Khurshid A. Najmi, former legal advisor to Reserve Bank of India, who has also worked for the Central Bank of India and Bangladesh, shared his perspective on the challenges, feasibility and acceptance of Islamic Banking and urged the scholars of Shari’ah and Finance to explore pragmatic ideas and concept in order to serve the purpose of Islamic Banking. He was addressing a programme organised by Forum for Group Discussions on Economic Issues (FDGEI), a joint forum of Sahulat and Radiance Viewsweekly, in the national capital on 22 June.
At the very outset, Najmi explained the role played by Banks in Shari’ah-compliant financial transactions, both on the liability side and the assets, its limitations and how under such circumstances an Islamic bank operates. He observed that during the process, Shari’ah principles are compromised and the perception that has been created that the Islamic bank is very popular and doing great transaction, is not true.
In order to substantiate his argument, he cited the examples of the United Bank of Kuwait, the Islamic Bank of Britain, Dedicated Islamic Finance Subsidiary of HSBC and LIoyds TSB. When Najmi was making people aware about the origins of the modern Banking, one very important issue was touched upon that in the definition of bank the word ‘interest’ has not been used, giving the impression that there has always been scope of interest-free banking.
Another very important role of Bank was highlighted by the learned speaker when he said that the role of a bank as an institution is the link between lakhs of depositors and the people who need money and here the banks plays the role of intermediary. He questioned whether a similar institution has ever operated in the Islamic banking system and that is the biggest grey area?
The present Islamic banking system is in the early stage and has not developed completely because of lack of awareness of the banking system, its operation and function among Shari’ah scholars. Only Tabung Haji is doing extremely well in Malaysia and all other aspects of Islamic banking have to be reviewed and explored by people well versed in finance, finance management, industrial engineering and the knowledge of Shari’ah.
Najmi also said, in Malaysia there are separate laws for Islamic banking, but in England Islamic banks operate with the traditional laws. The banks that have opened Islamic banking windows is not because they were impressed with the concept and principles of Islamic banking and norms but only because they could get easy money through current deposits where they don’t have to pay interest. The same banks follow Islamic banking norms in Bangladesh because they are bound to do so as per the law there. Sri Lanka has very recently adopted Islamic banking and it has mentioned that deposits can be accepted on the principles of profits and loss. This is not feasible in India; the only thing can be done here is to follow the UK model.
Former legal advisor to RBI stressed that after considering all pros and cons of the operation of the Islamic banking, the Shari’ah scholars must think afresh on why they need Islamic banking and what are Shari’ah laws and then try to correlate and evolve a new mechanism, keeping in mind all the limitations and strengths for smooth functioning of the Islamic banking.
He suggested that basically Shari’ah scholars can do only two things in terms of investment and that to buy and sell or buy and give the product or any Shari’ah compliant product on lease. Rest all other options available are only variations of these two methods. The need of the hour, according to him, is that Islamic banking must be Shari’ah-complaint in substance and form because in substance laws are followed and in form Shari’ah.
Najmi opined that there is need for economic research and new theory based on Shari’ah principles because it is still possible to follow 100 per cent Shari’ah principles and develop a viable financial institution and for that profit sharing option has to be explored. In Malaysia, which is a predominant Muslim county, nearly 40 per cent Chinese have taken loan from Shari’ah-compliant banking not because they are impressed with Shari’ah principles but because Islamic finance is more equitable.
While replying to a question, is there legal hurdle and lack of will on the part of the government even if Shari’ah scholars are able to present viable concept of Islamic banking, the learned speaker said that so far Shari’ah scholars have not been able to put forward any viable concept. There is no attempt made on the part of Shari’ah scholars to think of viable options. Even if they come out with such an option, it has to be first experimented in the Muslim countries because in India a fixed line has been drawn that if one wants to establish such banks, it has to be done within those fixed lines.
Towards the end, he suggested linking with the GDP and sharing the profit in accordance to per cent increase in the GDP, which will be in accordance to Shari’ah principles and without it there is no possibility of effective Shari’ah-compliant banking.
Some other unresolved issues raised during the presentation were about the nature of Islamic Bank, whether it is a bank or a trading house, saving deposits and fixed deposits, lending and investment under Banking Act or under Islamic Bank and maintenance of SLR/CRR.
Other measures suggested to be done by Islamic Banks, if allowed to operate in India, are the government may be approached to issue securities which are Shari’ah-compliant, both short-term and long-term. Likewise, Section 6(1) (b) of B.R. Act, 1949 allows banks to act as an agent for carrying on agency business of any description, including the cleaning and forwarding of goods.
Under Section 6(1) (i) B.R. Act (Banking Regulation Act), a bank is authorised to undertake administration of estates as executers, trustees or otherwise. The other things which can be done are that the Saheb-al-mal may execute a trust and appoint the bank as trustee for a fee. Under this arrangement, there is no deposit; hence RBI direction to deposit will not apply. The amount owned by the trust may however lie with the bank in the name of the beneficiary. The transaction would qualify as Mudarabah under Shari’ah.