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| Syed Shahabuddin is a well known in the political and academic circles as well as in the mass media and does not need an introduction. In his many incarnations he has been a university teacher, a diplomat, who served as an ambassador and a government official who was at the time of his seeking pre-mature retirement, the Joint Secretary in charge of South East Asia, the Indian Ocean and the Pacific in the Ministry of External Affairs. He was a MP for three terms between 1979 and 1996 and made a mark as a Parliamentarian. He has edited Muslim India, the monthly journal of research, documentation and reference from 1983 to 2002 and again from July 2006. He has been a regular contributor on current affairs in the media and a familiar participant in seminars and TV discussions. He has been a member of many learned bodies and associated with several Muslim institutions and organizations. More... |
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| Needed Reinterpretation of Riba and Changes in Banking & Investment Laws State of Global Economy In a global economy which is not based on Islamic principles or operates in an exclusively Islamic environment, no enterprise, industrial or commercial, whether engaged in manufacturing goods or providing services or marketing products, can be truly Islamic in an orthodox sense. Even national companies cannot operate in a vacuum because they interact with each other as borrowers or lenders or as suppliers or distributors, and engage in transactions which are invariably based on interest. Thus, in reality, the universally interest-based economy today leaves very limited space for interest-free enterprises or transactions. Muslim states and individuals both thus operate in an economy which is based on the interest system. They are not in a position, economically or politically or even professionally, to restructure the global economy on the basis of freedom from interest. Muslims believe that economic history as much as political history is but a manifestation of the divine will. But bound by the moral and ethical principles of Islam, they have to find a viable way to participate in the global and national economy with a good conscience, just as they are subject to other natural phenomena. In the final analysis, the institution of interest so pervades our personal lives that a pious Muslim consumer cannot avoid a product or a service in daily use, which does not have a hidden element of interest in its cost. He can hardly breathe but in such an economic environment, far less engage in interest-free financial transactions, official or personal. Government revenues include element of interest on investments and loans and payments of interest on all liabilities, payments of arrears and borrowings. Thus, revenues used to aid institutions, including religious seminaries, have an element of interest. All Muslim employees earn their emoluments from an interest-based economy and their Provident Funds when they retire are calculated on the basis of compound interest. Pious Muslims no doubt have the option of isolating themselves from the world and inhabiting like frogs wells of loneliness of their own creation, or plunging into the economic mainstream moving with the current under well- defined restraints. This is the choice of the Muslim as individuals, as well as a community, whether he manages a Madrasa or a Masjid or works for the government or private sector or runs an industry or a shop. An individual may or may not be conscious, but there is no escape for him from inbuilt interest in receipts and payments and sometimes even in capital formation. Even so-called ‘Islamic’ credit societies levy additional charges for service indirectly and opaquely. It has been noted that some Muslim investors in India (the few who have the money) invest in equities or in equity mutual funds which they deem to be Halal. But they forget that all equities or all mutual fund units they purchase finally feed the capital market, which is based on interest and the dividends they receive, are equally interest tainted. Nearly all Muslim countries have therefore woven the institution of interest in their economic system and laws. Many capital-surplus Muslim countries keep their reserves in foreign banks or in government bonds of friendly countries, which pay interest. Muslim Economic Behaviour in India Muslim Indians have inherited a tradition of avoiding contact with the banking system as far as possible because it is based on interest. Thus they have deprived themselves of the far-reaching benefits of a developing economy which is based on credit flow on interest. On the other hand, many Muslim individuals and families have ruined themselves by borrowing from non-formal cutthroat lenders at usurious rates, leasing their property as guarantee. They cannot depend on friends and relatives to meet their needs through Qarz-e-Hasna, because the latter are not prepared to accept a loss in the purchasing value of the amount they loan due to inflation which is another inescapable feature of the modern economy, which cuts into the value or the purchasing power of all money. Some Muslim depositors do not draw interest from the banks when it accrues to them. Some draw it but do not put it to any gainful use but simply give it away in charity (without seeking reward from Allah). The total estimated loss of the Muslim community in India every year runs into billions of rupees. However, unfathomable cumulative resources in the hands of the common Muslims, which remain unutilized or are spent recklessly or accumulated with constant fall in their value needs to be tapped. Shift in terms of Economic Debate and Discussion Over the years, the course of professional and academic discussion on the viability of constructing an interest-free economy has shifted from interest- free banking to Shariat-compliant investment. Banking serves the common man as an essential service to secure his meagre savings for the rainy day or for his retirement and old age or at least to race against inflation. But the common Muslim hesitates to avail of banking services. What is therefore essential is an authoritative clarification on the question of bank or personal interest. On the other hand, the common man is a stranger to stock exchanges and unfamiliar with the mechanics of investment in business stocks. In any case, stock exchanges and brokers are available only in the big cities and for a very small population. Islamic economists and academicians have long endeavoured and applied their mind to enlarge the permissible space for securing saving or to rationalize or even circumvent the bank interest in vogue. They have evolved phrases like participatory economy, ethical economy or socially responsible economy. But all of them operate within the framework of the capitalist economy; thus do not eliminate the element of interest. Of late they have isolated an economic sector, which has been designated as Shariah-compliant and is therefore open to Muslims, qua Muslim, for patronage and participation. They have been following the lead given by Dow Jones Islamic Market Index (DJIMI), which has been followed by a number of mega banks with the idea of attracting Islamic/Arab capital to invest in selected stocks with comfort. Applying a self-serving definition, they have found 60% of the stocks in the Indian stock market are Shariah-compliant, as against 57% in Malaysia, 31% in Pakistan and 60% in Bahrain. It has been estimated that both the principal stock exchanges in India i.e., NSE and BSE list a substantial number of companies which meet the definition. The Parsoli Islamic Equity Index claims that 41 out of 100 top companies fall in this category. India is still far from operationalsing a market or business segment based on Islamic concepts. This exercise is basically concerned with sale and purchase of stocks. Flaws in Defining Shariah-compliance The essence of the term ‘Shariah-compliance’ can be summarized for the common man cutting through economic jargon in the following terms; 1.The core activity of the company should be Islamic. It should therefore engage in manufacturing or selling a product or providing a service which is Halal according to Shariah. The trouble is that the definition does not rule out companies with side or supplementary business, which may not be related to Halal products/services. 2.At least 33% of its average capitalization should be interest free 3.At least 33% of its business transaction in terms of the average receivables and payables over a period of time should be interest free. There are several variations on the theme but the essential point is that apart from supplementary or side economic activities, which may not be Halal, capital as well as receipts and payments are admittedly tainted by interest. Irrespective of whether it is less than 1% or 33% or more, they cannot be strictly defined as ‘Shariah-compliant’. From this point of view, there is hardly any truly Shariah-compliant company in India or abroad. The bald claim that the ‘Shariah-compliant companies’ are Islamic vehicles for business investment is, to say the least, deceptive and misguide the community. Motivation to Attract Arab-Muslim Capital The motive behind this exercise in deliberate deception is understandable in the context of endlessly repeated assertion from all public platforms that time has come for massive flow of Arab/Islamic capital to India. Since India has emerged as one of the biggest, if not the biggest destination for foreign capital, looking for a safe harbour and a buoyant market, it is today indeed a preferred destination for all. Whether the surplus floating capital in the Gulf, private or institutional, shall be attracted towards India because of the existence of the duly certified Shariah-compliant stocks is a moot point. No statistics on short or long inflow to such stocks are available. I feel that the hardheaded investor who has the West and the USA open to him shall not respond in a substantive manner. However, a contingency may arise which may compel an investor in the Gulf to look for alternative investment market, such as when gradual slow-down in the Western economy and rising tension in the relation between the Muslim world and the West reach critical limits. Even now between the emergent economies of India and China, India has some advantages because of historic relations, geographical proximity and cultural familiarity. No doubt, from a national point of view the Muslim Indians should in any case welcome Arab/ Islamic capital to India. It is possible that as a sign of welcome Indian financial authorities may also make some cosmetic changes in the rules and regulations and even spread a red carpet. But they are not likely to introduce any basic change in the structure and working of the capital market. Marginal Benefits for Muslim Indians From the Muslim point of view, what is important is also to examine whether the flow of Arab/Islamic capital will make any difference to the economic status of the Muslim Indians in terms of employment and business opportunities. Indian market continues to be controlled by the private sector in which the Muslim do not count. No such benefit will reach the community unless the foreign partner pushes them to locate the industrial units in Muslim concentration areas, which are under-developed and deprived or to appoint Muslim distributors. Indeed, when one hears murmurs of possible reservation in the private sector, only the OBCs, the SCs and STs are identified as desirable beneficiaries and the Muslim community is left out. Will the label of Shariat-compliance make such companies more attractive for the Muslim elite in India? This is doubtful. Over the years, many Muslim enterprises basically medium and small financial companies have tried to attract dormant or idle Muslim capital in India by presenting themselves as interest-free commercial operations but their claims have not stood the test of time and the camouflage that they adopted have worn thin and were eventually discarded. Also the capital they collected from the common people was invested in interest-bearing business. So, the Muslim Indian is not likely to benefit from the effort to mop available Islamic capital under the slogan of Sharia-compliance, although, following on the heels of financial markets, even major mutual funds like the UTI and the SBI have floated Islamic Mutual Funds to attract investors in the Gulf though their services are not yet available in India for potential Muslim investors. Muslims, as a community, are under-represented both in the number of bank accounts they hold as well as in the per account advances their accounts receive as loan. The Muslims have not fully participated even in primary credit societies or cooperative banks or in special schemes crafted by the government for the backward classes, even at micro-credit level. The painful fact is that Muslim share in the totality of the financial system has been marginal and very low in proportion to their population. This is partly because of their under-representation in govt. jobs including such massive public sector or institutional giants as the Railways or the Armed Force. Their earnings which would have been of the order of hundreds of thousand crores would have generated massive savings, looking for channels of gainful investment or deposit. Crux is understanding of Modern Interest as Riba The real crux of the problem is in the Muslim understanding of all interest as ‘Riba’ and therefore as haram. Reinterpretation of Riba Over the years, our theologians, economists and social thinkers had tried to reinterpret the terms Riba or Al Riba used in the Holy Quran. The pioneering work was authored by Allama Iqbal Ahmad Khan Sohail under the title ‘Haqeeqat-ur-Riba in 1936, with a preface by another well-known scholar Maulana Tufail Ahmad. His basic thesis is that the term Riba does not apply to all forms of increase when a loan is repaid but only to particular forms, in a barter economy, with non- standard money prevalent at the time of the Holy Prophet in the Hejaz. The term Riba applies when the lender exploits the distress or misfortune of the borrower and imposes heavy penalties when it is not repaid when due. Since 1936, not much research has been done on the subject of distinction between Riba and interest. Some theologians have however issued fatwas in favour of bank deposits and even insurance but the debate was lost in controversy on the status of the Indian state in Shariat, whether Dar-ul-Harb or Dar-ul-Aman, and whether interest is permissible in transactions with non-Muslims. Our economists and politicians have consistently over the last decade tried to pressure and persuade the government to make suitable changes in the banking laws and financial regulations with a view to accommodate Shariah-compliant deposits. Our theologians have also been half-heartedly engaged in rationalisation of bank interest or gains from shares and payments for services rendered. The argument about neutralisation of the impact of inflation has also been raised. Shift in Discussion and Debate But of late there is an overall shift of economic debate towards Shariah- compliant investments on questionable assumptions which, in my view, has generated long term adverse consequences for the common Muslim by placing the real issue on the back burner and by softening the pressure by the experts & the politicians on the government for creation of interest-free or inflation-free space or on the Ulema for legitimizing bank interest as in most Muslim countries. Thus, there remains a yawing gap between the Muslim community and the financial system as in the common parlance; institutional deposits continue to be looked at with disdain or horror or at least with a sense of guilt. Indeed, persistent and raging inflation, which eats into the value and purchasing power of the savings and interest is completely lost sight of. There is a basic institutional difference between Riba and interest. The modern financial system is not based on coercion or oppression but on accommodation and cooperation. The lender (depositor) is in search of a borrower, not vice versa. The bank and the share market (borrower) do not operate arbitrarily but are bound by rules and regulations, which limit profit and which are justiciable. Another question raised is the ‘certainty’ of gain which makes it haram. But it is normal for any depositor or investor to make a choice among available openings on the basis of his judgment on the records of various banks and companies. He takes a risk with his eyes open and prefers sometimes to invest in gilt-edget stocks with low profit on long term and sometimes opts for a rising stock on short term. The depositor, the investor, has the freedom of choice and faces a danger of uncertainty. It is possible that new rules are written which could change the fixed rate of interest to a sliding rate depending upon the rate of inflation and introduce the principle of profit sharing between the bank and the depositor. There can be many variations. Conclusion: Action on both Political and Theological Fronts Our intellectual quest needs therefore to be revived in right earnest. A battle has to be fought on both fronts, theological and academic. The first front is to probe into the social and economic environment and the financial system prevalent in Arabia at the time of the Holy Prophet, into the nature of Riba then in force and the exact forms prohibited by in the Quran and in the Holy Prophet’s last Haj discourse. The second front is to exert sustained pressure on the government to rewrite the banking laws to create space for flexible operations, a relationship of mutual benefit between the lender and the investor, on one side, and the bank and the company, on the other. Our societies objective should be to make the common Muslim feel free to deposit his idle money in banks and to borrow from them when in need or purchase shares of commercial stocks in companies whose core business is Halal. Since the editor is neither a theologian nor an economist, this editorial does not presume to produce specific solutions; its basic point is to draw attention of Muslim economists, scholars, theologians and politicians as well as the authorities towards the felt need for an appropriate ambiance in the financial system which can at least soften, and if possible, eliminate any conflict of conscience for those who follow the Shariah. The debate on Islamic economy has been pioneered in India by the Indian Objective Studies (IOS), New Delhi, headed by Dr.Md. Manzoor Alam, and by Dr.Md.Nejatullah Siddiqui, the Islamic economist of world repute. The IOS is the only organised forum which, through its deliberation, may crystallize concrete proposals for possible changes in the banking and financial system as well as interpret the term Riba as in modern economy. If our objective to change the psychology of the Muslim community is fulfilled so that it saves and gainfully invests its savings with a clear conscience, this change will not only uplift the community but also influence the pace of growth of the national economy. New Delhi 1 Jult, 2008 |
