Tag Archives: zakaat

Islamic Banking – Where’s The Beef?

18 Sun Aug 2013

Posted by in India, Society, South Asia

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Whatever benefits Islamic banking may or may not have in its favour, public relations is not one of them. The Reserve Bank of India’s recent nod to sharia-based non-banking financial houses met with resistance from the usual suspects. Objections to Islamic banking in India range from regulatory inertia and concern about the unknown to Islamophobia. This is made worse by the existence of few rigorous analyses of Islamic finance.

The first Islamic bank in the world was founded in Egypt in 1963, and since than, the phenomenon has grown slowly but steadily. Conceptually, an Islamic bank has an equity-based capital structure, composed of shareholders’ equity and investment deposits based on profit and loss sharing. Just as supervisory issues such as capital adequacy ratios in conventional banking are regulated by the Basel Committee on Banking Supervision (BCBS), Islamic banks follow the standards prescribed by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI).

The most known factoid about Islamic banking is that it prohibits earning of interest, or riba. Muslims believe that profit should be based on effort; moneylenders expend little effort, their earnings accruing while they sit idle. Islamic banking also prohibits investment in activities considered haram, or sinful, according to sharia. Thus, projects involving alcohol, tobacco, pork products, weapons & defence, and pornography are all forbidden. The system also proscribes gambling and speculative activities. It should be mentioned that Islamic banks keep their doors open to all, including non-Muslims.

It should be noted, however, that while riba is prohibited, equity-based returns on investment are not. Islamic finance covers several types of financial contracts that vary in equity and profit-loss sharing (PLS). For the simplest accounts, Islamic banks perform a fiduciary role by primarily protecting the principle and sharing the surplus if any; for savvier depositors, the bank serves as an agency and provides administrative support. Modes of financing such as mudaraba (one partner provides the money and the other contributes expertise) and mushakara (investment, labour, expertise, risk is shared among all parties) may be seen as strictly profit-loss sharing, while murabaha (sale of goods in which profit margin is decided upon by both buyer and seller), ijara (leasing), and bai-us-salam (advance payment on future delivery of goods) are not. There also exist hybrid of these two types.

To enlarge the field of operations of Islamic banking, the requisite infrastructure has been slowly put in place. In 1995, the Dow Jones Islamic Markets Index (DJIMI), a listing of sharia-compliant portfolios, was launched. A special Sharia Supervisory Board oversaw the process, and the stocks are widely traded. In general, Islamic banks have performed as efficiently as conventional banks despite their self-imposed restrictions.

There is nothing inherently problematic about this system; investors are free to choose between conventional and Islamic finance, and the pitfalls of conventional investments such as investor knowledge, information asymmetry, and agency problems also apply to Islamic banking. Regulatory mechanisms such as financial cushions and prudent asset-liabilities structures will enhance the banks’ fiduciary role. Like conventional banking, Islamic banking also will require periodic audits and stringent rules on transparency.

India’s present laws obstruct the establishment of Islamic banking – the Banking Regulation Act (1949) prohibits the operation of banks on a profit-loss basis (5b), forbids murabaha, or, the buying, selling, or barter of goods (8), impedes ijara, or, bars the holding of immovable property for a period greater than seven years (9), and requires the payment of interest (21). However, there is no reason for these regulations not to be amended. The purpose of regulations is to ensure smooth and standardised operations, not vet business models; the market will be the best judge of the efficiency and pitfalls of Islamic banking.

Undoubtedly, beyond the infrastructural issues, Islamic banking faces many difficulties – given the partnership dimension of business, Islamic banks may have to maintain a closer watch on their investors than a typical bank would. Furthermore, Egypt’s al-Azhar disagrees with the Pakistani Supreme Court’s 1973 interpretation of riba – while the former restricts the meaning to usury, the latter accused the country’s banks of engaging in “conventional banking sprinkled with holy water” and interpreted it as all forms of interest. Again, these are questions best left to the investor, the bank, and bodies such as the AAOIFI and DJIMI; the regulatory authority’s mandate is only to create and maintain a system with maximum transparency and accountability.

Experts argue that Islamic banking will mobilise enormous capital held by devout Muslims who sparingly participate in the conventional market. The Raghuram Rajan Committee on Financial Sector Reform (2008) also considered interest-free banking, and by 2013, the global market for sharia-compliant assets has risen to $1.6 trillion. Specifically for India, this means institutional money from the Middle East and Southeast Asia, as well as private wealth held by Indian Muslims in and out of the country. Given the number of Indian expatriates in these regions, Islamic banking holds an enticing opportunity for fuller market capitalisation. Sharia-compliant schemes have already shown promise in India – Tata Core Sector Equity Fund, launched in 1996, was tailored to assuage Muslim inhibitions on riba. Furthermore, it would be an added bonus if Islamic banking reduces dead-end investments in gold and jewelry.

No matter, Islamic banking is a political and not financial argument in India. In an environment of minority vote-banking and cynical political manipulation, any idea tagged with a religious prefix is doomed. It should be remembered, however, that Islamic banking is not a mandatory methodology imposed on all financial operations in the country, even in Saudi Arabia. It is an additional choice for the investor, and nothing prohibits one from using different systems for different transactions. While Islamic banking is based on a package of ethical values, ethical investments are not a uniquely Islamic phenomenon – we make daily choices about fair trade coffee, blood diamonds, and other products. Consumers may choose not to patronise a store if the company supports a cause they disagree with, something we have seen with the attempted academic boycott of Israel.

Finally, there is the canard of terrorism. This is utter nonsense; there is no evidence to show that Islamic banking makes terrorist funding easier than any other financial activity. As long as transparency is maintained and regular audits performed under RBI guidelines, the system will remain viable. Islamic banks have appeared in several countries from the United Kingdom to Japan and Singapore without causing any disruption in either the financial system or in security.

The debate over Islamic banking is motivated by sectarianism in the guise of technical arguments over regulatory concerns, security, or secular society; none of these arguments survive scrutiny. Indians need to decide which idea they want to talk about – development or sectarianism. Whatever their choice, another economic term they might want to keep in mind is “opportunity cost.”

This post appeared on Daily News & Analysis on August 20, 2013.

Reply From A Muslim Youth

02 Tue Jul 2013

Posted by in Opinion and Response

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Dear epistolarians,

Salam alaikum. I thank you for your concern about my community, and felt it would be rude not to reply (I hear there is another reply floating around, but that one reveals the authors’ angst more than any coherent comment). Now to be clear, I do not claim to speak for India’s 150 million Muslims but of them. No doubt, my own socio-cultural and economic biases will seep in frequently, but I do hope you are not still under the illusion of perfect objectivity.

To explain the lay of the land, you must first understand that Islam is not a centralised religion – we have no Pope, even if we do have a fixed text like the other Abrahamic faiths. Islamic law, therefore, varies widely from region to region, and there are fours schools of legal thought. Decrees from our clergy are only as binding as the acceptance of the particular qadi pronouncing judgement. In personal matters, that faith is high, but in matters of geopolitics, that trust runs much shallower. Notice, for example, the disagreement between Gulf clerics and the Muslim Brotherhood.

Secondly, to get to more mundane matters, Muslims, like every other community, come in all hues – some are conservative, while others are orthodox; some are liberal, while yet others are indifferent; some are spiritual, while a fringe are, admittedly, radical. If this spread is not repeated in every community whether you divide people based on religion, ethnicity, or something else, I will eat your taqiyah! So when you write “Dear Muslims,” rest assured, most of us are looking around wondering, “Who, me?”

Now, let us start with the question on most of your minds: terrorism. I am sure most of you will agree that there has been a spurt in Islamic militancy, particularly in the last 15 years. Now, I am not sure if you noticed, but that violence carried out in the name of religion has less to do with its stated reason and more to do with power. Most terrorists have been dismal failures in expressing their cause, but US support of totalitarian regimes in Egypt, Saudi Arabia, Iraq, etc, overthrow of democracy in Iran, Israeli treatment of Palestinians in the occupied territories, and other such political reasons have fuelled the upsurge in terrorism; tragically, its leaders use the ambiguous category of religion as a means of luring followers. My explanation is not a defence of terrorist methods; in fact, the version of Islamic society these monsters envision – beheading, capital punishment, stoning, extreme gender discrimination – is abhorrent to many Muslims and goes against the most basic Islamic tenet of social justice (remember zakaat?). All but the radicals would agree that terrorists, whatever religion they claim to fight for, are enemies of society that should be resisted and defeated. just be wary of primitive social profiling based on ungrounded suppositions.

Muslims have fought Muslims from the earliest days of Islam just as much as they have fought non-Muslims. To this day, you see inter-sect as well as inter-faith conflict involving Islam, clearly indicating that religion is not necessarily the motivating factor in everything we do. To some, religion is important and to others, less so; yet to assume it is our only identity, even our prime identity, is about as sensible as assuming that someone buying a Tata Nano is expressing his or her solidarity with Narendra Modi because the factory is in Gujarat.

To turn this around a bit, let us ask you – are you Hindu, Tamil, or Indian? Can you be all? Can you be motivated by just one of those in certain tasks, two of those in others, and all three in yet others? I suspect you can, so why do I have to choose between being Muslim, Tamilian, and Indian?

Then comes the issue of the crude stereotypes – if you see all Muslims as Osama bin Laden or Hafiz Saeed, then by the same logic, are all Catholics like Tomás de Torquemada, Protestants like Anders Breivik, Jews like the first-century Kanaim or Yigal Amir, and Sikhs like Jarnail Singh Bhindranwale? Are all Hindus traitors like BK Sinha or Madhuri Gupta and assassins like Madan Lal Dhingra or Nathuram Godse? Or perhaps you think APJ Kalam, Altamas Kabir, Idris Hasan Latif, Shahabuddin Yaqoob Quraishi, and Asif Ibrahim are also terrorists? You can harbour such essentialist thoughts, but do not be surprised if we treat you as quacks.

Please don’t misunderstand me – there are indeed many problems with the Muslim community, and you are absolutely right that no one is taking on the fanatics out of fear. Yet to see this as a purely Muslim problem again misses the texture of the issue. For example, honour killings are not uncommon in Islam; yet they are not unheard of among Hindus either, particularly in the case of inter-caste or inter-faith relations. While the anti-religious lobby brigade like to find fault with religion itself, the fact is that it is a cultural problem, and there have been cases of honour killings even among atheistic families due to their cultural influence. Similarly, with female genital mutilation, it is an abhorrent custom that has tried to creep into religion but remains largely restricted to Africa more than to all Muslim lands and communities.

Some of you wonder why we hold ourselves apart from the rest of India like partially immiscible liquids; Muslim ghettoes exist in every nook and cranny of India. Yes, it is true that we have our own communities. It is also true that many of us have mingled quite freely with our Hindu and other neighbours during festivals and other occasions for celebrations such as marriages and births. Again, the reasons for this need not be religious – people segregate themselves based on caste, class, dietary habits, ethnicity, and various other criteria. You might not know this, but some Muslims refuse to live in certain Muslim areas for class reasons!

Personally, I have enjoyed the fruits of a liberal education in England, France, and the United States. I love my Faiz and Ghalib as much as I adore Balzac and Petrarch. However, very few people in the world – of any religion – have that sort of fortune. Imagine an Indian family of four earning ₹69,000 per annum – they would probably have to rely on state welfare and poor government schools or madaris to make ends meet. In this intellectually stultifying environment, there is the added burden of quotidian life in India – electricity and water shortages, corruption, poor infrastructure, and all those other problems successive governments have promised to solve since 1947. In the midst of these pressures, what do you think would be the impact of being asked repeatedly to prove one’s patriotism? Of being asked to officially accept that one’s ancestors were Hindu? Of being put in the spotlight for refusing to sing the Vande Mataram despite an explicit religious injunction on iconography? Of having to fight to eat whatever one wants? Of all those snide, covert and not-so-covert comments about one’s ancestors having voted for the formation of Pakistan in 1947 and the suggestion that perhaps one ought to go there? Does a free citizen of a democratic country have to put up with such haranguing?

Before you all collectively jump down my throat, it ought to also be conceded that the recent walkout by the Bahujan Samaj Party MP Shafiqur Rahman Barq during the playing of the Vande Mataram was deplorable – as a country of multiple communities, the respectful thing to do would have been to stay but not sing. I am glad to see that Barq’s action has been criticised by voices from most segments of the political spectrum, the BJP, Congress, as well as the Communists. Such pandering to the radical votebank must have strong negative consequences.

Another issue that pops us when the “M” word is mentioned is Babri Masjid. Hindus are right that the mosque was not of particular importance to Muslims, and that it was rarely used. However, any building that is over 450 years old is a part of Indian history and it ought to be of value for at least that reason. The merits of the case can be decided by the courts, but what is hurtful is the venomous Rath Yatra led by LK Advani and the crowd mobilisation for the destruction of the structure. As if that were not enough, a year later, the Bombay Riots orchestrated by Bal Thackeray in celebration only added salt to the wound. While Advani has since said that his role was unintentional in the demolition and expressed regret for 6/12 his loss of control over the crowd, the Shiv Sena was allowed to disband the Srikrishna Commission. Reconvened with a skewed mandate that included the Bombay blasts of 1993, the report it produced was nevertheless rejected and no action has been taken to punish the guilty. Muslims might eventually come to terms with Advani’s and the Babri Masjid incident, but the unabashed revelry and criminal inaction of the BJP’s ally in Maharashtra casts doubt on the sincerity of their outreach to the Muslim community.

The destruction of Indic religious structures and the erection of mosques upon those very sites is, no doubt, a grievous offence Muslim rulers of yore gave local populations, and a human tragedy. Yet is there no statute of limitations on these sorts of civilisational crimes? Should we exterminate the Israelis for killing and chasing out the Philistines from Judea some 3,500 years ago, or perhaps the Europeans and Americans for their intrusion into the New World? Even among Muslims who are not particularly attached to the Babri Masjid issue, the question arises up to what point one can go back to settle old scores. Furthermore, what does it mean to be an Indian? In a multi-cultural society like India, short of genocide, these questions will continue to haunt unless a common sensical approach is taken.

The greatest irony in all this Hindu-Muslim acrimony is importance you give to the All India Muslim Personal Law Board (AIMPLB). The body is a private non-governmental organisation whose views are taken as largely representing all Indian Muslims. They threatened political action against the High Court ruling on Babri Masjid, objected to Salman Rushdie at the Jaipur Literature Festival, disagreed with the Right of Children for Free and Compulsory Education Act, opposed gay marriage, supported child marriage, and resisted change in divorce law for Muslim women.

Interestingly, while the government accepts this non-elected organisation’s claim to represent all Indian Muslims, it is Muslims who have problems with the board – there have already been two splinters, the All India Shia Personal Law Board (AISPLB) and the All India Muslim Women’s Personal Law Board (AIMWPLB). For all the talk of shariah, how many Indian Muslim men actually have more than one wife? Most Muslims, in India or elsewhere, do not apply each and every facet of of Islamic law to their lives. By focussing on the AIMPLB, in essence, the Indian government has made, as Prayaag Akbar pointed out, a more regressive faction of the Muslim community the voice of all Muslims. For all the hungama you raise about Muslims, how many politicians have challenged the AIMPLB’s position as the sole voice of Indian Muslims? Would you allow, say, the Art of Living Foundation to represent all Hindus in religious matters? More importantly, why has my personal relationship with God become a matter of national policy?

No conversation on Muslims in India, particularly around elections, ends without mentioning the other “M” word – Modi. Many of you would like to know why we do not support Narendra Modi as a prime ministerial candidate. I am not sure if you noticed, but many did vote for him in the Gujarat Assembly elections last year, and there are some Muslims in his party. So make up your minds – did he win from Muslim-majority districts or do Muslims not vote for him? It cannot be both. As Zafar Sareshwala points out in an interesting article, most of Modi’s critics are actually Hindu.

Non-support has many reasons – disagreement with economics, distaste for others in the party, and yes, the unease many feel over the whole Godhra issue. You can score political points with the Congress about 1984 and whatever else, but as far as many Muslims are concerned, even those who acknowledge his governance record, there is a black mark against his name that will take time to fade away. Let us not pretend to have no emotions!

All this started with Chetan Bhagat’s letter. There were issues with his letter, as many have pointed out, but the letter was really not as bad as people have made it out to be. Bhagat appealed to our better instincts, did not play up fault lines, and talked of Muslims as part of the Indian whole. Despite whatever analytical weaknesses exist in his letter, his intentions were, in all probability, noble. What we need is more reassuring Chetan Bhagats and fewer fear-mongering and hate-spouting Praveen Togadias or Subramaniam Swamys. If you genuinely want to work towards a congruence of visions between India’s two largest religious communities, learn about us with an open mind: historical flexibility and half-baked notions about civilisational friction are best left to demagogues. If you are more than your rhetoric about a strong and united country, give us our due – treat us as countrymen.

Yours sincerely,

(The author of this piece is an education industry professional in New York. He is an acquaintance of the owner of this blog, Chaturanga, and it was requested that this letter be reproduced here as well.)

A version of this post appeared on Rediff on July 22, 2013.