Islamic banking is again in the news in India after the Jammu and Kashmir High Court issued notices to the government and the Reserve Bank of India (RBI). Some enthusiasts hope that Islamic banking could be introduced in India through legal channels. Those who keep an eye on the political developments consider this only as a matter of whipping some passion at a time when some big Indian states are going to have provincial elections.
Earlier in 2015, the RBI’s internal committee (known as the Deepak Mohanty Committee) had recommended the introduction of interest-free banking as a trial by some commercial banks in India. Political tide by then had turned in favor of the Bharti Janta Party which, led by the current prime minister, had achieved roaring success in the Indian parliamentary elections. Since then, it has become embarrassing even for the RBI to follow up on its own recommendation.
Several pleas to the RBI and the government have received a lukewarm response in the form of a mere statement that the current government has done a lot to improve financial inclusion in the country through the government’s flagship scheme Jandhan Account (no-frills banking account) and therefore there is no need for any further attempt on financial inclusion by the government. Nobody seems to understand that the demand for interest-free banking and a no-frills banking facility is not the same.
In 2009 when the Kerala government decided to promote an Islamic non-banking finance company, some right-wing political activists led by a maverick stalwart, Dr Subramaniam Swami, had opposed the move citing the decision to be against India’s professed secularism and on account of weakening the autonomy of financial regulators in favor of so-called Shariah advisors.
The High Court of Kerala had decided that floating a company working under Shariah principles is neither a compromise on Indian secularism nor a manner of ceding any regulatory authority to the Shariah advisors. The company since then is working albeit on a very low profile.
In the same year, central government-owned GIC Re started offering re-Takaful facilities to Takaful companies spread across the Middle East and Southeast Asia. The company has been very smartly marketing its re-Takaful services over the last one decade but without any explicit marketing through its website. This has kept the company’s business growing without any undue controversy. Indian mainstream players have a lot to learn from this strategy.
One may also recall that in 2014, the State Bank of India-owned SBI Mutual Fund had proposed to launch the SBI Shariah Equity Fund, but the plan was scuttled on the eve of its launch.
Review of 2021
While developments of Islamic finance at the official level look disheartening, it is encouraging to note that Islamic finance has been taking deeper roots within the community-owned informal groups and societies and by adopting other legal formats.
Several state-level cooperative credit societies have come up across the length and breadth of the country that are now doing financial intermediation among their members through Murabahah and Ijarah products. Some have also started experimenting with Musharakah- and Mudarabah-type facilities.
Many chambers of commerce have started encouraging and facilitating their members to meet each other’s financing needs without resorting to external capital support. These all are at various experimental stages and with the passage of time, it will definitely improve financial understanding and experience.
Another positive development comes on the front of human development. During the last 10 years, many youngsters have gone abroad to study Islamic banking and finance, many of them to the International Centre for Education in Islamic Finance and the rest to the UK, Turkey and the Middle East.
Preview of 2022
India now has a good pool of Islamic finance professionals with global education and experience. This availability of talent has immensely improved the creativity which is visible in the practices of the new-age Islamic finance institutions.
Equity and profit-linked debentures not only meet the Shariah criteria of linking risk and reward but this is tax-efficient — a luxury that was not available to old-age Islamic financial institutions.
The emergence of fintech has further revolutionized the thinking behind the Islamic finance concept. Mutual healthcare products are under pilot testing which if successful can revolutionize the availability of mutual Takaful in India.
Indian information technology companies are already serving many Islamic financial institutions globally. Their experiences are available to Indian aspirants in a much cost-effective manner. India provides the most lucrative Islamic finance opportunities globally and it is only a matter of time when all the independent experimentation will lead to the creation of the next Islamic finance unicorn from India.
Indian Muslims’ desire to have government-supported Islamic banking and finance has not borne fruit and it seems challenging to imagine any change in stance in the near future.
Any attempt by the community to get Islamic banking introduced via a legal injunction is highly unlikely and risky as the courts lack enforceability power in business matters.
However, the community’s own effort in promoting value-based financial intermediation through available legal structures like cooperative credit societies and others will help deepen the market and strengthen the case for Islamic banking before Indian financial regulators. The community needs to realize that Islamic banking has a stronger case on business merit than on religious merit.
Dr Shariq Nisar is a professor at the Rizvi Institute of Management Studies and Research and a co-founder of ShariahCap Advisors. He can be contacted at [email protected]