Bank of faith

The Kerala high court’s green signal for the formation of an Islamic banking institution as a joint undertaking between a state government and a private company is welcome as it will introduce, though on a small scale, a system of stable, ethical and humane financial practices. What has been approved is not an Islamic bank but a non-banking financial institution which will be run in accordance with the RBI’s regulations. But the proposal had become controversial because there was a view that setting up of a company with government participation which would follow the principles of Islam went against the secular idea. But the controversy was misplaced because the institution, while following sharia principles, would abide by all the laws of the country. If there was no violation of any secular laws or rules, how could it be opposed?

Islamic finance works on the basis of the injunction of sharia laws against taking or paying interest, and allows only profit or loss to be shared among participants and investors. There is no need to communalise the idea, which should be seen as an economic and ethical principle that can be adopted by anybody. Islamic finance forms a good part of the world’s economy and these institutions proved they were strong and resilient during the recent global banking crisis. Many governments, like those of the US, the UK and Australia, are encouraging Islamic finance. Prime Minister Manmohan Singh also said recently that the RBI would be told to study the demand for establishing Islamic banking institutions. They should be considered as an alternative banking system with many advantages.

A large number of Muslims in the country are not participants in the mainstream banking system because of their sentiment against interest. They can be brought into the system if Islamic banking institutions become popular. These institutions can also become large vehicles for investments in infrastructure. This is because they do not offer credit on interest but seek to share profits from the projects which they finance. The proposed Kerala institution has already got offers of Rs 10,000 crore for infrastructure spending. Islamic banks control hundreds of billions of dollars worldwide, offer many popular products to customers and their activities are growing every year. Most international banks have an Islamic banking section and there are more non-Muslim participants and investors in it than Muslims. There is no need to disapprove of Islamic finance.