Tuesday, December 16, 2014

Why you shouldn’t fret over Islamic Banking

By H Jayesh
Last week, SBI Mutual Fund deferred its plan to introduce a Shariah-compliant equity fund, which was scheduled to be launched on December 1, as it faced opposition to the proposed structure of the scheme. In an article in ET (‘SBI’s Islamist Blunder’), Sadanand Dhume described SBI’s move and Islamic banking in general as a medium only to advance a “retrograde political agenda”.
This view needs an informed response. The goal of trade and enterprise in Islamic finance is equitable generation of wealth and prosperity through acceptable business activities. Likewise, risk in trade and business is sought to be shared. This means that the accumulation of wealth merely through the receipt of interest is prohibited, as it is deemed as ‘effortless profit’.
Islamic banking encourages and facilitates investment in real economic activity and societal welfare while prohibiting investment in speculative businesses. It has its roots in religious principles. So does the concept of the Hindu Undivided Family, which is treated as a distinct class of taxpayer and not taxed as an Association of Persons (AoP). The tax laws have been specially modified to harmonise the legislation with Hindu customs and social practices. The provision blatantly favours only a section of society. This is not seen as preferential treatment or ‘antisecular’ even though it is available only to Hindus.
Islamic banking has the same purpose as conventional banking: to make money for the banking institute by lending out capital. At the same time, it recognises the sensitivities of a section of society.
The widespread censure of the Islamic banking system is ill-advised when one considers that such a system neither casts a financial burden on the participant nor requires such person to be a follower of Islamic principles.
Abolishment of sati and enactment of the Widow Remarriage Act, 1856 paved the way for empowerment of women and attempted to bring them on the same level with men. Even the enactment of the Scheduled Castes and Tribes (Prevention of Atrocities) Act, 1989, the Untouchability (Offences) Act, 1955 were enacted with a view to establish a bias-free society.
The Maharashtra government even amended the stamp duty regime by cutting the rates of stamp duty to 0.1% on the value of the securitised instruments. This could be seen by many as a discriminatory move towards housing loans, credit card loans, car loans and even to industrial borrowers. However, it was seen to be an industry requirement and beneficial to all and so was effected. A similar approach towards Islamic banking and finance in India only seems fair.
As far as the argument that Islamic banking is merely a means to fulfill a political agenda is concerned, it is notable that several countries with relatively insignificant Muslim populations have amended their laws to include Islamic banking and finance in their banking framework. These countries include Germany, the US, France, Japan, Hong Kong and Singapore. The search for alternatives to conventional banking in the aftermath of the global financial crisis put the spotlight on Islamic banking. Even major multinational banks such as HSBC Amanah, Standard Chartered Saadiq and Citigroup offer products in accordance with Islamic finance principles.
Earlier this year, Britain raised $339 million from the issuance of sukuks, becoming the first non-Muslim sovereign issuer of Islamic bonds. This is not political pandering but sound financial sense.
To make financial inclusion a reality, Islamic banking and finance have to flourish. A large section of the population is refusing to engage in the current banking framework as it is violative of their religious beliefs. An alternate model coherent with religious beliefs and at the same time which does not impose any religious or financial burden would be ideal and beneficial to all.
Currently, there is no demand for a special legislation for Islamic banking in India. Banks and nonbanking financial companies (NBFCs) can very well carry out Islamic financing activities and introduce products and services that are in compliance with the extant laws. In fact, in 2008, present RBI governor Raghuram Rajan had recommended the introduction of interest-free finance and banking as part of mainstream banking in the interest of inclusive, innovative growth. This was seen by the market as a reference to Islamic banking. After all, Rajan could not have intended to espouse that monies should be advanced for free!
H Jayesh is founder partner at JurisCorp

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