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Why Islamic Banking is back in the news ?

Islamic Banking (IB) is back in the news. Former RBI governor Dr Raghuram Rajan first suggested it in 2008 as part of Financial Sector Reforms. Soon, Kerala government came up with a proposal, but it was shot down as the RBI Act was (still is) Sharia non-compliant. Just days before his departure from the RBI in September, Rajan reiterated the need for IBs. His point: paying interest is against the belief of certain faiths and this was restricting banking access.

According to IMF, Islamic finance levies zero interest, finances only harmless projects, and operates on risk-sharing as against risk-transfer. That’s why IB was gaining popularity. But before exploring its socioeconomic impact, it is pertinent to note that the move militates against India’s secular principles. IB is widespread in Gulf Cooperation Council countries and is prevalent even in Japan, UK and France with global players like Standard Chartered operating IB divisions. Among its star products is Sukuk, the Islamic equivalent of bonds. With enterprises courting economic volatility, such interest-free alternatives are a hit. Perhaps for this reason, even the Narendra Modi-led government, opened doors to Saudi Arabia’s Islamic Development Bank last year, though nothing materialised. If history is any precedent, IB’s core functions get watered down soon.

For instance, Sudan’s largest lender, Faisal Islamic Bank, now favours low-risk, shortterm loans and quick returns. IMF also warned of risks relating to business mode, liquidity, and complexity of transactions. At a peripheral level, profit-sharing is appealing. But here, the lender decides how to run the business, (taking away free enterprise), claims a lion’s share of profits and still collects its loan. Simply put, it’s an interest, premium at that, in disguise. Those who consider it novel should know that the concept isn’t an Islamic monopoly. It can be replicated by any financial institution that so desires, without religious connotation.

Courtesy: New Indian Express