Case for interest-free banking and finance

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As many as 75 countries across the world have adopted the system. The operational term in many cases is not ‘Shariah’ but “interest-free” banking.

In an open letter addressed to the citizens of the country published on May 26, 2015, i.e., on the occasion of completing one year of the Union government, the Prime Minister stated that government was dedicated to the poor, marginalised and those left behind. Sabka sath Sabka vikas, the slogan extensively used in BJP campaign, also conveyed the same idea. ThePradhan Mantri Jan Dhan Yojna was also aimed at financial inclusion of the most deprived sections of the society.

The State Bank of India Shariah-compliant Mutual Fund that was cleared by all agencies for launch on December 1, 2014 was suddenly deferred on November 30, 2014, hours before the scheduled launch. There is no clear-cut, above board explanation for this decision. In that case, the only obvious reason seems to be the government’s antipathy for the word Shariah.

This move of the government militates against its avowed commitment to inclusion and a sense of fellowship of citizens. A sizeable section of Muslims avoids investment in interest-related funds because interest is seen by them as unethical and exploitative. For people like them an interest-free system is a great attraction.

That such a mutual fund is going to benefit everyone is clear. Pious Muslims, including NRIs, particularly those in the Gulf region, stay away from finance and banking transactions mainly because of their aversion to interest. With the availability of such a system the country’s finance and banking system will benefit from surplus funds with such NRIs and it will become more inclusive.

The report of the committee on financial sector reforms, headed by the current RBI Governor Raghuram Rajan, in its report in 2012 recommended interest-free banking being “in consonance with the objectives of inclusion and growth through innovation.”

Delhi-based Institute of Objective Studies (IOS), which has conducted several studies, seminars and symposia with international participation on the subject has explained to the government and bank authorities that they would not insist on the nomenclature “Shariah” and would welcome any name like Ethical Investment, Participatory Banking, Alternative Banking etc. In fact, interest-free banking is operational in UK, France, Singapore, Brazil and the West Asia. Some of the world’s largest banks have special counters for such operations in major Western countries. Even China is promoting it. As many as 75 countries across the world have adopted the system. The operational term in many cases is not ‘Shariah’, but “interest-free”.

Interest-free banking is interest-free banking and its proponents do not insist on a particular nomenclature. The SBI had announced the scheme after completing due diligence about feasibility, legal-technical and regulatory issues. That’s why the sudden deferral of the decision has been intriguing.

Interestingly, a substantial chunk of people investing in such schemes are non-Muslims. An important attraction of such funds is that their backers discourage speculation, manipulation of value of assets and making tall promises about the value of products. Because of this it is less prone to fluctuating markets than traditional funds. The prospect of interest-free transactions attracts a certain class of investors, most of whom are Muslims. This is the secret behind UTI Unit 64 and others’ popularity among Muslims. However, this does not deter non-Muslims from participation as Tata Ethical Fund and Taurus Equity Fund support shows. In the latter, there are 40 % Jains.

It is important to note that most farmers’ suicides have their inability to repay their loans behind the gruesome act. As crop fail and interest on the loan taken for buying farm inputs mounts, the cornered farmers have no option but to kill themselves, leaving behind destitute widows and orphaned children who inherit such liabilities.

The scientist MS Swaminathan, who played a crucial role ushering in India’s Green Revolution, has endorsed this concept as a solution for rising farmer’s suicides in the country.

Finding the deferral of the SBI mutual fund at the last moment intriguing, I wrote to the Finance Minister on March 12 to know the cause of such a last-moment decision. On May 19, Union Minister of State for Finance, Jayant Sinha, wrote back to me that it was deferred because of “operational constraints arising out of the inputs received from various participants in the pre-launch meeting”.

It will be of some help if the Finance Ministry lets us know as to who were the “participants” and what were the “inputs” they provided. What type of constraints arose from those inputs? Why had the SBIFMPL not rectified those constraints and re-launched the scheme within the stipulated time (January 25, 2015)?

Meanwhile, the Islamic banking assets with commercial banks worldwide are estimated to be around US$ 1.8 trillion and it happens to be growing at a faster rate than traditional banking in Qatar, Saudi Arabia, Malaysia, Indonesia and Turkey. This reckoning does not include Iran.

With these facts and figures in view, we will do well to allow the system in India as its will help both the investors and economy as a whole. Continuation of the deferral is arbitrary and unfair. This is particularly so in view of Dr Swaminathan’s remarks. According to P Sainath, a respected journalist specialising in rural development and farm economy, about 3,00,000 farmers have committed suicide in India since 1995.

“Most farm suicides have been linked to debt, a sharp rise in input costs, serious water crises, price volatility and crop failure due to pest-attacks and diseases,” says Sainath. Whatever the reason behind crop failure, the interest goes on accumulating leading to desperation and suicide. Hence, the beginning of an interest-free system will be of immense help in this regard.

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