Mujeeb Jaihoon explores the socioeconomic imperative for interest-free banking in a progressive state. (2009)
A UFO once landed in the city of Calicut. The aliens disembarked from the spacecraft and began roaming the streets and villages of this Malabar city. After a while, they contacted their HQ on Mars and reported, “Negative.” Apparently, they had planned to install a relay station to enable Earthlings to communicate with their home planet. However, Calicut, as a chosen location, presented the following critical flaws:
- There were only a few skilled experts capable of operating the facility.
- There was hardly an educational system equipped to produce a workforce for its operation, research, and future evolution.
- The residents of Calicut also could not afford the substantial cost of running and maintaining such an infrastructure.
I am honored to present a sociological approach to the study of Islamic banking’s scope in Kerala. Despite my limited competence, I hope to shed light on certain overlooked opportunities, without delving into the theoretical details that other speakers in this session will cover. My conclusions were drawn from research and discussions conducted two years ago during a visit to Kerala, where I shared my perspectives on this topic with scholars and leaders. I am grateful to the organizers for inviting me to this scholarly function and for providing the opportunity to share my thoughts.
The Doctor Is Sick
As believers, we are called to discern the good in all circumstances. The current global crisis, therefore, presents a unique opportunity to highlight the positive aspects of Islamic banking practices. For too long, we have accepted the Western concept of the financial system as absolute and eternal. We continue to impart this flawed doctrine to our younger generations, yet no one has dared to question the ethics of Wall Street and its avaricious investors. Recently, an article published in The New York Times quoted a Hong Kong investor who observed, “It is hard for America to take its own medicine that it prescribed so successfully for others. There is no doctor anymore. The doctor himself is sick.” The same article attributed Wall Street’s condition to being “fuelled by cheap credit, low standards, and high greed.”
This is precisely where Islamic Banking distinguishes itself, as it is fundamentally based on mutual assistance and risk-sharing. Let us embrace this ethical and sustainable banking practice and strive to make a positive impact on society.
Benefits of Islamic Banking
The Islamic financial instrument known as ‘Sukuk’ is often projected as a potential solution to the world’s economic problems. As experts suggest, conventional banks are on the verge of collapse, while Islamic banks that utilize Sukuk have remained virtually untouched. The United Kingdom Treasury and Ministry of Finance are currently considering the use of Sukuk as a debt management tool in the wholesale sterling and yen markets. It is noteworthy that, despite having a Muslim population of less than 2 million, the UK already hosts six Islamic banks, three of which were established in 2008.
However, we must understand that a bank, like any other corporate entity, incurs expenses such as staff salaries, utilities bills, rent, and other overheads. Technically speaking, Islamic banking is not a charitable endeavor, and the profit motive is essential for any business. Nonetheless, Islamic banking cannot charge interest for this purpose.
Islamic banking is still in an evolving stage and has not yet reached its zenith. Service charges in an Islamic bank may be higher than in conventional banks, but such charges should be perceived as fees paid for higher-quality services. Just as we are willing to pay a premium for high-quality produce in our grocery shopping, we should also be willing to pay extra for utilizing a service that could save us from hellfire.
Islamic Banking in India
The Indian government has expressed interest in introducing Islamic banking in India, and the Reserve Bank of India (RBI) has conducted studies on this subject. The Raghuram Rajan Committee on Banking Sector Reforms has recommended the introduction of interest-free banking in India, also known as Islamic banking. “Interest-free banking does not mean charity,” the committee states. “It only means that the investor/lender does not receive interest but is compensated through a form of profit-sharing.”
Islamic Banking in Kerala
Let us return to the topic of Islamic banking in Calicut, or within Muslim-majority areas of Kerala. The aliens in the UFO story provided three reasons for their negative assessment regarding the implementation of a relay station in Calicut. Let us, metaphorically, substitute the relay station for an Islamic bank in Calicut.
Muslims in Kerala possess three distinct characteristics that make them ideal for adopting Islamic banking:
- Potential Population: Muslims constitute the second-largest community in the state, and in Northern districts, they may even outnumber others.
- Capable Leadership and Infrastructure: The community is led by proficient political and religious leaders who have paved the way for their prosperity compared to their counterparts in other Indian states. Several groups operate schools and colleges in a systematic and organized manner, indicating a strong political will to implement Islamic banking. Furthermore, institutions of higher religious learning can provide the intellectual backing required for the research and development of Islamic banking concepts.
- Abundant Funds: There is no shortage of funds, as Muslims in Kerala are arguably the wealthiest in the country, enjoying the highest standard of living. “There is at least Rs 5,000 crore of unclaimed interest in Kerala alone. People prefer to put their money in gold or jewelry, which is the worst kind of investment from an economic point of view,” states an expert.
These factors necessitate the establishment of Islamic banking in Kerala much earlier than in any other part of India. According to Sheikh Mohammed Karakunnu, approximately 200 institutions currently exist in Kerala that are working towards achieving this goal.
Organizations such as the Indian Association for Islamic Economics (IAFIE) are active, but the Islamic banking model has yet to become mainstream. The RBI has yet to officially recognize them as legal entities. However, a positive development is that Islamic banking is widely perceived as a viable financial system rather than a religious initiative driven by religious fanatics. Many conventional banks have opened separate Islamic units that offer Sharia-compliant products and services.
It is interesting to note a comment by an investor, Margaret McDougald, who stated, “I strongly believe that if we had operated on what I understand to be Islamic principles, we would not be in the current global mess we are today. I write not as a Muslim but as a Christian with great respect for Islam, and I studied Islamic finance to understand how it was possible to operate without usury. The principle appears to be one of shared risk, leading to shared profit or shared loss. I am looking to put some (small) savings into an Islamic Bank as this seems to be a better way of doing things.”
It is crucial to bear in mind that Islamic Banking revolves around an ethical perspective concerning the profit motive in our lives. The current global economic breakdown is a direct consequence of rampant greed, devoid of concern for human welfare or divine intervention. Banks are an integral part of our community. While an individual profit motive is not a crime, the relentless pursuit of it cannot lead to the deaths of thousands. Allama Iqbal, the Poet-Philosopher who authored the Book of Economics titled “Ilm-ul-Iqtisad,” eloquently articulated the exploitation by banks in these words:
“In splendor, in seduction, and in grace,
The buildings of banks outsoar the Houses of God.
In appearance, it is trade, in reality gambling,
Profit for one, for thousands sudden death.”