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Banking: A Dilemma for Indian Muslims

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There is no theoretical macro-economic model with any Muslim country to help realize the vision of an interest-free economy.

Muslims in general avoid ‘banking’, the reason for it being the institution of interest (‘riba’ in Arabic) which has been regarded as highly 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 so completely institutionalized that it is almost impossible to conceive a system without interest. In the light of this fact the question arises whether there is an independent Islamic economics. Is it a discipline of its own, and is it in practice among Muslims?
The discussion on the subject of Economics is important in this regard as banking is a part of the economic system and interest is a common factor both in the banking and modern economic systems. Islamic Economists argue that an independent Islamic Economics has been defined in accordance with Islamic Law (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 which are not formed as a means of production or 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.
Is all this in practice among Muslims and Muslim-dominant countries? The answer is ‘No’, though efforts are continuing to realize the vision. Although more than 1400 years of Islamic History have been completed, yet the community has remained warped in the interest-based economic system. The major reason claimed for this is the period of colonial domination of Muslim countries, during which period the interest-based system became solidly entrenched and today still continues.
The dominance of interest is so complete that almost no Muslim country can say that their economic and banking system is without the factor of interest. An eminent Islamic Economist Dr. 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 realize the vision’.
The contemporary Islamic ‘resurgence’ has ignited the desire of many Muslims around the world to conduct their financial dealings consistent with Islamic Economics. But a feasible system has not yet been found, and the reasons for this failure should include the attitude of the community of preferring to avoid the educational and professional fields which are related to money and banking. The reassertion of what are thought to be Islamic principles has also pushed the Muslims who were banking with the available avenues (commercial banks) into difficulty with a definition of ‘riba’ as being all forms of interest, thus putting an end to the debate about whether ‘riba’ refers to interest or to just usury. Differing views are still voiced referring to inflation as a fact of life in every economy and every country, but this factor has not been given due consideration while concluding that in a financial transaction a certain amount is ‘riba’. The definition of ‘riba’ has been supposedly concluded but the dilemma of Muslims has been compounded!
The ‘resurgence’ is not without its share of success. Landmark developments have been made since 1960’s especially in the field of banking. 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 narrowed down significantly differences of opinion. More importantly,Muslim scholars have voiced that banks are wholly acceptable in Muslim society as they perform useful services of financial intermediation and help in the process of mobilizing savings and channel them into productive uses for capital formation and development.
With regard to the Indian Muslims, a large majority 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 merchants are now relegated to businesses such as scrap collection, automobile repair, etc. and owners of almost only micro, small and some medium enterprises. Although, education is catching up and graduates are increasing,most of them are ending as employees with no means of capital for entrepreneurship.
What is the way forward for Indian Muslims? They must recognize the fact that in the modern-day economy,interest has become institutionalized worldwide. There is no theoretical model with any Muslim country to help realize the vision of an interest-free economy. Commercial banks have been operating based only on interest for centuries, and to date in the nooks and corners of every Muslim country. Muslims should note that the 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? No! Can it be avoided? The answer is: ‘Impossible’. The salaries/pensions of the employees in government and private sector are not without elements of debt or income from sources which are not considered to be halaal. So, is the community having a privilege of picking and choosing jobs by analyzing the employers’ financial sources? Not at all! Why then has a large section of the community singled out only banking for avoidance?
Commercial banking is no doubt based on interest, but then what are the alternative choices for the community for raising large credit? Money, banking and finance have become powerful means for domination, and their avoidance has already resulted in the pathetic economic status of the community, which may only further worsen in future.
‘Islamic banking’ is it the panacea? Islamic banking is rapidly becoming more visible as a global activity, and it has attracted serious interest of Indian Muslims as well. Success so far has showed that Islamic Banking is not only conceivable but also feasible and viable. It has attracted hitherto untouched segments of Muslims which for religious reasons had stayed outside financial circuits. 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 the religious scholars should come together for discussions and debates on the subject of banking for breaking the barriers of understanding, for knowing the banking needs of Indian Muslims, for finding solutions and also for drawing ideas for establishing acceptable financial intermediaries. Younger community members should be encouraged to be part of the start-up ventures, to become business leaders and also to become bankers, as without entering the deep waters of banking, finding alternatives that meet the community’s requirements would be difficult.
(The writer, presently based in Bangalore, is retired VP, Dubai Islamic Bank and can be reached at [email protected])

By Mohamed Ashrafulla