Islamic Banks may be a vehicle to promote Islam in the name of ethical banking. Such an approach is not only against the spirit of the Constitution of India but also destroys the concept of brotherhood
Puhazh Gandhi P
The recent decision of Reserve Bank of India (RBI) to allow a Jeddah based Investment organisation-IDB to set up an Islamic banking operation in Ahmedabad has revived the debate on the legality and morality of Islamic banking in India. While Islamic banking was considered by many as an alternative to conventional banking, particularly after the global financial crisis in 2008, can it really be an alternative to conventional banking or is it just another form of conventional banking? Would it pose any kind of threat to Indian comity if allowed to operate in India?
Islamic Banking: Bank or Venture Capital?
Islamic Banking is basically a banking system based on Sharia law. It carries out and supports a commercial activity in accordance with the principles of Sharia law. Islamic bank has two unique features when compared to
conventional banking viz (a) It is not interest based i.e. an Islamic bank
neither gives any interest for the deposits nor accepts any deposits; (b) It does not provide financial assistance for any activity which is considered as haram under Sharia law—such activities include business on liquor, pornography, gambling and many others.
An Islamic bank is said to have a
participation in business. That is to say instead of levying any interest, it takes the returns in the form of a share in the profit if the business makes profit and will not receive anything if the business makes a loss. Thus an Islamic banking is akin to a venture capital or a mutual fund in the normal parlance.
Interest free or deferred interest?
Conventional Banking considers money as a commodity which can be sold at a higher value or could be rented out. The higher price or the rent which is linked to time is nothing but Interest or ‘Riba’. A conventional bank survives by paying lesser rate of interest on deposits and levying higher rate of interest on advances. An Islamic Bank though does not charge any interest but it charges a ‘fee’ on the advances which can be paid by the borrower at the end of loan tenure. This fee which the Islamic bank charges is nothing but another form of interest levied by a conventional bank. For e.g., if one takes a loan of Rs 10,000/- from a
conventional bank for a rate of interest of 12% per annum, at the end of one year that individual would have to pay Rs 10,000 as principal plus Rs 1200 as interest. When he borrows the same amount from Islamic Bank he would have to pay Rs 10,000 as principal and say Rs 1200 as a fee. In Conventional Banking it is called as interest, but in Islamic banking it is a ‘fee’. In effect both are one and the same. Why then this hype that Islamic Bank is service-oriented and does not charge interest while blaming the conventional bank for charging the interest. It theoretically creates two sets of banking system but in practice is one and same though the modus operandi may differ.
No Investments in Haram: A myth
The second aspect of Islamic banking is that it will not fund any commercial activities which are prohibited by Sharia law—Haram, like liquor, pornography, gambling etc. The practicality of this aspect seems a mirage as an Islamic bank may not have the ability to monitor whether the loan taken by a Company is utilised only for that specific purpose. For example, Company A borrows Rs 10,000 for agricultural purposes and diverts the funds to any of its sister company involved in liquor business and makes profit in the liquor business and repays the advance to the Islamic bank with interest. Islamic bank cannot prevent the sister company in investing in liquor because it does not have privity with the sister company. It could well recall the loan immediately on
knowing that the loan is used indirectly for liquor business and demand the Company A to repay it with a penalty. But Company A repays the loan with the penalty out of the profits it might have earned from liquor business
carried outthrough the sister company.
Secondly, in a secular country governed by rule of law, can a bank, legitimised by the same law, declare certain commercial activities as haram? If it does declare, won’t that amount to overriding the constitutional principles in the name of religious practice? Gambling, liquor etc. may be permitted by law in some
territories and prohibited in some others. However, a bank, or any institution for that matter, which derives existence from law cannot declare an action as illegal which is permitted by the same law.
Effect on Social values
Islamic banking thus creates a myth that it doesnot operate on the interest and will not invest in sinful practice recognised by Sharia law, whereas, in practice it does both in a manner different from conventional banking. Thus Islamic Banking attempts to create an image of itself that it is a banking system based on ethics and moral values. Such a claim has an undertone that conventional banking system is purely commercial in nature and does not adhere to ethics and moral values.
This type of argument will hurt the sentiments of people in a pluralist society like India where more than 85% of the population are Hindus and Christians who neither believe that levying interest is sinful nor that involving in gambling or liquor is to be dictated by religion. Moreover, whether Islamic banks really practice what they preach is a question that needs to be debated. While they claim that ethical banking does not allow to levy interest they charge interest in the form of a fee which is nothing but a double standard and a deceptive trade practice.
Further Islamic Banks may be a vehicle to promote Islam in the name of ethical banking and indirectly
blaming that conventional banking is unethical and is as a result of the
practices of religions other than Islam. Such an approach is not only against the spirit of the Constitution of India but also destroys the concept of brotherhood. Since Islamic Banks have greater discretion in not recovering the loans by stating that the venture is loss making, it can be well used to fund illegal and terror activities, which can be a threat to the security of the nation.
Prof Hamid Al-’Ali, a cleric says, “Islamic banks disguise usury by inventing documents that appear on the surface as sales documents, but that are actually interest-bearing loans. Therefore, anyone who distinguishes between traditional and Islamic banks is ignorant”. RBI would have felt that since there exists no difference between Islamic banking and a conventional banking but the name Islamic would invite foreign investment from Middle Eastern countries which may be beneficial for the Indian
economy. However what actually lacks is the mechanism to check this deceptive
practice and to prevent public institutions like banks to indulge in deceptive trade practices with the sanction of law.
One western critic points out that Islamic banking is normal banking ‘sprinkled with holy water’. It is akin to the concept of Halal: If you kill an animal it is Haram and if I kill through a different method it is Halal. Islamic banking tends to demean practitioners of conventional banking system by stating that charging interest is a Haram whereas Islamic Banking
justifies charging interest in a different form, the Halal!!
(The writer is an International lawyer specialised in International Trade and Banking)