The Indian Government can deny Islamic banking in India, but can’t keep ignoring the deprivation of the poor to access equities from formal sources like corporate avails from the stock market. To get rid of NPAs and be ready for Basel–III standards, Indian banks may need innovative investment products like Micro Equity.
It is often asked if countries like the UK, France and Switzerland can adopt Islamic banking, then why can’t India? One should not forget that India has had a history of communal violence since colonial days. Even after 70 years of independence Indian democracy is still polarised in the name of religion and castes; there are many pending communal issues in addition to those cropping up at the slightest provocations. Owing to this historical baggage it is politically inconvenient for any ruling party to support Islamic banking, even for the right wing Hindu Nationalist BJP.
Thus on 9th December 2016 the State Finance Minister discarded RBI’s proposal of Islamic banking by saying that on consideration of inter-departmental group reports, it is observed that even to introduce limited products, various legal changes would be required. Moreover, the objectives of financial inclusion for which Islamic Banking was explored by RBI has no relevance, as Government has already introduced other means of financial inclusion for all citizens (like Pradhan Mantri Jan Dhan Yojna, Suraksha Bima Yojna, Pradhan Mantri Mudra Yojna etc). Furthermore the way RBI officials, cabinet ministers and the parliamentarians are now ignoring fresh queries in this regard, it is clear that the Government is not open for Islamic banking in India.
Earlier in 2006 the RBI’s Working Group (to examine the financial products used in Islamic banking) had mentioned that “as distinct from modern, conventional banking, Islamic banking due to its inextricable influence of religious doctrines has often evoked a sense of mysticism and curiosity”. After ten years RBI again analysed; and this time recommended Islamic banking windows for financial inclusion. But the way it was proposed with an Islamic tag instead of a secular mode meant that there were doubts that the Government would approve it. To maintain ethics in banking we may need to adopt principal guidance from religious doctrines. Instead of proposing any banking model with a religious tag, RBI should have better proposed an Ethical Board to suggest ethical guidelines for the banking business in India. That Board should have been comprised of scholars from different religions with banking background to suggest sought ethical guidelines. Since all religions guide towards ethics, an ethical board should not be tagged with any particular religion.
It should also be noted the contemporary Islamic banking model has neither been promoted by the Prophet Muhammad ﷺ nor by his companions (Sahabas). Islam instead of promoting any banking model has rather instituted infrastructure of Baitulmaal to support financial prayers and interest free transactions. But despite prohibition of interest under Islamic governance, interest based lending was carried on by Non-Muslims. After the decline of Islamic rulers in the world, Muslims were in need of an innovative banking model that adhered to Shariah principles. Thus in the 1950s the Islamic banking model was articulated by using Shariah compliant financial products. The tag of Islam caused the emotional attachment of the Muslim community towards this particular banking model. This model helped bankers attract excess surplus capital held by Muslims especially from the Gulf nations. Later, this model was introduced in many secular nations with the prime objective of drawing surplus capitals from Muslims.