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MAGAZINE | APR 26, 2010

Mumtaz Begum of Jogeshw ari, Mumbai, w ent to a zero-interest Islamic f und to escape a debt trap

BANKING: SHARIAH RULES

Interested Parties
Islamic banking has some pluses. But with our secular banking rules....
PRAGYA SINGH

Creeping Timeline: No Progress 2010 An interim order on a PIL filed in the Kerala High Court has resulted in the state government having to step out of a partnership with an Islamic NBFC. 2009 SEBI allows India's first Shariah-tolerant mutual fund scheme. First VC fund also allowed. 2009 UPA government clarifies that there are no plans to introduce Islamic banking in India. 2008 Raghuram Ramrajan committee recommends interest-free banking to encourage financial inclusion. 2008 Bids called to reconstruct National Minorities Devpt Fin Corp on Shariah lines. 2005 RBI sets up committee to study Islamic banking products, says laws will have to be changed by Parliament. 2007 Committee set up by the UPA government, no further details available. How Islamic Funds Are Different No receipt and payment of interest. Instead, leases, hire purchase, cost-plus deals allowed. No excessive ambiguity in terms, conditions No speculative non-productive activities such as gambling etc No investments in banks and NBFCs, breweries, distilleries, adult entertainment, gambling, advertising and media (except newspapers), tobacco and related businesses, chewing pan masala, trading of gold and silver etc No deviations from strict restrictions on quantum of debt, equity, interest-bearing securities, and non-permissible income The Ground Reality
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While Islamic banking isn't allowed, there are limited options for Islamic investments, which are doing well. However, there is no groundswell of demand. At 47%, credit-deposit ratio among Muslims in India is way below the national average of 74% Loan sharks and non-banking institutions posing as Islamic funds routinely rip off gullible investors. There is a need for a regulatory regime, which can happen only if businesses are given clearer legal status. But that is a gray area because it's a political hot potato with the BJP opposing it tooth and nail. ***

ohammed Manzoor Alam has now been petitioning the Indian government for six years. He has met the prime

minister, the finance minister, the vice-president and at least two Reserve Bank of India chiefs. He has lobbied members of Parliament and many in top posts, including the Rajya Sabha deputy chairman. He has invited hundreds to attend conferences (in India and abroad) of the Indo-Arab Economic Cooperation Forum, which he chairs, to rally support for his causeallowing Islamic banks in India. So far he hasnt had much luck. Like scores of other Islamic financial groups, educational institutions and public interest organisations, the Indo-Arab Forums petitions have led the government to form several committeessome of them even acknowledge that there is potential for interest-free banking (a key feature of Islamic finance is that charging and receiving interest is prohibited). But then it fizzles out. The Reserve Bank of India (RBI) says the law does not permit Islamic banking, though, piecemeal, SEBI has permitted Shariah-compliant financial products such as mutual funds. When it comes to (pure) banking, says an RBI spokesperson, the Banking Regulation Act will have to be amended to allow Islamic banking. Thats true, and it can be a complicated process, but theres much more to it. Like the tireless votaries, there is an equally overt opposition to the Shariah model of finance. As Manzoor Alam puts it, the government is perhaps a little scared of people belonging to the RSS and other such groups. A senior BJP leader, speaking on condition of anonymity, says Islamic financial products are absolutely unnecessary. We are a secular nation. Do we have Hindu investment schemes? he asks. Earlier this month, the Kerala state government was asked by the high court to not partner with an NBFC structured on Shariah lines (see box). Here too, the petitioner, Subramanian Swamy, president of the Janata Party, argued that such an NBFC discriminates on the basis of religion.

For Manzoor Alam, such debates are futile. If a company has the name Om, does that mean the company is against secularism? he asks. For Alam and others like Ashraf Abdul-Haq Mohamedy, who runs Idafa, an investment firm along Shariah lines, the words Islamic banking are somewhat of a misnomer. More than half the Shariah-compliant mutual funds that Idafa distributes are bought by non-Muslims, he says. The demand from Muslims is there, says Mohamedy, but the Muslim strictures have attracted as many Jains and Hindus as Muslims to Idafa products.
Abdul-Haq Mohamedy, Investment Firm Idafa

The demand from Muslims is there...but Idafas strictures have attracted as many Jains and Hindus. Ashraf

Indeed, the low ratio of Muslims who access regular bank credit points to a latent demand for Islamic banking in the country. But experts shy away from citing a boom. Waqar Naqvi, who runs Taurus Mutual Fund, which launched an Ethical Fund (Shariah-compliant) last year, says a Muslim will not invest in a fund just because its Shariah-friendly. But they will definitely want to put their money in a top-performing fund, he says. He doesnt think that many Muslims avoid opening regular bank accounts due to the interest credits involved either. I know of scores of Muslims who simply dont take the interest credited to their accounts. Problem solved. Those who favour Islamic banking argue that the Shariah permits more participatory bankinginterest rate profits and speculation are less important than sharing profits and losses, and partnerships will be on mutually agreed terms rather than dictated by financial institutions. Those against say that Indians do not invest on religious lines, but only based on the profit motive. But theres no denying the arrival of West Asia-based firms into Indiasuch as construction giant Emaar (with Indias MGF), or the partnership of DLF with the UAE-based Nakheelhave fuelled hopes that many more ventures will follow suit. Expectations are that many of these will be on Shariah-compliant lines. There is a view that Indias needs in financing large infrastructure projects can be met by attracting the Gulf surplus (estimated at up to $3 trillion) provided the right opportunity is created. Last year, SEBI also approved Indias first Islamic Venture Capital Fund, and now the finance ministry has hinted at new norms for NBFCs. A new, fifth category of NBFC that permits interest-free products may be officially recognised, but discussions have barely begun. Making room in the law for Islamic financing, says kpmg analyst Keyur Shah, may not be as tough as it sounds. Current accounts are not interest-bearing. The interest part is not as hard to sort out. What
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6/3/2010 www.outlookindia.com | Interested Pa becomes hard to do is if you are a Muslim and you want to invest that money productively. The laws are not tuned to that sort of investment, he says. Significantly, the RBI spokesperson points out that at present there is no application for Islamic banking pending with them.

Of course, most of the activity has been diverted to the NBFC side. Unofficial estimates say there are hundreds of NBFCs, recognised or not, offering Islamic products in India. Often, these options arent reliable, and people end up getting cheated. There are various kinds of funds, particularly in western UP, that call themselves Shariah-compliant. But how Islamic they really are is another question, says Dr Javed A. Khan, who teaches at Jamia Millia University. In fact, Manzoor Alam, when asked for successful examples of Islamic financial institutions in India, says, I can give you a list of failed ones easily. There are no checks and balances from a regulatory body, which leaves room for dishonesty and failure. Indeed, survival can be tough as these firms navigate the legal muddle. For, while an Islamic institution allows leases, hire-purchase or cost-plus agreements, partnerships and mark-ups, it doesnt allow for interest payment, nor does Islamic finance tolerate excessive vagueness in terms and conditions, or speculation. That leads to a search for innovative solutions. Rahmatullah A. Ahad, vice-chairman, AICMEU, explains that he set up a Cooperative Credit Society simply because it was the nearest approximation to what he wanted to doprovide resources to the poor as interest-free loans. Cooperatives gave freedom to set their own interest rate. AICMEU seized the opportunity, setting the rate at the acceptable zero per cent (a mark-up, or service charge, is levied).

Islamic banking is anti-economic growth. You cant create jobs, become an economic powerhouse this way. Jagdish
Shettigar, Convenor, BJP Economic Cell

But issues still abound. For instance, under Islamic law, you cant sell something you dont own. So, if an institution purchases, say, a house for somebody on hire-purchase basis, at the time of transferring the residence, a fresh agreement will have to be drawn up. A fresh stamp duty and registration ends up being paid. This amounts to double taxation and discourages Islamic financing. Notwithstanding the hiatus in Kerala, most of the companies now permitted to offer Islamic products say business has been growing at a fine clip, if not at gale force yet. Moreover, research over the last couple of years shows that, internationally, passive returns for the Europe Shariah etf was better than the main ftse 250 index. At home, annual remittances from the UAE alone are said to amount to $2.5 billionbut a bulk of these are lying unused in the so-called 786 accounts belonging to families of Gulf expats. It would make business sense, at least, to make something of this money.
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