million pact with Rashtriya Institute of Skill and Education (RISE) to provide medical care to rural poor in India. The IDB had to provide 350 fully-equipped medical vans (mobile clinics) to India, 30 of which had to be received for the tribal areas of Chhota Udepur, Narmada and Bharuch in Gujarat, in the first phase.

“IDB and its private sector arm, the Islamic Corporation for the Development of the Private Sector (ICD), have already met with top officials of the Reserve Bank of India (RBI), EXIM Bank and other nationalized banks. They are likely to start their India operations from Gujarat with a branch in Ahmedabad,” said Zafar Sareshwala, chancellor, Maulana Azad National Urdu University (MANUU), who had accompanied the PM in Saudi Arabia.

IDB’s entry into Gujarat and India is likely to boost long-term private finance from its member countries on a large scale. IDB has also shown keen interest in the SME sector of India. It is executing a project on Wakf properties in different countries too.

“There are a number of such properties in Gujarat. The properties stand neglected as Wakf Board or the concerned trusts do not have money to maintain these monuments. IDB is keen to finance projects under which these properties can be maintained and redeveloped,” Sareswala replied when asked by the media persons post arrival from the Saudi Arabia’s Modi trip.

However, this plan of the Modi government has been opposed by the Vishwa Hindu Parishad. In past as well, this concept has faced opposition from some political sections. The Hindu organization is of the view that such a banking practice is against the Indian constitution and it would help terror finance to flourish in the country as well. If it’s true, then it’s better to find solution to this problem as even existing banking system in India is facing this problem. We need to understand that there are flaws in our parliamentary system. But, rather closing it down, we are fighting and trying to find solution to it. Similarly, there should be proper arrangement being taken care by the RBI over the issue while going ahead.

Globally, the Islamic banking has witnessed a significant increase, especially in the wake of the financial crisis. It could be noted that in late 2008, a committee on Financial Sector Reforms, headed by Raghuram Rajan had opined the need for a closer look at the issue of interest-free banking in the country. The committee had said, “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.”

“This non-availability also denies the country access to substantial sources of savings from other countries in the region,” the committee had said.

In December 2015, a committee on ‘Medium-term Path on Financial Inclusion’, headed by RBI’s executive director Deepak Mohanty had also recommended that commercial banks in the country may be enabled to open specialized 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 Modi government is of the view that the Islamic banking would enable financial inclusion in India among the minority community without putting any repayment pressure among the account holders. The banking system neither gives any rate of interest on account holder’s savings nor charges any rate of interest on the loans it has levied to its customers. In such a scenario, the banking system allows to go for the joint venture or equity financing model to allow the bank run smoothly. The government wants to tap the $3 lakh crore Islamic finance markets globally through this banking system — a major step towards the financial inclusion that the IDB can allow through its 56 nation’s network.

Apart from this, it can pump entrepreneurship among the minority community as the Islamic banking system shares risk involved as it is based upon the profit sharing model which helps mobilize resources and are less likely to face any sudden run on deposits. As such, they have a minimum need for maintaining high liquidity. The banks are likely to know their fund users better in order to ensure that the funds are used for productive purposes and vice-versa for investors. In this way, it develops better relations between the financial intermediary and the fund providers or consumers. It will also promote productive economic activities and socio-economic justice. Last but not the least, Most of the non-Islamic institutions are trading heavily into financial markets and carrying out huge speculative transactions. These transactions are sources of instability and the returns on investments are highly speculative. On the contrary, Islamic banks are prohibited from carrying out such activities. This destabilizes the speculation and is in the better interest of the depositors.