THERE’S NO BANKING WITHOUT INTEREST
Indian Muslims, many of them small-scale entrepreneurs, will benefit from shedding their opposition to mainstream banking
Muslims in general avoid ‘banking’. The reason is that the institution of interest (‘riba’ in Arabic) is regarded as ignoble because the Holy Qur’an strictly prohibits interest-based transactions in all forms. But, in the modern economic and banking systems of all countries, interest has become completely institutionalised. The questions that arise are whether there is an independent Islamic economics, is it a discipline all its own, and is it in practice among Muslims.
Islamic economists argue that an independent Islamic economics has been defined in accordance with Islamic (Shariah) law. It is driven by ideals such as full employment, satisfaction of basic human needs and economic distributive justice, which in general is the same for all other economic systems. But the distinctive feature is that it is based on certain pivotal institutions, of which most important is the prohibition of interest on financial transactions not backed by tangible assets. Money cannot be traded for any return. In addition, the rationality includes prohibition of excessive uncertainty, speculation, unearned income, wealth by chance, etc. But is it being practised by Muslims and in Muslim-dominated countries? The answer is no.
Over more than 1,400 years, the colonial domination of Muslim countries led to the system of interest becoming solidly entrenched. Today, barring Iran and Sudan, no Muslim country can say their economic and banking system has eschewed the interest factor.Economist Umer Chapra has said in this context: “There is no theoretical macro-economic model that would show how the Islamic values and Institutions, and different sectors of the economy, society and polity would interact to help realise the vision.”
Contemporary Islamic resurgence has ignited the desire of many Muslims around the world to conduct their financial dealings in consonance with Islamic economics. But a feasible system has not yet been found. The reasons for this should also include the attitude of the community: it prefers to avoid educational and professional fields related to money and banking.
The reassertion of Islamic principles has also pushed Muslims who were banking with available avenues (commercial banks) into difficulty. The definition of riba stated in the late 1970s, “all forms of interest fall under the purview of riba” has put an end to the debate whether riba refers to interest or usury. While inflation is referred to as a fact of life in every economy, any excess in a financial transaction is a riba. The definition of riba is conclusive but the dilemma has been compounded.
Changing the mindset
Many Islamic banks and non-banking financial institutions have been established since 1975. The driving force behind these developments is the collaboration between Islamic scholars, economists and bankers. This unique collaboration has significantly narrowed differences of opinion. More importantly, Muslim scholars have said that banks are wholly acceptable as they perform useful services of financial intermediation and help in the process of mobilising savings, and channel them into capital formation and development.
A large majority of Indian Muslims avoids banking. They are against raising credit from banks and generally rely on self-financing, although they are mainly engaged in businesses requiring capital for their ventures and working capital for growth. It is sad to note that the community of most skilled artisans and traditionally a merchant community is now relegated to scrap collection and automobile repair, etc, besides some of them being owners of only micro, small and some medium enterprises. Although education is catching up and the number of graduates is increasing, most of them end up as employees with no means of capital for entrepreneurship.
The way forward
They must recognise that today, interest has become institutionalised worldwide. There is no theoretical model with any Muslim country to help realise the vision of an interest free economy. Commercial banks have been operating on the basis of interest for centuries in the nook and corner of every Muslim country. Indian Muslims should understand that roads, transport, electricity, government health and educational facilities, and other social infrastructure they use are largely funded by issuance of bonds or by debt. So, has the community avoided their usage and can it be avoided? Impossible.
The salaries and pensions of employees in government and the private sector are not without elements of debt or income from sources that are not halal. So, does the community have the privilege of picking and choosing jobs by analysing employers’ financial sources? No, it is not that privileged. Why then has the community singled out only banking for avoidance? Commercial banking is no doubt based on interest but then, what alternative choices are available to the community for raising large credit? Money, banking and finance have become lethal weapons for domination and their avoidance has already resulted in the community becoming an economically disadvantaged strata of society; and this may only worsen in the future.
Is Islamic banking the panacea the community is looking for? Islamic banking is rapidly becoming more visible as a global activity; it has attracted the serious interest of Indian Muslims as well. The success achieved so far has shown that Islamic banking is not only conceivable but also feasible and viable. It has attracted hitherto untouched segments of Muslims who, for religious reasons, had stayed outside the financial circuit. It is also important to mention that the movement is still developing and is experiencing difficulties comparable to an embryo struggling to survive in an inhospitable environment.
The community’s political and business leaders, economists, bankers and religious scholars should come together for discussions and debates on the subject of banking in order to break conceptual barriers, understand the banking needs of Indian Muslims, find solutions and draw ideas for establishing acceptable financial intermediaries.
Younger community members should be encouraged to be part of startup ventures and to become business leaders, and also to become bankers. Without entering the deep waters of banking, finding alternatives that meet the community’s requirement would be difficult.
The writer was formerly vice-president of Dubai Islamic Bankwww.thehindubusinessline.com/opinion/indian-muslim-must-shed-opposition-to-banking/article9553969.ece