New Delhi: The supporters of interest free banking have approached Prime Minister Narendra Modi, seeking the introduction of such participatory banking in the country, in his second term in office.
Speaking to The Sunday Guardian, Abdur Raqeeb, who is the convener of the National Committee on Islamic Banking and general secretary of the Indian Centre for Islamic Finance, said that he wrote to the PM on 26 May seeking his intervention to necessitate the opening of the interest free banking system in India.
“Interest free banking will not only help the large number of people not covered by the banking system, but will also ensure a huge pool of finances, which is presently deposited in other countries, for investing in infrastructure projects in the country. All this money belonging to Indians is being used by other countries to develop their own infrastructure,” said Raqeeb. The Rajinder Sachar Committee, which studied the social, economic and educational conditions of the Muslim community, estimated that their share in bank deposits was 7.4% in 2005 and that they took just 4.7% of the loans disbursed.
The countries that have allowed interest free banking include China, United Kingdom, Germany and Japan, among others.
Independent studies have found that interest free banking, which started less than 30 years ago, has already become a $3 trillion portfolio. As per Thomson Reuters, interest free banking is projected to grow to $3.2 trillion by 2020, with Saudi Arabia, Iran and Malaysia emerging as hubs of interest free banking by holding almost 65% of global Islamic assets (2015).
As per independent experts, as of now, such finance represents about 1% of global financial assets, but with a growth rate touching 12% annually, it is expanding at a very rapid pace, with banks in the Gulf and African countries now doing more business than conventional banks.
In June 2015, Reserve Bank of India had set up a committee under the then executive director, Deepak Mohanty to look into the “medium-term path on financial inclusion”.
In its report, which was submitted the same year in December, the committee recommended that “interest free banking” should be allowed: “The Committee recommends that commercial banks in India may be enabled to open specialized interest-free windows with simple products like demand deposits, agency and participation securities on their liability side and to offer products based on cost-plus financing and deferred payment, deferred delivery contracts on the asset side.” “In the event that interest-free banking is allowed in India, the extant regulatory guidelines in respect of capital and liquidity as applicable in the case of commercial banks would have to be made applicable to those as well,” the report added.
However, coming under pressure from various groups, the leadership in India decided to sit on these recommendations and subsequently in November 2017, the RBI declared that “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 for the introduction of Islamic or ‘interest-free’ banking in India.”
Those who are against interest free banking, say that if introduced, the banks will become a conduit for money laundering and jihadi financing. However, security experts told The Sunday Guardian that these concerns did not deserve much attention.
“These banks will not operate in a vacuum and will have to follow all regulations, including very strict KYC norms. Secondly, knowing that this system can be used by certain elements to launder money, it will be under greater scrutiny. Thirdly, detailed studies analysing terror attacks in various parts of the world have proved that these banks have not been the preferred choice by terrorist groups when compared to conventional banks,” said a senior officer with a security apparatus.
He quoted the 9/11 Commission report, which said that Al Qaeda’s pre-9/11 funding came mostly from Islamic charities that were supported by people who were generally ignorant of how the funds would be used finally. Most of the funds transfer was done through poorly-regulated formal systems and unregulated value transfer systems (IVTS) like hawala, physical couriers and invoice manipulation.
One other concern raised by those who are against interest free banking is about “sukuk”, which is an integral part of interest free banking. Sukuk denotes financial certificates or “Sharia compliant” bonds that have been used by investors of Gulf countries to acquire shares in large western companies such as General Electric, Deutsche Bank and HSBC.
However, Abdur Raqeeb says that such concerns are exaggerated. “Even Citibank and HSBC have entered the market and established such independent banks. These new opportunities are not only being used by Muslims, but people from other religions too are using it. Non-Muslims in Malaysia are buying almost 70% of the products offered by these banks,” he said.