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Wednesday, 7 May 2014

Islamic Finance is growing

''Prime Minister David Cameron made a bid to position London as a leading hub for Islamic finance, announcing plans for Britain to become the first Western country to issue a sovereign sukuk, or Islamic bond''. (Reuters,UK).

"There should be no doubt about our determination to establish a platform for Islamic finance in Hong Kong," Hong Kong Monetary Authority (HKMA) Deputy Chief Eddie Yue''.(Google).
The finance industry is abuzz with such news around, with banks going berserk to get into this industry, where are we? It is good that University of Kashmir accepted our proposal to offer courses in it, but masses need to be educated about it. Let's, at least, skim over the ten sections below to know it and see how we can implement it.

Section 1: Rationale of Shaira’h Compliant Finance of Islamic Banking.
1a) Shariah forbids the earning of riba on the grounds that money generating more money without accompanying liability or risk is detrimental to society. The depositors are treated like the equity shareholders. They earn a portion of the bank's profit instead of interest.

1b) Shariah also prohibits financial involvement in industries such as those related to gambling, alcohol & adult media, so Islamic banking (herein referred to as ‘IB’) products are of interest to the burgeoning ethical-investing segment. Indeed, many pundits say that IB, given its attractive characteristics, would quickly become a powerful phenomenon, were it called by a secular name. However, we believe it can still become a global force if current growth trend gains momentum. The untapped potential is truly vast. The Jammu & Kashmir Bank Ltd. (here in referred to as JKB) should ask themselves a critical question: Given the appeal of IB, both to the members of rapidly growing Muslim faith--already 1.6 billion strong--& Non-Muslims alike, can the opportunity to pursue this business really be ignored? IB business is still relatively young and early movers will have a distinct advantage.

Section 2: Its Growth rate and potential share in the Finance industry.
2 a) Around four decades ago, banking industry started to realize the benefits of ‘Fiqh- al Muamalat’ (transaction rules) of Shariah law. It began showing steady growth right from its inception at around 15% a year and today, Islamic investments & finance institutions are the largest growing sector in this industry, with staggering 25% growth every year, notwithstanding economic-meltdown of the US & other recessions in the world economy.

2b)Shariah-compliant assets reached about $400 billion throughout the world in 2009, according to Standard & Poor’s Ratings Services, and the potential market is $4 trillion. Iran, Saudi Arabia and Malaysia have the biggest sharia-compliant assets. Currently, Islamic finance is one of the fastest growing sectors in the global financial industry, estimated to be worth US$1 trillion.

Section 3: Its relevance to our state and Islam:
a) Jammu & Kashmir is a state with an overwhelming Muslim majority and even a layman’s justice demands that their religious obligations be respected and choice be provided to them, so that devout Muslims do not find their religion at loggerheads with the current system.

b) I would like to bring into your attention that apart from numerous other commandments for prohibition of Interest, the following one is very unambiguous. Near the completion of the Prophet’s mission, he severely censured those who take riba by declaring them to be at war with God and His Messenger, established a clear distinction between trade and riba, and required Muslims to annul all outstanding riba, instructing them to take only the principal amount, and to forego even this in case of the borrowers’ hardship..

Section 4: Ways of Introducing IB in general and in our case in specific.
a) There are three broad stages of IB: An initial stage where selected Islamic products are offered; a second stage where full-fledged Islamic banks are allowed to operate; and a third stage where non-bank Islamic financial institutions develop and expand the range of Islamic financial products available.
b) Since the second and the third stage solicits new banking and non-banking institutions to be established, respectively, I would suggest that we should ask for the first stage wherein Islamic products will be offered by an already functioning conventional bank (I have attached its proposed roadmap at the end).

Sections 5: Our Demands.
So, broadly our demand should be
a) To Introduce Interest free finance in banking sector as recommended by the present Governor of RBI when he headed the high level Committee on Financial Sector Reforms-CFSR of the Planning Commission.

However, initially, we can be specific by asking to

b) Introduce special interest free Islamic window in JKB as practiced in several internationally famed banks like HSBC amanah, CITI Islamic, Standard Chartered Sadiq etc which are operating in European, GCC and Far Eastern Countries like Malaysia etc.  When London. Paris, Singapore, Hong Kong and Japan can be hub and house of Islamic finance & banking why not Kashmir?

Section 6: Role of Non-Muslims and various names of Islamic Banking.


Interest free Islamic finance has emerged as a viable alternative world over after the financial meltdown of the West. It is growing at the rate of more than 15%. Not only Muslims countries but modern, secular and industrialised countries like UK, Singapore, France, Japan and Hong Kong have become hub of Islamic finance & banking. Even World Bank considers it as a priority area.

In countries where Islamic finance has been allowed, it has attracted both Muslims and members of other faith because it is seen as encouragingly ethical and socially responsible investment. It is really economic growth oriented and employment generating and not financial engineering as the conventional interest based finance mostly are based on.

In Malaysia for instance, more than 40% investors and 60% borrowers are non-Muslims and in Britain the figure is about 20%

Call it Islamic Finance or alternate finance as in the UK, Participatory finance in Turkey or interest free finance & banking in other countries. But it should be based on shariah principles - risk sharing, asset based with real growth,not financial engineering and avoidance of investments in business dealing in alcohol, drugs, casinos, armaments etc

Section7. Dr Raghuram Rajan committee recommends interest free finance
High level Committee on Financial Sector Reforms -CFSR of the Planning Commission of India headed by Dr Raghuram Rajan, the present Governor, RBI has recommended interest free finance to be introduced in the main banking sector for growth with inclusion and innovation.

Section 8: Example in India and the need.

When Kerala Government allowed an NBFC based on Islamic principles, Dr Subramaniam Swamy petitioned against this initiative, but Kerala High Court gave the verdict stating that constitutionally there is no issue in introducing Islamic banking, nor does it violate secularism.

Now the present Government of Kerala has started an NBFC named ‘Cheraman Financial Services Ltd’ with 11% share of Kerala Government and the rest from NRIs and the public 

Government of India, particularly Finance Ministry and RBI should allow Interest free Islamic finance & banking Window in JK Bank as a pilot project, which can be instrumental in determining the course of action, when introducing IB all over India.

Section 9: Road map for Interest free window in J&K Bank
(in consultation with the former RBI legal advisor)

I acknowledge that the JKB being one of the leading banks of the country has sufficient knowledge, expertise and competent operational and legal experts to develop a suitable roadmap proposal to RBI, requesting approval for the introduction of the Interest Free Banking window in its premises in J&K. I, however suggest that following steps may be considered;

I believe approach by Jammu & Kashmir Bank Ltd., Srinagar ("JKB") for getting approval from RBI for JKB Special Window ("JKBSW") for interest-free/shariah compliant products & services has to be slightly different.

Following points can be considered and incorporated suitably in letter of request /presentation/representation by JKB to RBI.

1. Proposal: JKB is a scheduled bank.{Secs. 2(e), 42 & 2nd schedule to RBI Act, 1934}.It is a commercial bank governed by the BR Act, 1949.Being a conventional bank, it carries on "banking"and other "forms of business". {sec. 5(b) and 6}.

It now proposes to open JKBSW for interest-free/Shariah compliant products & services. Hence, it seek RBI's permission to do so.

2. Status: JKBSW will be a cell/division/department/branch of JKB but as a unit it will be totally separate.Some "fire walls" will be created between JKB and JKBSW.

3. Corpus: JKB will place certain sum, say Rs. 25 Lacs,from equity capital fund/donation/grants/interest-freeadvance as corpus. Other source of funds will be interest-free deposits, interest-free income, fees/commission/charges levies generated from JKBSW activities.

4. Organization: The following will be provided by JKB to JKBSW free of cost, i.e., cost and expenses will be born on thebooks of KJB till JKBSW achieves break-even: 
(a) Premises/place of business
(b) Staff and officers and shariah advisers
(c ) Establishment/furniture/fixture, stationery, etc.

5. Functions: JKB will continue to do its conventional banking business. JKBSW will take such of the shariah compliant banking businesses which are cleared first by shariah advisers and then by RBI so as to ensure that shariah advisers role does not come in conflict with RBI.

6. Accounts and Audit: All accounts and audit will continue to be in conformity with Companies Act/RBI Act/BR Act as well as RBI's directions and regulations etc. In addition, it will be ensured that there is no breach of principles of shariah in respect of accounts/audit for products and services offered by JKBSW.

7. RBI's Role: RBI's Regulatory and Supervisory functions as well as Control over JKB and JKBSW operations shall remain in full force and binding except to the extend exempted by RBI e.g Sec. 42(7) of RBI Act or any direction issue under sec. 20
of BR Act, 1949 specific to JKB/JKBSW.

Section 10: Potential of Non-Banking Finance Company (NBFC) in the state of J&K.
Another choice is to go with the third option of NBFC. In that case, following modus operandi can be adopted:

Since in J& K assembly, majority of the members are Muslims, it should be possible for the State Assembly to pass an Act for the establishment of a Participatory State Finance Corporation on the lines of Finance Corporations operating in various states with the only difference that this corporation would finance on Participatory basis . The Govt of J&K may have a minority stake (not more than 26 %) and rest of the equity may be subscribed by the residents of J&K (read rich Muslims traders and others). I would prefer that the institution so created should cater to members of all the communities. The Muslims being more in number would obviously have a larger say in the management as also in loan granted by the institution.

The advantage is that a financial corporation established under an Act, will not be subject to the Regulations as stipulated by RBI to NBFCs and can be regulated by the Ministry of Corporate affairs or Industry or the Finance Ministry of the Government of J & K. The Govt. should not however be majority owner because if it happens, the corporation will behave like a department of the Government and would be highly inefficient.

If this succeeds, it will at least establish that the pure Islamic Finance is commercially viable and would attract many more people to follow suit. Since our state is in a position to get such an Act passed our people should demand for the same.

We should discuss the matter with the Members of Legislative assembly of J & K (across all parties) and in case we find that majority of the members are in support of such an Act, we can come up with the detailed working of the statute.

(Greater Kashmir / 06 May 2014)
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