Islamic Banking: India has potential to become world leader in this system

A recent announcement made by Reserve Bank of India (RBI) proposing the opening of an "Islamic window" in conventional banks for a gradual introduction of Sharia-compliant or interest-free banking in the country, has led to a fierce debate on the ethicality of Islamic Banking.

While, a section wants to justify Islamic Banking in India, the other wants to dump down the RBI proposal as "utter nonsense", which will encourage Indian Muslims to move back to the medieval past. To simplify the term, Islamic Banking is a Sharia-compliant banking system which prohibits all types of interest.

But, before debating the pros and cons of Islamic Banking, here is a caveat.

First thing first, at present, there is no question of having Islamic Banking in India. Simply because as per The Banking Regulation Act, 1949, there can’t be a parallel banking system — that doesn’t allow charging of interest — along with our conventional banking system.

A file image of Bank Islam branch, a leading player in Islamic Banking to have emerged from Malaysia. Reuters

What we need immediately
So, instead of debating the issue of whether or not to have Sharia banking in India, the focus should be on tapping the huge $3 trillion Islamic finance market.

But, before that it needs to be ensured that every Indian Muslim, who earns a livelihood should have a bank account, which at present is missing to a large extent.

More numbers of Muslims should get into the regulated banking system — open accounts, have PAN, file Income Tax Returns, etc.

The young entrepreneurs should prepare viable project reports and seek loans from banks. There are incidences where people failed to get loans, but it can’t be generalised.

They should approach RUDSETI (Rural Development and Self Employment Training Institute), which has its footprint in more than 500 districts for skill development.

There is enough for the common man in our system and the need of the hour is to use it by being a part of it. All these will help Muslim youth to empower themselves and be prepared to be a part of the global Islamic finance market. Why can’t India be a big player in it?

How the West took the lead in Islamic Banking

When we talk about Islamic Banking, the first thing that comes to the mind is that it’s a monopoly of the Muslim nations and they are the key players. It’s a misconception.

It was the Western world which recognised the importance and potential of Islamic finance. Citibank was the first to set up its Citi Islamic unit in Bahrain in the 1980s. It was followed by HSBC Amanah to set up its headquarters in London, which then shifted its base to Dubai and later back to London. Soon, ABN Amro, Commerz Bank (Germany) and others followed.

Despite it having such a huge potential, I came to know about Islamic finance only in 1999 when I was invited and sponsored by Faisal Islamic Bank, Bahrain to attend "Islamic Finance Conference" in London. It opened my eyes when I came to know that 75 percent of papers presented there were by non-Muslims, and most of the experts on this subject were from non-Islamic countries.

It’s none other than the Harvard University that has been running a three-day Islamic Finance Programme every year. I presented a paper on setting up an Islamic fund in a non-Islamic environment, which focused on the aspect that India doesn’t participate in setting up investment.

One example can make it clear how the UK sees the importance of Islamic finance. In 2002, when Gordon Brown was the Chancellor of the Exchequer (UK), a task force was formed and the CEO of Barclays Bank, Andrew Buxton suggested ways and tweaked the laws to make the UK a hub for Islamic finance. The next year, in 2003, the first Islamic Bank of UK was set up with five branches.

It was a big opportunity and I, too, set up an onshore fund in the UK, in which 70 percent subscribers were non-Muslims, with Jews at the top.

Halal Foods — a case in point

Halal brand foods is a perfect example of how an investment opportunity could be tapped without getting into an unwanted debate on Islam and non-Islam. Barring Muslims, others including Hindus hardly take cognizance to Halal meat. Almost in every restaurants and food joints, it’s the Halal poultry products that are served. Muslims don’t consume pork and to ensure that a Muslim consumer gets to eat as per his religious belief, the Halal brand tapped that $6 billion market.

Today, two Jain sisters from Gujarat have ventured into "Halal" cosmetics — that manufactures cosmetic items without using animal fat, gelatin or extracts. Same is with Islamic finance — instead of getting into religious belief and faith, the true investment opportunity should be tapped.

Let's not stigmatise Islamic Banking

It was the Jews who first introduced us to conventional banking, but do we call it Jewish banking? Islamic Banking is as old as Islam. Prophet Muhammad, who was an entrepreneur and trader in his earlier life, was known as "Sadiq-ul-Amin" — a man who is trustworthy — because people used to park money with him for safety.

Mudarabah was the first banking system in the Islamic world. It's an Islamic contract in which one party supplies the money and the other provides skill expertise to undertake a specific trade. The party supplying the capital is called the owner of the capital, whereas, the another party is referred to as an agent or entrepreneur who actually runs the business. It’s also called sweat equity. Here the profit and loss are shared, unlike in the present system, where an entrepreneur has to bear the brunt.

Representational image. Reuters

Islamic Banking system died with the rise of colonial power, but the corporate banks in the UK, where bankers were non-Muslims revived it.

As per Islam’s fundamental principle of justice and equality, no interest can be charged on a loan given to a person. One is not allowed to sell debts and make money out of money.

So, instead of calling it Islamic Banking and stigmatise it with a religious label, it should be known as "inclusive banking".

India: Next Islamic finance destination

In 1998, Dow Jones had set up Dow Jones Islamic Index and its CEO was a Jew and not a Muslim. There was no Indian company listed on it. And, I had raised this issue at the press conference of Dow Jones in London.

Instead of arguing on Hindu-Muslim, Islamic-non-Islamic issues and looking through a religious prism, why can’t we be a player in the $3 trillion Islamic finance market, which is expected to double by 2020?

Indian Stock Market is the most Sharia compliant in the world — more than Pakistan, Bangladesh, Malaysia, Turkey or Bahrain. The Bombay Stock Exchange (BSE) already has a training centre for Islamic finance. India needs big investments to fund its infra projects, and here Islamic finance can be of use.

As the RBI has spelt out, the Islamic window can offer Mudarabah finance. India can be the hub to provide Islamic finance experts to the world. If Europe, US, China, etc, can gain the advantage and get capital through Islamic finance, why can’t India?

(The author is Chancellor of Maulana Azad National Urdu University)

— As told to Debobrat Ghose

For a counter-view on the idea of Islamic Banking in India, read Tarek Fatah's opinion here