Hope and despair about Islamic banking in India | Mumbai news - Hindustan Times
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Hope and despair about Islamic banking in India

Hindustan Times | By, Mumbai
Jan 02, 2017 10:57 AM IST

This column had reported that a major public sector bank had announced that it will start a division that will provide interest-free banking.

A few months ago, reports that the Reserve Bank of India (RBI), the national banking regulator, was planning to introduce rules that would allow banks to start Islamic banking divisions had excited groups that want these type of financial services in India.

A few months ago, reports that the Reserve Bank of India was planning to introduce rules that would allow banks to start Islamic banking divisions had excited groups.(HT FILE)
A few months ago, reports that the Reserve Bank of India was planning to introduce rules that would allow banks to start Islamic banking divisions had excited groups.(HT FILE)

Islamic banking is run on religious principles that consider the taking and giving of interest as sin. Customers earn returns on investments through equity, lease rents and dividends. India does not have norms for such services. According to the promoters of this kind of financial service, scriptures of other religions, including Christianity, Judaism and Hinduism, mention the taking and paying of interest as wrong. 

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This column had reported that a major public sector bank had announced that it will start a division that will provide interest-free banking. Those hopes have now died down. Last month, Chandrakant Khaire, a Shiv Sena Member of Parliament (MP), submitted a plea during zero hour in the Lok Sabha opposing an “Islamic window” in the banking system. 

Syed Zahid Ahmad of Mumbai-based Economic Initiatives, a group that has been campaigning for interest-free banking products, said that Khaire’s views are important because he is a member of the Standing Committee on Finance. Khaire, incidentally, represents Aurangabad, an area with a high proportion of Muslim residents. 

Khaire’s doubts about interest-free banking largely comes from a misunderstanding that borrowings are free of cost. “If the RBI allows banking without interest, Muslim youth will benefit; where will Hindus go?” said Khaire. “Banking should not be done in the name of religion. There should be a discussion on the subject before such facilities are introduced.” 

The campaign to promote Islamic banking received another jolt when the minister of state for finance, while replying to a question in the Lok Sabha on December 9, said that though Islamic finance was explored by the RBI as one of the ideas for financial inclusion, other schemes like Jan Dhan Yojana and Suraksha Bima Yojna worked too. The minister said that the RBI had set up an inter-departmental group on Islamic banking and the aims were, apart from promoting financial inclusion, to attract finance from Gulf countries for infrastructure development. However, the idea was not accepted as various legal changes would be required. 

H Abdur Raqeeb, convenor, National Commitee on Islamic Banking and general secretary, Indian Centre for Islamic Finance, said that the discussion on interest-free banking was made much before the programmes. “We are very disheartened because the RBI has given a road map for interest-free banking.” 

Raqeeb, who recently wrote to two MPs for the revival of the SBI Shariah Fund, said that the RBI’s agenda for the financial year mentioned an alternate system of interest-free banking. “This is to mainstream people who are away from banking because of religious reasons,” said Raqeeb. 

Ahmed said that the statement by the minister has not been welcomed by Muslims who want interest-free banking and finance in India. “Since the RBI’s recommendations about interest-free banking was made after thoroughly analysing the significance of PMJDY for financial inclusion, it is dubious that schemes like PMJDY will help ensuring financial inclusion of Indian Muslims,” Ahmed said. 

Muslims are not well represented in the banking business. They form about 14% of the country’s population, but the Rajinder Sachar Committee which reported on their social, economic, and educational conditions, estimated that their share of bank deposits was 7.4% in 2005; they took just 4.7% of the loans. But they need better access to finance. The report said that 20.5% Muslim workers are in manufacturing, compared to 12.4% among Hindu upper castes. The wholesale and retail trade employs 16.8% of Muslims and 13.4% of Hindu upper castes. More Muslims are involved in the transport and communication business than Hindus. The National Sample Survey Office survey on debt and investments in 2013 reveals that a smaller proportion of Muslims operated a bank account compared to Hindus and other religious groups. 

Ahmad suggested that if the government is reluctant to pass new norms to allow Islamic banking, banks should allow micro-equity – an arrangement where customer buys into the bank’s ownership and enjoys a share of the profits.

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Interest-free not Islamic banking is the preferred choice

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  • ABOUT THE AUTHOR
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    Manoj R Nair is part of Hindustan Times’ nationwide network of correspondents that brings news, analysis and information to its readers.

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