Islamic banking can be a success in India
But only if it is implemented in spirit as well as the letter of its principles.
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Would it be beneficial to introduce Islamic banking into India? This is the question everyone is asking ever since the Reserve Bank of India floated the idea.
Consider these facts.
From almost nothing to $2 trillion in 40 years, international Islamic banking and finance industry’s trajectory of growth has been nothing short of phenomenal.
India has a population of more than 170 million Muslims today, from around 70 million in 1976. However none of that $2 trillion action has taken place in India.
Whatever the varied reasons for that may be, there is today serious talk in the RBI and government of introducing an Islamic window in banks. The stated goals for this proposed move are to facilitate the inflow of some of the $2 trillion from the Gulf and other countries into India, and to facilitate the inclusion of millions who do not participate in the banking industry because their faith does not allow them to give or receive interest.
It is widely known that Islam does not permit usury (riba). There are many Muslim religious scholars and leaders in India who define usury as referring only to excessive and exploitative interest. By this, they allow for interest as charged and given by commercial banks.
There are others who say that riba includes all kinds of interest, and therefore transacting with commercial banks on this basis is not permissible.
A third group says that an element of sale can be introduced into interest-based transactions between the client and the commercial bank. This would happen in a tacit agreement between the bank representative and the client, which would neutralise any element of interest as far as the client is concerned, allowing him or her to go ahead with the transaction within the bounds of Islamic law.
Islamic banking and finance, contrary to common perception, are not only about not dealing in interest, they are also about equitability, compassion, protecting the weak, encouraging and supporting enterprise, and giving an opportunity to those, who otherwise would not have it, to climb the economic ladder.Islamic banking is not just about not dealing in interest but also about giving an opportunity to everyone to climb the economic ladder. (Photo: Reuters)
Nasser Social Bank was established in 1971 in Egypt as a social effort to provide credit to the disadvantaged classes who did not have access to the conventional commercial banking system.
According to some scholars, the current state of the Islamic banking, finance and insurance industry is such that it has come to resemble the conventional banking, finance and insurance industry, which it intended to replace, and is representing those very ideas and practices which it started out condemning.
The nationalisation of banks in India in 1969 and then 1980 was also done with equally noble intentions of providing banking to the large mass of the population who did not have access to it. There are mixed opinions as to how far these goals were achieved. What is almost universally agreed upon is that the move lead to long-term inefficiency, corruption, and a build of a disproportionate amount of non-performing assets in nationalised banks.
The disadvantage India has today of being a late entrant to this industry can be turned into an advantage. The lessons that have been learnt from 40 years of Islamic banking need to be carefully considered.
For example, there is criticism among many Islamic economists that the stated goals of Islamic banking to replace the commercially exclusive and sometimes exploitative practice of conventional commercial banks were never achieved. They were simply re-vamped and introduced in different clothing.
On the other hand, the World Bank has lauded the Islamic banking industry for becoming an effective tool in financing development worldwide, and that it has the potential to address the problems of extreme poverty and boost shared prosperity.
The key for India to benefit from the introduction of Islamic banking is if it is done to implement its spirit as well as the letter of its principles.
Whether it is done under the name of Islamic banking or not, it would be beneficial if it is taken as an opportunity to re-introduce ethical banking in India. Where loans are given on merit to businesses rather than cronyism and kickbacks; where means are actually devised to service those who need a boost to rise economically; where provisions are made so that these schemes do not fall prey to political machinations.
The advantage Islamic banking has in this regard is that it has a religious-moral underpinning to its activities, which could sustain itself in spirit, if it is woven into the norms of Islamic banking without stifling their freedom of business operation.