Avoidance of interest in banking transactions i.e. mobilisation of deposits and lending may be termed as interest-free banking. Islamic financial system on the other hand is a broader concept that includes not only Islamic banking but also Zakat and Wakf as sources for mitigating financial needs of the society. Moreover, Islamic financial system not only prohibits interest but also freedom from gambling and speculation/ hoarding in financial transactions. Since Interest is the main component in conventional banking, but strictly prohibited in Islamic financial system, to some extent it is natural to feel that interest-free banking is Islamic banking. Moreover, with some regulatory changes it is possible to convert interest-free banking into Islamic banking.
While France, Japan, UK and other countries have opened the door for Multi Billion dollar business of Islamic Banking, for some reasons India is still distancing itself from it. The first reason is religion-based politics. Since every Government needs to ensure that the majority community should not get anguished by any action, there is always a threat for the ruling party that if a bill is introduced in the parliament to amend the Banking Regulation Act 1949 just to allow Islamic Banking in India, the communal political parties and organs may propagate saying that the ruling party is trying to appease the Muslims by Islamising the financial system to ensure their votes.
The second reason is exclusion of Indian Muslims from the financial regulation. Muslims being just 0.78% in RBI and negligible in the Ministry of Finance are insufficient to attract others about the true potential of Islamic Banking in India. There is hardly any economist within the RBI and the Ministry of Finance to illustrate the significance of Islamic Banking and Finance for socio-economic growth of India. Though, RBI constituted a working group in 2005 delegating the task to study the feasibility of Islamic Banking in India, there was not any qualified person in that group to do so. Thus the working group of RBI led by Mr. Anand Sinha failed to visualise significance of Islamic Banking for Indian economy and concluded that it is not possible to allow Islamic Banking in India under present regulatory framework.
The third reason is dominance of US-based economists in India. Since majority of high officials in Indian financial and monetary system are graduates from US School of Economics, they tend to listen the US Economists. The US will never like India to go for Islamic Banking, because if India does so, US will swiftly lose the huge capital flow from Gulf countries which in turn will divert from US to Indian market. While communal political parties defy Islamic Banking, the secular parties accompanied with economists qualified from US have further distanced Islamic banking for India.
RAGHURAM RAJAN COMMITTEE ON INTEREST-FREE BANKING
Considerably the draft report on ‘Financial Sector Reforms’ as presented by Raghuram Rajan Committee had nothing about Islamic Banking. While commenting over that draft report, we had the opportunity to interact with that committee in Mumbai where we requested them to include recommendations for Islamic Banking. Mr. Vijay Mahajan gave due attention over financial exclusion of Indian Muslims and also convinced other committee members to recommend ‘Islamic Banking’ for financial inclusion of Indian Muslims. We are thankful that first time in India our appeal was listened and due recommendations were made by some high level committee.
MISSED OPPORTUNITY FOR INDIA
Definitely this is the case after global financial crisis when Muslim investors in Gulf region are seeking opportunities to invest through Islamic Financial Products in emerging economies like India. Failing to get such opportunities in India, they are parking their investments in Islamic Banks of UK and switching to other emerging economies like China, Taiwan, Indonesia and Malaysia, etc. India is definitely missing billion dollars investment funds which could be mobilised in terms of Islamic investments.
GULF CAN BE BETTER TAPPED BY ISLAMIC BANKING
Yes, because Gulf investors being Muslims look for profit and not for interest on their capital/savings. Second, India has always a better socio–cultural relation with Gulf countries. This relation may yield higher returns for India if we succeed in increasing our current and capital account transactions with these countries. Islamic Banking in India will certainly pull Gulf-based investors’ capital resources into Indian market. There is no doubt about it.
AMENDMENT IN BANKING REGULATION ACT 1949
As we know that the Urban Cooperative Banks in India have been incorporated through a separate legislation, Islamic Banking could be simply allowed in India if the Parliament approves addition of a separate chapter in the Banking Regulation Act 1949 to describe and deal with Islamic banking and Finance.
INSUFFICIENT FINANCIAL INFRASTRUCTURE
Somehow Islamic banks are unable to isolate themselves from the conventional world because being new and smaller in size they do not have the required financial infrastructure to work independently. The present infrastructure for conventional banking has not developed in a few decades but has taken centuries. Hopefully, Islamic Banking will not take that much time to create required financial infrastructure or to grow.
SUKUK IS NOT QUESTIONED BUT ITS MANAGEMENT
The concept of SUKUK has not been questioned, but the managements and regulations have been objected by Muslim scholars around the world. Just to capitalise maximum financial resources, the private corporate issuers of SUKUK have somehow perverted the management by offering buy back guarantees. It may kindly be noted that the SUKUK as issued by different state and central Governments have not been questioned and are doing well. Indian regulators are supposed to do well if Government of India issues SUKUK to raise interest-free finance for infrastructure development projects in India.
ISLAMIC FINANCE FOR INDIAN ECONOMY
Considering structure of Indian workers we have to admit that India cannot grow inclusively unless the growth benefits are duly shared among Indian workers. Since 50 per cent Indian workers are engaged into agriculture, Bai Salam could be most powerful financial instrument to empower farmers, cultivators and agricultural traders. It will help us increase agricultural exports as well. Second, most important sector after agriculture is MSMEs. The products like Musharaka, Murabaha, Mudarba, Istisna, Ijara etc. could be well utilised by our MSMEs. It will help them grow at international level. Besides agriculture and MSMEs sectors, SUKUK could be very useful Vehicle to mobilise interest-free financial resources for the Government to develop required infrastructure. This will also help us reduce the fiscal deficit of the Government with no cost of interest.