Should the secular Indian state advance the religious norms enshrined in Islamic shariah law? This is the question raised by an ill-advised move by SBI Funds Management to start an Islamic mutual fund called the SBI Shariah Equity Fund. The fund, whose scheduled launch this week has reportedly been deferred, will be benchmarked to the S&P BSE 500 Shariah Index. Managers will pick stocks guided by a shariah board, whose responsibilities include procuring appropriate fatwas, or religious edicts, for permissible investments.
To understand why this is a terrible idea, go back to the roots of modern Islamic finance. First proposed in pre-Partition India by Jamaat-e-Islami founder Abul Ala Maududi (1903-79), shariah-compliant financial practices are part of a larger Islamist project to order every aspect of the state and society by the medieval norms enshrined in shariah law. According to Duke University’s Professor Timur Kuran, Maududi’s goal was not to foster prosperity in his community, but to underscore the idea that “to be a Muslim is to live differently”.
Islamic finance ostensibly hinges on three principles: a ban on interest, a wealth tax (zakat) and honesty in business. More broadly, it applies religious norms to business decisions. Shariah-compliant funds, for instance, will not invest in companies whose practices are frowned upon by Islam, such as pig farms or banks that charge interest.
Historically, Maududi’s idea languished for decades before being given a boost by Saudi oil wealth in the 1970s. Since then Islamic finance has grown steadily. Standard and Poor’s estimates that shariah-compliant assets are worth about $1.4 trillion worldwide, the vast majority in Muslim-majority countries such as Saudi Arabia, Pakistan and Malaysia.
Maududi envisioned Islamic finance as accomplishing three goals: minimising Muslim interaction with non-Muslims, deepening the transnational identity of the community of believers, or ummah, and injecting Islam into every aspect of daily life. Over the years, Islamist groups worldwide, including the Muslim Brotherhood in the Arab world and the Jamaat-e-Islami in the Indian subcontinent, have worked tirelessly to advance these objectives. It’s no coincidence that Islamic finance has grown along with a broader swing in the Muslim world away from secularism and toward literalist interpretations of Islam.
What does all this mean for India? Simply put, policymakers need to gauge products such as the new SBI fund not merely in narrow financial terms, but in terms of their larger implications.
They can start by asking some basic questions. Should state-owned institutions in an avowedly secular republic advance Islamist political goals? Is India better served by integrating its 150-million strong Muslim population into the financial mainstream, or by ghettoising it in the economic equivalents of Ahmedabad’s Juhapura or Thane’s Bhiwandi? Does the new fund inch India closer toward accepting Islamic banking, which it has so far avoided?
The answers ought to be self-evident. That the questions were apparently not asked highlights a certain naiveté at the heart of India’s financial establishment. Last year, during the waning days of D Subbarao’s tenure as RBI governor, the central bank set a poor precedent by granting a licence to a non-banking finance company in Kerala based on shariah principles. The new SBI fund would further strengthen the dubious principle of mixing religion and finance. It would also make India only the second non-Islamic country (after Britain) with a stateowned bank that offers a shariahcompliant fund.
For the BJP-led government, the shariah-based fund ought to be a litmus test. In the 1990s, the BJP rose to prominence in part by critiquing the Congress’ tendency to equate secularism with pandering to the most orthodox elements in Islamic society. At its heart, stripped of financial complexities, this is what the proposed new fund represents.
Indeed, when given a choice, ordinary Muslims worldwide show no special affinity for shariah-based financial products. Most are happy to use regular banks that pay interest. Moreover, pious Indian Muslims already have the option to channel their investments through shariahcompliant private funds such as the Tata Ethical Fund. There’s no reason for state-owned institutions to follow.
More broadly, instead of promoting Maududi’s divisive vision, India ought to do exactly the opposite. Rather than minimise Muslim exposure to regular financial instruments, India should encourage more Muslims to enter the financial mainstream.
And instead of spawning financial products that appeal to religious identity, state-owned banks should simply treat Muslims like they treat all other Indians. Indeed, if properly implemented, the prime minister’s ambitious financial inclusion plan, the Jan Dhan Yojana, could offer a template of sorts by increasing the number of Muslims with bank accounts.
For now, though, the ball is in SBI Fund Management’s court. If it’s wise, it will give the SBI Shariah Equity Fund a quiet burial and move on to more sensible projects. The last thing India needs is clueless bankers who strengthen a dangerous ideology without understanding the consequences.
The writer is a resident fellow at the American Enterprise Institute, Washington, DC