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Mirage of Islamic Banking


Islamic banking would make the transactions beyond the reach of State control. It will build up a parallel economy, financing the terrorist activities

Over the last few years, topic of Islamic Banking is being kept in circulation. The Hindu published a write up on widening of Britain’s Islamic Finance (Nov 3, 2014). Later on State Bank Mutual Fund was to launch Sharia Equity fund, an open-ended scheme under which money would be invested in the companies which follow Sharia rules. There were estimated 600-700 companies in Bharat which follow Sharia precepts. Taurus MF also launched a scheme which will not invest in the companies producing alcoholic beverages, gaming, gambling and non-halal food products etc.In short no investment in non-Islamic undertakings run by the so-called kafirs.

The latest news item is an interview with Zeehan Shaikh in The Indian Express dated November 28th where proposal from RBI for opening of an Islamic window and its ramifications in the banking sector have been discussed. This is in spite of the fact that way back in 2012 then Governor of RBI, Dr Subbarao had said that the Islamic Banking is not possible because it needs amendments in the banking laws and that there must be a separate law for Islamic banking. He had said that it is motivated propaganda. The question came up as the Keralites serving in the Gulf countries were pressing the Government and RBI to open the Islamic banking facility.

Denunciation of Riba in the Quran

Quran has rejected interest – riba in no uncertain terms. Those who charge riba are destined to go to hell on the day of resurrection. It has appealed to all Muslims to do away with riba. It is to be noted here that word riba in Quran is not just interest, but in implies usury, exorbitant rates of interest which annually double the burden on the borrowers. As per the Hadis narrations, loaned items should be returned as an apple for an apple. In the event there is no parity in the items given and taken, the transaction would be treated as haram – forbidden. However growth of capital through trade is acceptable. It could be understood on the background that the Prophet himself was a trader for years before he took to spiritual seclusion. The clear distinction is to be noted between interest on the loaned amount and usury. In the later period, the Mullahdom did not make the distinction and banned charging of interest in any form. It was out of ignorance of the trade and transactions. It is to be noted here that the ordinary Muslim did not go for interest free loans and system of charging interest continued throughout the Islamic world.

Why Charge Interest?

Since ancient times taking loans from the money lenders and paying back the loaned amount with interest has been an accepted norm. However there was always risk for lender. What if the borrower doesn’t return? There would be many uncertainties and several reasons. Due this personal loans were mortgaged against assets and in the event of non-payment, the mortgaged properties were confiscated. This mode of operation still continues. Time to time banks put on sale the properties of bankrupt borrowers. The rates charged in modern banking are no way compared to the usury mode. The interest continues to be charged for the risk on capital and day to day expenses for bank running. In the ancient times there were individual money lenders who took the entire risk. Banks reduced the burden of the risk. The depositors shared the risk, capital became easily available; travel and transport became secure and safe. As the risk elements reduced, the interest rates too came down. With the growth in prosperity, banks continued to reduce the interest rates such that in Japan banks charge minimal rate of interest such that it is almost interest free banking. Many developed countries charge very low interest rates as well as pay low interest to depositors, leading to almost interest free banking. In our country too we are expecting lowering of interest rates. Those who wish to take risk in investments on shared basis go for mutual funds. These are invested in shares and make profits. The profits thus made are shared with the investors. The modern banking system is gone much beyond the ancient abominable system of usury and that it has also become transparent.

Lie, Half Lie and Statistics

Bank interest rates ruining the borrower for which the lender would go to hell is outright lie. The fact that banks charging interest is harmful for an individual and for society is a half lie. Interest charging and giving through the banking system has indeed helped the growth of Gross Domestic Product (GDP) benefitting common people. Although in due course interest rates are bound to fall. Although it is stated that there are fifty-two countries where Islamic banking is operational, there are only 300 banks working. Major country which contributes to Islamic banking turnover is Saudi Arabia where Islamic banking contributes less than 20 per cent of the total. It is well-known that Saudi Arabia has to distribute the oil money largesse to its citizens. With huge profits in oil sector and less population, it doesn’t need to charge interest on loans to the citizens at all. All these transactions are then passed on as Islamic banking. The major contribution to the turnover of the order of $2 trillion in Islamic banking, comes from Saudi Arabia. With full commitment for the Quranic precepts, Saudi Arabia should have gone for full scale interest free economy long back. In Indonesia, Islamic banking is just about 12 per cent. In Egypt it is less than 2 per cent. Why all these Islamic countries have shunned from interest free banking?  By the way the Islamic banks pay so called profits to the account holders. These are nothing but interests on deposits as old wine in a new bottle. As regards the growth of Islamic banking at 10-12 per cent, this too is deceptive. As claimed by Zeeshan Shaikh, it is no global phenomenon. It is highly localised and in the hands of Islamic zealots. In case RBI announces to open window of ‘Islamic’ banking, there will be many zealots from the Muslim community opening Islamic banks. These will be mushrooming all over the country, just like the credit societies. Just a few, 50-60 such societies getting registered as Islamic banks will enhance statistical growth by 20 per cent in a year. In reality it will not mean anything making significant impact. Statistics advanced to impress the global scenario on Islamic banking is thus a stark deception.

Larger Implications

Sharia based Islamic banking will need total overhaul of the banking system inducing parallel banking system. It will mean recruiting experts on the Islamic banking who will come from the section of Muullahdom and die hard home grown jihadis and would be more loyal to the Ummas. It will mean initiating a parallel financial system. It is a worldwide trend that the Islamic society is trying to establish its distinct identity in many countries by insisting on the Islamic dress code, especially for ladies, for implementing Sharia independent of the local country law, on promoting the Islamic educational institutions which will be antagonistic to the local society norms of behaviour and last but not the least an independent financial set up beyond State control by way of insisting on Islamic banking. In Bharat, it will mean unconstitutional reservations for Muslims in the banking sector based on religious considerations. Before it is realised, these will soon be turned into official hawalla rackets for siphoning the terror funds. It will breed separatism in the Muslim society for which the Mullahdom is craving.

Dr Pramod Pathak

(The writer is a Vedic scholar based in Goa. He is Ph. D. in the Vedic literature, authored books on the Vedas and is a freelance [email protected])

Courtesy: Organiser