Issue Of Islamic Banking

The issue of Islamic Banking has been in circulation for a long.  Every now and then our economists and social activists having an inclination towards Islamic thoughts have been raising the issue that the regulator should allow the banks and NBFCs to follow the Shariah rules and be allowed to carry on Islamic Banking. In the past decade, the Kerala High court has also dealt with this issue. 

quote “In late 2008, a committee on Financial Sector Reforms, headed by former RBI governor Raghuram Rajan, had stressed the need for a closer look at the issue of interest-free banking in the country.

Prohibit The Use Of Financial Instruments

Certain faiths prohibit the use of financial instruments that pay interest. The non-availability of interest-free banking products results in some Indians, including those in the economically disadvantaged strata of society, not being able to access banking products and services due to reasons of faith,” the committee had said.” Unquote. 
Efforts were on in the State of Kerala for promoting the First Islamic Bank of India with Govt. Patronage. It got into legal and constitutional tangles.

Islamic Banking In India

Govt. Of India and RBI were seized of the matter of introduction of Islamic Banking in India. The following paragraph reveals the outcome. 
Quote “The issue of introduction of Islamic banking in India was examined by the RBI and the government of India, it said.
“Taking into account, the wider and equal opportunities available to all citizens to access banking and financial services, it has been decided not to pursue the proposal further,” the central bank said in its reply to the RTI application filed by this PTI correspondent.

The RBI was asked to provide details of steps being taken for the introduction of  Islamic or ‘interest-free’ banking in India  .” Unquote. 
(Source Times Of India Nov 12, 2017)

Regulatory Authority In Islamic Banking

RBI, which is the regulatory authority for the Banking Industry and NBFC Sector in India is very much alive to the concern of depositors. The main concern being the security of depositors. The present Banking system works on the principle of ensuring the safety of depositors’ money and thus interest-earning and risk-reward principle have to be in place. Moreover, the present system requires maintaining a certain percentage of liabilities (deposits) with RBI as SLR to ensure the safety of depositors’ money. These deposits also earn interest which goes against the principles of Shariah. 

Now that RBI and Govt. Of India has decided not to pursue the proposal further, there is little chance of Islamic Banking being practiced in India in near future.  
However,  an attempt is made in the following paragraphs to put certain points in the right perspective. 
Shakespeare once remarked – ‘Neither be a borrower nor a lender be’.  
“Do the things you enjoy, but stay out of debt” – Robert Louis Stevenson.
The evils of present days EMI culture are very much visible in our society. The fall out of the mortgage-based economy in the U.S has been experienced by the entire world. Young graduates are passing out of their colleges with a burden of heavy EMIs. 
Job security is no longer available. In such uncertainties, the added burden of interest compounds the trouble. So, whether Islamic Banking can be a solution? 
Let us understand. 

Interest Free Economy In Islamic Banking

The interest-free economy suggested in Islamic Banking is neither  Capitalistic nor Communistic, yet it has good features of both. It can create a healthy society wherein there will be no place for hoarding and profiteering. It is based on the principle of ‘neither do harm nor be harmed. 

RIBA  – It is an excess charged over the principle to grant extensions for the payment of debt. This is strictly prohibited in Islam as it is considered unjustified enrichment and monetary advantage without a counter value. 

LENDING – As per Islamic law, loans are of two types. 

Salaf – Loan for a fixed time which may include short, immediate, and long-term loans. And 

Qard – Loan recoverable on demand. 

On the basis of purpose, loans are further classified as

Productive – loans for extension of business, trade, and industry.

Unproductive – loans granted to individuals for purchasing consumer goods.
on the basis of securities, loans are classified as secured against securities unsecured and clean

Assure The Investors

An Islamic bank may accept time and demand deposits from the public, which in fact are loans to the Bank. Islam is not against the idea of securities taken from the borrowers, so as to assure the investors about the secured repayment of their money. For this purpose it allows :

Pledge

The Arabic word Rahn stands for a pledge or security. “Every soul is in pledge or rahina for its deeds” is the Quranic verse.
According to Islamic law, the pledge is a security for the satisfaction of the debt, if the debtor fails to repay it and whatever validly forms the subject of sale may be given as security.

Lien

Apart from Pledge an Islamic bank has the right of lien i.e. right to retain the property belonging to another until a debt due from the latter is paid. This is called a possessory lien which may be permissible under Islamic law. For example, a seller has a right to retain the property sold by him, in his possession until its price is paid to him.

Mortgage

The mortgage has no place in Islamic laws as interest only in the property, and not the possession, is transferred to the Mortgagee.

Mudaraba : the principle of partnership. It is a system to share profit and loss equitably as against the present day’s modern banking system where losses are borne by the borrower alone and the lender always stands to gain. The profit-sharing principle provides incentives to investors.
Lending and borrowing are unavoidable in this worldly life and therefore permissible in Islam.
The Prophet had once opined – The best among men are those who repay the debt in the best possible manner.

Shirkah

Means sharing and it has further been divided into two parts.
Shirkat-ul-milk: It means joint ownership of two or more persons in a particular property. It may happen in two ways such as at the option of two or more persons coming together to buy an asset or through inheritance.

Shirkat-ul-amwal

Where all the partners invest some capital into a commercial enterprise. It is also more commonly referred to as Musharakah and forms the basis of most of the transactions taking place in modern days.
Musharakah or Shirkat-ul-amwal is a relationship established by the parties through a mutual contract. All the ingredients of a valid Contract are present here. Parties should be capable of entering into a contract, the contract should take place with the free consent of parties without any duress, fraud or misrepresentation, etc., etc.
Apart from these, there are certain ingredients that are peculiar to the contract of Musharakah, which are summarized hereunder.

Distribution Of Profit

Proportion of profit to be distributed between the partners must be agreed upon at the time of effecting the contract.
The ratio of profit for each partner must be determined in proportion. To the actual profit accrued to the business and not in proportion to the capital invested by him.
Sharing of loss :
– In case of loss each partner shall suffer the loss exactly according to the ratio of his investment and not more – not less.

Mudarabah

Mudarabah is a special kind of partnership. Where one partner gives money to another for investing it in a commercial enterprise. A person who provides the money is called “rabb-ul-mal”. While the management and day-to-day work is the responsibility of another, who is called “mudarib”.

Difference between Musharakah and mudarabah

In musharakah investment comes from all the partners whereas in mudarabah investment is the sole responsibility of rabb-ul-mal.
musharakah all partners participate in management. In mudarabah management is carried out by mudarib only.
In musharakah all partners share loss to the extent of the ratio of their investment while in mudarabah the loss, if any. Is suffered by rabb-ul-mal only.
The liability of all the partners in musharakah is unlimited. In the case of mudarabah liability of rabb-ul-mal is limited to his investment only.

Appreciation in the value of assets, in the case of musharakah is shared among partners. In the case of mudarabah the beneficiary is rabb-ul-mal. Mudaraib can only earn his share in profit in case he sells the goods profitably. He is not entitled to claim his share in assets themselves if their value has increased.

Murabahah

Murabahah is a special type of financing by way of sale. This is commodity/ assets for a deferred price which includes an agreed profit added to the cost. Being a sale and not the loan Murabahah should fulfill all the necessary conditions of a valid sale.
while approving Murabahah facility it should be ensured that the client really intends to purchase commodities that may be the subject matter of Murabahah facility.
It should never be used for speculative purposes.
Murabahah can not be used for payment of overhead expenses, paying the bills, or settling the debts of the client, nor it can be used for the purchase of currencies.
Two different prices for cash and credit sales are allowed on the condition that either of the two options is specifically elected by the customer.
In the case of earlier payment by the client, no rebate can be claimed by him.

IJARAH

Ijarah literally means giving something on rent. In the financial world, Ijarah means ‘ to transfer the usufruct of a particular property to another person in exchange for a rent claimed from him.’ Thus we may see that Ijarah is analogous to the English term ‘leasing’. Here the lessor is called ‘Mu’jir’, the lessee is called ‘musta’jir’ and the rent payable to the lessor is called ‘ujrah’. It is generally used as a form of investment and as a mode of financing, too.
Some scholars have opined that the terms and conditions set in the lease agreement may amount to “RIBA” which is prohibited by Shari’ah. Therefore an Islamic lease must conform to the basic principles of Shari’ah.

Salam And Istisna

According to Shariah a valid sale has three ingredients –
The commodity should be existing.
The seller should have acquired the ownership of that commodity.
Mere ownership is not enough. It should come into the possession of the seller either physically or constructively.
There are only two exceptions to this general principle. One is Salam and another is Istisna. Both are sales of a special nature.

Salam

Salam is a sale whereby the seller undertakes to deliver some goods to the buyer at a future date in exchange for a price fully paid in advance. This is allowed subject to certain conditions. These are –
that the buyer pays the full price to the seller at the time of effecting the sale.
Salam can be effected only in those commodities the quality and quantity of which can be specified exactly. For example, precious stones can not be sold on the basis of salam, as each stone is different from another by way of its qualities and size/weight.

Istisna

Istisna is the second kind of sale where a commodity is transacted before it comes into existence. It means to order a manufacturer to manufacture a specific commodity for the purchaser. The contract of istisna creates a moral obligation on the manufacturer to manufacture the goods. Any party may cancel the contract after giving notice to others but once the manufacturer has started the work the contract can not be canceled unilaterally.
From the above, we see that the basis of Islamic banking has been social justice and is aimed at the protection of the common man from the atrocities of money lenders. The main difference between Islamic banking with modern banking is that modern banking deals in money only. Islamic banking stresses commodities and existing securities which are in lawful possession of the person dealing in them.

The exact date and place of delivery must be specified in the contract.
Quantity of the commodity should be agreed upon in unequivocal terms.
Salam can not be affected by the commodities which need to be delivered on spot. For example purchase of gold in exchange for silver or wheat in exchange for barley can not be affected by way of salam. According to Shariah the delivery of both should be simultaneous.

Way Of Hadith Is To Ensure The Protection

Bindings by way of Hadith is to ensure the protection of economically weaker sections from the prosperous.
As against the general belief, Islamic Banking can be made flexible on the basis of a general principle laid down by the Holy Prophet in his famous Hadith, which says –
“All the conditions agreed upon by Muslims are upheld, except a condition which allows what is prohibited or prohibits what is lawful.”

Holy Prophet has laid down basics and it is up to the learned of the period, how they develop the subject without compromising the basic principles of Shariah. Islam is all-embracing and so should be Islamic Banking. Only then it can serve society in a meaningful way. It would be great harm to society if we connect Islamic Banking only to the Muslim community. It is for all. Everyone.

KOZHIKODE

Islamic banks are yet to gain traction in Kerala, but nearly 2,000 self-help groups (SHGs) in eight districts have been operating on the lines of Islamic banking under Sharia norms, offering interest-free loans to its members. According to the Interest-Free Associations’ Coordination Committee (INFACC), a society working to bring all SHGs under one roof for promoting zero-interest microfinance, more than 40,000 members have been benefiting from the scheme, which is aimed at helping people escape from the clutches of the blade mafia and loan sharks.
“We can truly say that this is a successful model of Islamic banking at the micro-level, promoting zero-interest microfinance,” said INFACC chairman T K Hussein.

Each SHG has 20 members or more and the working capital is raised from the money that they contribute.
“Once a sufficient fund is raised, a member can avail a loan after finalizing a repayment period. The model has become successful as the people can rely on their SHG for money in case of an emergency and that too without any hassle. As the SHGs are managed by people of their respective localities, they know the economic background of each member and their repayment capacity.
Loans are sanctioned only by a committee after analyzing the merit of each application. Hussein added.” Unquote.
(Published: 30th January 2018 The New Indian Express Kerala.)

Contributed by: M K Bajaj
General Manager (Retd.)
Central Bank Of India
 E-mail : mkbajajcbi@gmail.com.