Sharia Banking : CPM ?Halals? Banking System

Grossly RBI norms, CPM starts India’s first Islamic Bank ‘Halal Faidah’ in Kerala

Prashanth Vaidyaraj

In November 2017, the Reserve Bank of India (RBI) in its reply to a RTI query had stated that it has decided not to pursue the proposal for Islamic Banking further. The RBI was categorical in its reply and had said that it was taking into account the ‘wider and equal opportunities’ available to all citizens to access banking and financial services while arriving at its decision. Contrary to RBI’s judgment and in contravention of democratic principles, the Kerala Chief Minister Pinarayi Vijayan inaugurated the Halal Faidah Co-operative Society, a Sharia-compliant banking institution, in Kannur on December 24.
The LDF Government took advantage of the fact that the primary cooperative banks are not directly monitored by the RBI since they function under the State Co-operative Societies Act of 1969. All powers under the Act are vested with the Registrar of State Cooperatives, which is under the administrative control of the state government. The LDF government is known to subvert any institution to further its interests rather than the well being of the society. This latest move to further Islamic Banking is based less on its merits towards financial inclusion of disadvantaged sections as it has claimed and more towards appeasing its Muslim vote bank.
Path to Hegemony
The idea of Islamic Banking is not as old as it is being portrayed. It was an outcome of the ‘Islamic Revival’ movement during the 1970s which was intolerant and exclusivist in nature. The movement is seen as the response to the Arab world’s defeat in the 1967 Six-day war against Israel and the energy crisis which led to the formation of the OPEC. The movement culminated in the return of the Khomeini to Iran in 1979 and his establishment of a fundamentalist Islamic state. The Iranian revolution which emboldened the Islamists world over, hankered for the exclusivist treatment of Muslims in every walk of life. Islamic Banking was a reaction to break away from the established traditions of banking which was seen as a product of the western world.
While Islamists insist Islamic Banking is as old as the religion itself with its principles primarily derived from the Quran, many opine that it is a modern phenomenon or ‘invented tradition’. The very first Islamic bank was Nasser Social Bank, started to operate in Cairo in 1972. This was followed by the Dubai Islamic Bank established in 1975. These banks thrived on the deposits of oil companies and real estate which were booming in the region during that period. Boosted by few such examples, Islamists insisted on copying their model of Banking elsewhere in the world by thrusting it on the gullible Muslim populace.
While the debate over the genuineness of Shariah-compliant banking continued, a Fatwa by Al-Azhar’s Institute of Islamic Jurisprudence in 2002 categorically stated that accruing of interest in the context of bank deposits is legitimate under Shariah. This fatwa follows Al-Azhar University’s view that interest is simply a form of profit on a ‘mudarba’ (partnership) and characterises the depositor-bank relationship as that of an investor and his investment agent and legitimised collection of a fixed profit percentage (interest). The Islamists, who otherwise are happy to adhere and enforce Fatwas, were ruffled and rejected the decree so that their hegemony over financial instruments remains intact.
In India however, this demand is more from the terror sympathising organisations like the PFI, SDPI and political parties who pamper them for votes like the Communist Party of India (Marxist). Since Islamic Banks operate in exclusion, financial inclusion is difficult. Moreover, if the argument of CPM on financial inclusion of the backward Muslims is to be believed, they should be the first to exhort Muslims to embrace Government schemes like the Pradhan Mantri Jan Dhan Yojna, Pradhan Mantri Suraksha Bima Yojna, Pradhan Mantri Mudra Yojna etc which do not discriminate among citizens on their religious affiliations. Last year, minister of state for finance Santosh Kumar Gangwar, in his reply to the Lok Sabha had said, “The objectives of the financial inclusion for which Islamic banking was explored by RBI has no relevance, as government has already introduced other means of financial inclusion like Jan Dhan Yojana and Suraksha Bima Yojna for all citizens.” This is true as financial inclusion of every section of the society can be pursued with the financial instruments that are already available. Today, from the tribals of Arunachal Pradesh to the poor weavers in Tamil Nadu are part of financial inclusion schemes and are reaping its benefits.
Trojan Horse for Terror
The rise of Islamic fundamentalism is intricately linked to the funding received by the militants from their financial backers, sympathisers and associates. One important aspect in this regard has been the role played by the fast expanding Islamic banks.
Donation (zakat) is the most significant aspect of Islamic banks based on the Sharia. Donation to Charity, which Islamic banks are obliged to make to comply with the Sharia, is the biggest drawback of the system, particularly at a time when the world is grappling with Islamic terrorism. Sharia compliant banks donating money to madrasas or people acting as conduits to terrorist organisations is common in the Arab world. Many Islamic banks are under scrutiny world over for donations made to non-profit organisations that act as fronts for terror organisations. Osama Bin Laden donated millions of dollars to his associates through a Sharia bank in Sudan, an impoverished African country. Banks in Pakistan and Bangladesh too have been accused of donating crores of rupees to jihadists.
An annual report of Financial Intelligence Unit of Ministry of Finance, for the year 2015-16, states that the number of Suspicious Transaction Reports (STRs) received in 2015-16 almost doubled from the previous year. The number of STRs received has increased from 817 in 2006-07 to 105,973 in 2015-16. There was a remarkable increase in the number of STRs received from private banks which includes co-operative banks. The same report also recorded that the Counterfeit Currency Reports (CCRs) received during the past ten years indicate a growing trend. The no. of reports increased from a mere 8,580 in 2007-08 to  4,10,899 in 2015-16. Of the total CCRs received from the Banking Companies, a huge majority of 3,64,009 CCRs were from Indian Private banks including co-operative banks.
In January 2017, Enforcement Directorate (ED) in its report said that co-operative banks have the “weakest” anti-money laundering (AML) and combating terrorist financing (CFT) mechanisms, with their staff having no knowledge regarding “usefulness” of suspicious transaction report (STR).
Islamic banks and terror financing is a huge concern world over too. A 2012 report of the US Senate Permanent Subcommittee on Investigation, a Congressional watchdog panel, revealed that two Bangladesh based banks, Islami Bank Bangladesh Ltd (IBBL) and Social Islami Bank Ltd (SIBL), were involved in terror financing. SIBL whose largest single share holder had been the Saudi based NGO International Islamic Relief Organisation (IIRO) was implicated in terrorist financing by the US administration.  A second shareholder of SIBL was the Islamic charitable society Lajnat-al-Birr-al-Islam also known as Benevolence International Foundation (BIF) that has also been designated by the US administration as “a financier of terrorism” and was among the 20 main financiers of al Qaeda.  The report further mentioned that Saudi Arabia”s Al Rajhi Bank was also involved in suspicious transactions and had associations with the IBBL in Bangladesh.
Combating terror finance has also been on IMF’s radar. The IMF in its working Paper on Islamic Finance and Anti-Money Laundering and Combating the Financing of Terrorism, published in 2016, made critical remarks about Islamic Banking and terror financing.  It noted that in Islamic finance, the nature of the relationship between the financial institution and its customers could diminish the level of transparency of the related transactions and create vulnerabilities that increase the risk of Money Laundering/Terror Financing. It also noted that ‘Islamic finance products’ introduces a layer of complexity, which may render it more vulnerable to abuse by terrorists.
Unsound Proposition
A 2008 study by Mohammad Mansoor Khan of Mount Gambier Regional Centre University of South Australia and Muhammad Ishaq Bhatti of Economics and Finance, School of Business La Trobe University at Melbourne, on ‘The Causes of the Failure of Islamic Banking and Finance in Pakistan’, reveals that Islamic Banking failed in Pakistan as ‘institutions cannot function as an alien entity’ and since ‘they are religious-based bodies’ they ‘need Islamically imbued sociopolitical and economic environments to survive and prosper.’ The paper further shows that Islamic Banking institutions should become integral part of the entire system to function successfully. They primarily rely on other state institutions to drive their core objectives and  working mechanisms. The study suggests that the entire government machinery, regulators, financial sector, business people, tax and legal and other socio-economic institutions have to pitch in to keep Islamic Banks afloat.
For India, this would mean that the entire society and the  government should adopt an Islamic way of working to keep the Sharia-compliant banks afloat. It’s an irony that a party like the CPIM which swears by ‘Secularism’ and a Socialist constitution is bent upon thrusting religion even in banking and finance. While the move could be struck down by the RBI or the Central government, this imprudent act could have far reaching consequences if similar means are adopted by state governments headed by leaders whose motive in governance is only to appease the so-called minorities. Dividing  citizens on the basis of religion even in the financial instruments of the society is a huge blow for a democracy that has equality as part of its preamble.     n