The opportunity provided by the upcoming Union Budget may be used by the Finance Minister to usher in Participatory banking without any major change in the existing laws and procedures, opines SYED ZAHID AHMAD, delineating the roadmap for the task.
Had Reserve Bank of India (RBI) as financial engineer studied financial products used under Islamic banking system, it might have developed new secular financial products with equally attractive and acceptable alternatives to Indian Muslims as well. But the internal working group of RBI constituted for this purpose sensed mysticism in Islamic banking with inextricable influence of religious doctrines, and delineated the principles and entire gamut of financial products used in Islamic banking for better understanding. So the report presented by that working group mostly dealt with legal hurdles disallowing Islamic theology in the present banking system; and did not focus on evaluating the scope of alternative financial products potential for financial inclusion. That group did not interact with any professional group practically working for Islamic banking to find its pros and cons, rather based on study of two theological websites (www.islamic-banking.com and www.islamic-world.net) put statements like “every Islamic bank has to establish a Zakat fund for collecting the tax and distributing it exclusively to the poor directly or through other religious institutions” in its report.
Considering the better growth rate in Islamic banks around the world amidst global financial crisis, RBI has been approached through different parties (including Minister of Minority Affairs). But probably based on the study done by the working group, the RBI Governor concluded saying that “Islamic banking is not possible…. We have studied the issue. We appreciate the objectives behind the request. But there are some legal problems. It can be got around not through banking, but other vehicles”. The sensed mysticism in Islamic banking by RBI working group might be a big reason behind such a stand by the RBI.
It is better to call Islamic banking as ‘Participatory Banking’ because the products used under Islamic Banking are driven by the spirit of participation. It allows through participation of the depositor and financier in trading, leasing, forward sale, equity subscription, risk sharing and partnership activities. So the term ‘Participatory Banking’ can well replicate the term ‘Islamic Banking’ in India. Any additional banking system based on principles of participation along with interest-based banking would help achieve effective financial inclusion among all communities (including Muslims) without any sense of mysticism.
Deregulation of interest rate has opened gateway for Shari’ah-compliant banking and financial services within the existing regulatory framework. Under present banking regulations, following products and services are potentially Shari’ah-compliant and can be carried out by any subsidiary doing participatory banking.
A. Deposit Side Products & Services
Saving deposits with zero interest
Current Account
Safe Deposit Locker Services
Online Trading Services
Internet Banking services for receiving, disbursing and transferring funds on fee basis.
Consultancy Services (on commission basis) to customers seeking Shari’ah-compliant Investments in Mutual Funds
Consultancy Services (on commission basis) to customers seeking Shari’ah-compliant Investments in Equities / preferred Shares
B. Finance and Investment Side Products & Services
Investment in Equity of any listed company (selected after Shari’ah Screening)
Investment in Mutual Fund (selected after Shari’ah Screening)
Lease Finance business
Hire purchase business
Discounting of bills and Vouchers (on commission basis)
Factoring services
FOREX Services
E-Freight Services
E Tax services
Issuance of Bank drafts by charging Fee for the service
Issuing bank guarantee / Letter of credit by charging Fee for the service
Retail Sale of Gold Coins or other metals
Gift Cheques Services
Gift Card Services
Pay Roll Card Services
Foreign Travel Card Services
Initial Public offer Services
ATM Services
Broking services
If these products and services are clubbed together as a package and offered through subsidiary model in the name of Participatory Banking; or through NBFCs, it would resolve problems related to financial inclusion of Muslims along with helping the disadvantaged groups and sectors to get suitable financial products and services at better prices.
Currently NBFCs are regulated through Chapter IIIB in the RBI Act 1934, which allows NBFCs to operate under the scheme framed by NBFCs itself. So NBFCs can be permitted to accept deposits and extend finances on participatory basis. This view is based on a report published by the Department of Financial Services, Government of India on 31 January 2012. Section 4.3 of that particular report significantly put the following two specific directions with regard to NBFCs undertaking Participatory Financing –
“As regards NBFCs that are undertaking participative financing and / or any other non-interest based financing, the following directions should be complied with:
(i) The Fair Practice Code should set out the model on which facilities will be granted to borrowers. The NBFCs should also set out the commercial considerations for its facilities, (after factoring in aspects such as cost of funds, expected return and other parameters to determine credit viability). The Fair Practice Code should be displayed on the website of NBFCs and updated periodically;
(ii) The borrowers should be made aware of these commercial considerations in the agreement and the loan sanction letter. Expected returns and servicing charges should be communicated separately. If the expected rates of return and service charges are different for different categories of borrowers, the same should be communicated to the borrowers.”
Based on the above directions, RBI should frame regulatory provisions to allow NBFCs accept deposits and extend finance on participatory basis. The depositors may be clearly told that their deposited funds will be invested on basis of sharing financial risks and rewards.
There is a need to constitute a working group for studying the scope and challenges to allow Participatory Finance through opening up of subsidiaries at SCBs for Participatory Finance or introduction of a new category of NBFC in India. We expect that considering the Union Budget for 2013-14 as an opportunity to set the pathway for the next Parliamentary election, this time the Union Finance Minister may propose any working group for studying the hurdles for financial inclusion of Muslims with an object to enable India achieve inclusive growth with better financial inclusion of 150 million Indian Muslims.
Anything proposed by the Government of India in the name of Participatory Finance instead of Islamic Banking may reflect as a pure alternative financial model instead of religious agenda. Hopefully Participatory Banking may allow equality for all before the law in India.