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Archive for July, 2010

Published in The National on July 21, 2010.  You can read the article here, or see below:

The noted Islamic scholar Khurshid Ahmad once described the philosophy behind Islamic banking: “Money never becomes the objective, the hero of the cast. It remains an intermediary and an instrument for real productive effort, for asset creation, and for the expansion of physical economic activity.”

Islamic banking essentially reminds us that money is not the end goal, but rather an intermediary that helps build non-monetary assets in society. As a result, say Sharia scholars, one should never profit from money alone, and one should never use money for unproductive purposes (including haraam activities like alcohol and gambling).

This philosophy has resonated throughout the Muslim world for centuries. Today, Sharia-compliant banking is practised in more than 50 countries, and has even found a place in societies without a Muslim majority. Around the world, financial institutions have adjusted their offerings to comply with Islamic law.

Surprisingly, India is not included in these 50 countries. Even though India has the third largest Muslim population in the world (more than 160 million individuals today), Indian Muslims have few options to practise proper Islamic banking.

This is largely because of India’s strict banking laws. Regulations do not explicitly prohibit Islamic banking, but they certainly don’t encourage it either. Banks in India are supposed to further lend the deposits they accept, meaning that – in direct opposition to Islamic philosophy – they are supposed to profit from money. Banks are also not allowed to make investments in non-financial endeavours, which most Islamic banks regularly do.

But recently the Reserve Bank of India (RBI) has begun making strides in favour of Sharia-compliant banking. Citing the safer nature of debt-free Islamic banking, the RBI has been pushing for regulations that would allow Islamic banks to thrive.

For India, this could have huge consequences. If new legislation passes, devout Muslim households would finally be able to save their wealth with formal banks, as opposed to relying on poorly funded co-operative societies.

Amid these new opportunities, however, there is significant opposition. India is a secular country, detractors say, and financial services should not have religious elements attached to them. The fear is that Islamic banking cause further social divisions in society.

Hopefully, the RBI will not heed these concerns. There will always be naysayers to new propositions, especially when they involve communities as marginalised as Indian Muslims. There will also always be groups afraid of how concepts like Islamic banking comply with India’s democratic ideals.

In this case, however, the potential benefits from Islamic banking are too great to allow these arguments to become serious setbacks. And Islamic banking may actually foster India’s democratic ideals, rather than detract from them.

The Indian Muslim community would obviously be the largest beneficiary of Islamic banking. At present, there are very few avenues for Muslim households today to practise Sharia-compliant banking. Many families, as a result, simply do not access formal financial products. They keep money with relatives and friends, inside closets and under floorboards – essentially, in places that are less safe than banks.

Introducing Islamic banking would be revolutionary for this entire segment of Indian society. For decades, India has been touting the need for greater “financial inclusion”, the need to bring more citizens into the formal banking systems. Indian laws even require banks to locate a percentage of their branches in so-called “economically backwards” areas.

Islamic banking could help to achieve this goal. Millions of families could deposit their savings in formal banks in accordance with their religion. By doing so, these households would be on a more equal footing with non-Muslim ones, thereby promoting India’s democratic values.

India could also benefit from added investments. By opening Sharia-compliant banks, India could potentially gain investment opportunities from the Gulf that would otherwise have been lost. On several occasions, investors from the Middle East have been interested in Indian projects – particularly in infrastructure – but existing legislation has blocked them.

Worldwide, many countries have opened Islamic banks to cater for their Muslim constituencies. Some corporate giants – including Microsoft, GlaxoSmithKline and BP – have also taken steps towards being Sharia-compliant.

It is time for India to follow their lead. India has a sizeable Muslim population that needs tailor-made financial solutions. Over the next few months, the RBI should continue taking steps towards opening Islamic banking, while explaining to the public how important it is for India overall.

Sarika Bansal is a Mumbai-based freelance writer with a background in microfinance

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