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usiness MAGAZINE | APR 26, 2010
Mumtaz Begum of Jogeshw ari, Mumbai, w ent to a zero-interest Islamic f und to escape a debt trap
BANKING: SHARIAH RULES
Interested PartiesIslamic banking has some pluses. But with our secular banking rules....
PRAGYA SINGH
Creeping Timeline: No Progress
2010 An interim order on a PIL filed in the Kerala High Court has resulted in the state government having to stepout of a partnership with an Islamic NBFC.2009 SEBI allows India's first Shariah-tolerant mutual fund scheme. First VC fund also allowed.2009 UPA government clarifies that there are no plans to introduce Islamic banking in India.2008 Raghuram Ramrajan committee recommends interest-free banking to encourage financial inclusion.2008 Bids called to reconstruct National Minorities Devpt Fin Corp on Shariah lines.2005 RBI sets up committee to study Islamic banking products, says laws will have to be changed by Parliament.2007 Committee set up by the UPA government, no further details available.
How Islamic Funds Are Different
No receipt and payment of interest. Instead, leases, hire purchase, cost-plus deals allowed.
No excessive ambiguity in terms, conditionsNo speculative non-productive activities such as gambling etc
No investments in banks and NBFCs, breweries, distilleries, adult entertainment, gambling, advertising and media(except newspapers), tobacco and related businesses, chewing pan masala, trading of gold and silver etcNo deviations from strict restrictions on quantum of debt, equity, interest-bearing securities, and non-permissibleincome
http://www.outlookindia.com/section.aspx?secid=18http://www.outlookindia.com/peoplefnl.aspx?pid=3893&author=Pragya+Singhhttp://www.outlookindia.com/article.aspx?265071http://www.outlookindia.com/content.aspx?issue=10611http://www.outlookindia.com/section.aspx?secid=18

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The demand from
Muslims is
there...but Idafas
strictures have
attracted as many
Jains and
Hindus.AshrafAbdul-Haq Mohamedy,
Investment Firm Idafa
The Ground Reality
While Islamic banking isn't allowed, there are limited options for Islamic investments, which are doing well.However, there is no groundswell of demand.
At 47%, credit-deposit ratio among Muslims in India is way below the national average of 74%Loan sharks and non-banking institutions posing as Islamic funds routinely rip off gullible investors.There is a need for a regulatory regime, which can happen only if businesses are given clearer legal status.But that is a gray area because it's a political hot potato with the BJP opposing it tooth and nail.
***
Mohammed Manzoor Alam has now been petitioning the Indian government for six years. He has met the primeminister, the finance minister, the vice-president and at least two Reserve Bank of India chiefs. He has lobbied membersof Parliament and many in top posts, including the Rajya Sabha deputy chairman. He has invited hundreds to attendconferences (in India and abroad) of the Indo-Arab Economic Cooperation Forum, which he chairs, to rally support for hiscauseallowing Islamic banks in India. So far he hasnt had much luck.
Like scores of other Islamic financial groups, educational institutions and public interest organisations, the Indo-ArabForums petitions have led the government to form several committeessome of them even acknowledge that there ispotential for interest-free banking (a key feature of Islamic finance is that charging and receiving interest is prohibited). Butthen it fizzles out.
The Reserve Bank of India (RBI) says the law does not permit Islamic banking, though, piecemeal, SEBI has permittedShariah-compliant financial products such as mutual funds. When it comes to (pure) banking, says an RBIspokesperson, the Banking Regulation Act will have to be amended to allow Islamic banking. Thats true, and it can bea complicated process, but theres much more to it. Like the tireless votaries, there is an equally overt opposition to theShariah model of finance.
As Manzoor Alam puts it, the government is perhaps a little scared of people belonging tothe RSS and other such groups. A senior BJP leader, speaking on condition ofanonymity, says Islamic financial products are absolutely unnecessary. We are a secularnation. Do we have Hindu investment schemes? he asks. Earlier this month, the Kerala
state government was asked by the high court to not partner with an NBFC structured onShariah lines (see box). Here too, the petitioner, Subramanian Swamy, president of theJanata Party, argued that such an NBFC discriminates on the basis of religion.
For Manzoor Alam, such debates are futile. If a company has the name Om, does thatmean the company is against secularism? he asks. For Alam and others like Ashraf
Abdul-Haq Mohamedy, who runs Idafa, an investment firm along Shariah lines, the wordsIslamic banking are somewhat of a misnomer. More than half the Shariah-compliantmutual funds that Idafa distributes are bought by non-Muslims, he says. The demand
from Muslims is there, says Mohamedy, but the Muslim strictures have attracted as many Jains and Hindus asMuslims to Idafa products.
Indeed, the low ratio of Muslims who access regular bank credit points to a latent demand for Islamic banking in the
country. But experts shy away from citing a boom. Waqar Naqvi, who runs Taurus Mutual Fund, which launched anEthical Fund (Shariah-compliant) last year, says a Muslim will not invest in a fund just because its Shariah-friendly. Butthey will definitely want to put their money in a top-performing fund, he says. He doesnt think that many Muslims avoidopening regular bank accounts due to the interest credits involved either. I know of scores of Muslims who simply donttake the interest credited to their accounts. Problem solved.
Those who favour Islamic banking argue that the Shariah permits more participatory bankinginterest rate profits andspeculation are less important than sharing profits and losses, and partnerships will be on mutually agreed terms ratherthan dictated by financial institutions. Those against say that Indians do not invest on religious lines, but only based onthe profit motive.
But theres no denying the arrival of West Asia-based firms into Indiasuch as construction giant Emaar (with IndiasMGF), or the partnership of DLF with the UAE-based Nakheelhave fuelled hopes that many more ventures will follow
suit. Expectations are that many of these will be on Shariah-compliant lines. There is a view that Indias needs infinancing large infrastructure projects can be met by attracting the Gulf surplus (estimated at up to $3 trillion) provided theright opportunity is created.
Last year, SEBI also approved Indias first Islamic Venture Capital Fund, and now the finance ministry has hinted at newnorms for NBFCs. A new, fifth category of NBFC that permits interest-free products may be officially recognised, but

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Islamic banking is
anti-economic
growth. You cant
create jobs, become
an economic
powerhouse this
way. Jagdish
Shettigar, Convenor,
BJP Economic Cell
. , ,as tough as it sounds. Current accounts are not interest-bearing. The interest part is not as hard to sort out. Whatbecomes hard to do is if you are a Muslim and you want to invest that money productively. The laws are not tuned to thatsort of investment, he says. Significantly, the RBI spokesperson points out that at present there is no application forIslamic banking pending with them.
Of course, most of the activity has been diverted to the NBFC side. Unofficial estimates say there are hundreds ofNBFCs, recognised or not, offering Islamic products in India. Often, these options arent reliable, and people end upgetting cheated. There are various kinds of funds, particularly in western UP, that call themselves Shariah-compliant. Buthow Islamic they really are is another question, says Dr Javed A. Khan, who teaches at Jamia Millia University.
In fact, Manzoor Alam, when asked for successful examples of Islamic financialinstitutions in India, says, I can give you a list of failed ones easily. There are no checksand balances from a regulatory body, which leaves room for dishonesty and failure.Indeed, survival can be tough as these firms navigate the legal muddle. For, while anIslamic institution allows leases, hire-purchase or cost-plus agreements, partnerships andmark-ups, it doesnt allow for interest payment, nor does Islamic finance tolerateexcessive vagueness in terms and conditions, or speculation.
That leads to a search for innovative solutions. Rahmatullah A. Ahad, vice-chairman,AICMEU, explains that he set up a Cooperative Credit Society simply because it was thenearest approximation to what he wanted to doprovide resources to the poor asinterest-free loans. Cooperatives gave freedom to set their own interest rate. AICMEU
seized the opportunity, setting the rate at the acceptable zero per cent (a mark-up, orservice charge, is levied).
But issues still abound. For instance, under Islamic law, you cant sell something you dont own. So, if an institutionpurchases, say, a house for somebody on hire-purchase basis, at the t ime of transferring the residence, a freshagreement will have to be drawn up. A fresh stamp duty and registration ends up be

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