By Ather Farouqui My commentary published in Economic & Political Weekly May 07, 2011 Islamic Banking: An Anathema to Civil

Society The debate over Islamic banking versus non-Islamic banking has gathered force in recent years with Islamists seeing a noninterest banking system as an issue to rally support for their cause. This essay points out that the Quranic injunction against interest refers to the practice of exploitative usury and not bank interest. There are a few practical and realistic alternatives to functioning outside the modern international banking system, which is based on interest payments. The socalled Islamic banks in India only hoodwink depositors by paying them no interest while profiting from investing their money elsewhere for interest. The debate on the practical application of Islamic teachings in a modern world is a vexed one for Muslims. Islamic banking or Islamic finance is central to the enterprise of those who wish to rule the world in the name of Islam. They desire to consolidate the Muslim world around the issue of Muslim bashing. The debate on Islamic banking is thus one which brings the tension between Islamists and others nakedly to the fore. In this tension, the everyday humiliations that ordinary Muslims face in the modern world help Islamists consolidate their arguments and forces. This essay deals with the issue of Islamic banking with special reference to the Indian banking system and contemporary social realities. I have used the secular spirit and goals of the Constitution of India as reference points for the discussion. The secular state has always been anathema to religious forces, particularly Islamic ones that is, those in politics in the name of Islam. Islamic political parties, for decades, have stridentl y opposed the word secular, interpreting it as atheism. This raucous hatred of the word and its proponents was, however, toned down as a strategy in the 1980s when Hindutva forces gained decisive strength and these Islamic forces needed the support of secular voices. The extent to which this marriage of convenience between Islamist and secular forces, particularly the left parties of late, have damaged the cause and fibre of secularism and the formation of civil society is a different debate altogether. By forging an alliance with Islamic forces, the secular enterprise has been unable to widen its appeal. To return to the central theme, levying interest is prohibited by the Quran. However, it must be stressed that this applies to the practice of usury and not bank interest, as modern banking did not exist when Islam came into being. The rapacity of usurers and moneylenders in their dealings with borrowers has been recorded throughout history and in all cultures of the world this was one of the reasons behind the anti-Semitism that was until recently prevalent in the west. Hence the Qurans abhorrence of usury and of any business dealing solely in money. Idle Dream In the modern economy, however, financiers and the circulation of money play a very important role. If any Muslim government were to successfully introduce an interest- free economy today, it would certainly lead to a new economic order. As of now, this is an idyllic dream. However, given the Islamist propaganda against modern banking, a majority of Muslims who want to avail themselves of modern banking facilities but do not want to appear to be doing so, deposit their savings in a bank but do not accept interest in the belief that by so doing they are conforming to the dictates of Islam. With changes in Muslim politics, the idea of promoting Islamic banking as a parallel to so-called non-Islamic banking has emerged in recent years and further complicated the issue in the Indian economic system, which is in any case full of contradictions. Broadly speaking, in the modern Indian banking system, banks are financial institutions that charge and pay interest for business dealings. Besides, modern Indian banking is not just about interest; it is a tool for organising life in many ways and there is no escape from it. In the common civic space, all citizens, including Muslims, are directly or indirectly involved in modern banking. Interestingly, in Saudi Arabia, banks, as a part of the international economic system, charge and pay interest. Saudi banks, however, employ semantics and use the terms profit sharing and loss sharing instead of interest. Since banks in Saudi Arabia, an oil-rich economy, do not usually suffer losses, the depositors share the profits as a matter of course, and this is not considered riba (usury). A few years ago, Islamists in Pakistan demanded an end to the interest-paying system of banks. They got the federal Sharia court to pronounce a judgment in their favour but the government did not pass it in the legislature. Later, the judgment was set aside by an appellate bench of the Supreme Court of Pakistan and the matter is still sub judice. Profit from Backwardness

In Muslim India, conventional and reformist approaches to Islam exist side by side. The reformist approach is, of course, based on the compulsions of modern life. According to Maulana Shibli Nomani, Allama Iqbal and some other eminent Muslim thinkers of the 20th century, bank interest is a profit on investment or a charge on capital and when it is not exploitative, it is not riba. But classical Quranic commentaries support the conventional approach and their interpretations by those who are opposed to modern banking use the word riba as synonymous with interest. While in the oil-rich economy of Saudi Arabia and even, in the ultimate analysis, in Pakistan, a practical approach to the issue of bank interest is the majoritarian one, in India, probably because Muslims are educationally backward, it has become a much-debated and polemical one. Thus unscrupulous Muslim shylocks, supported by the Muslim clergy, operate in the country, hoodwinking Muslims in the name of Islamic or non-interest banking. They are supported by those whose only agenda is to oppose everything nonIslamic, even if by doing so they prop up archaic ideals that have no place in the modern world and are contrary to the interests of Muslims. The modus operandi of these Islamic banking organisations is very simple and one can find them in almost every locality where a substantive Muslim population exists. They open accounts in nationalised banks and make huge deposits in them of money collected from poor Muslims in their so-called Islamic banks. They use their knowledge and skills of the banking system very shrewdly to profit from the interest earned on deposits of the collected money depositing 80% of it in different fixed deposits, leaving hardly 20% in circulation. The common investor, who has entrusted his principal amount to the Muslim usurer, gets back his or her original amount when needed, little knowing that the interest from the money has been used for the moneylenders other businesses. If these poor Muslims need loans, the Islamic bank gives it to them, with their gold ornaments or land held as security or collateral, and charge interest, calling it service tax. Thus this system not only makes money for its unscrupulous operators in the name of Islamic banking, but also prevents the Muslim community from becoming a part of the modern economy and availing itself of the benefits of uniform economic programmes. Many Muslims do not take bank loans, believing that giving or taking interest is un-Islamic. So their businesses do not flourish and they do not progress while others benefit from their money. Scamming the Poor Sometimes it gets murkier. Around 15 years ago, a Muslim, who happened to be lecturer at Jamia Millia Islamia, a central university in New Delhi, began a big scam, calling it a model for Islamic banking. Al- Falah, as it was known, had the backing of prominent Muslims (political and religious) and offered returns three to four times higher than other investments. It proclaimed that investors would be partners in the venture, thus avoiding using the word interest for whatever they earned on their principal investment. Millions of Muslims deposited money without realising that in a partnership venture they were also liable for loss if the bank did not intelligently invest their money. Although the venture declared that the depositors were partners in the venture, their opinion was not sought when their money was invested in the share market, a high-risk venture. Being shrewd, the owner of Al-Falah also invested some part of the money in an engineering college and certain other projects run by separate charitable organisations. In two to three years, the scheme collapsed. The mullahs and politicians got their money back, but the common Muslim depositors were left without redress. The cheat went to jail and came out after some time on bail. Lengthy legal proceedings are now on and are likely to carry on for the next 50 years or more, given the way the Indian judicial system operates and that money had been collected from all over the country. The engineering college established with the ill-gotten money gives Al-Falahs founder returns because it is run under the aegis of a so-called charitable trust set up by exploiting legal loopholes that exist in this country. Not only that, he has opened a college and is planning to apply for it to become a deemed university with minority status. The campus is spread over 56 acres in the national capital region and is worth thousands of crores of rupees. If the government and the Reserve Bank of India (RBI) do not take stern action against this kind of banking, which exists in almost every locality where a considerable Muslim population resides, the shylocks in the community will not allow Muslims to even join the debate on the issue of modern banking, far less avail themselves of its benefits and join the mainstream economy. And the Al-Falah kind of scam will happen again. A main focus of the tussle between the Muslim world and others are the financial avenues available to the former, particularly oil-rich countries. The debate in India is as vigorous as in any other Muslim country. For recent trends one need only look at reports and other discussions in Muslim newspapers the world over, India being no exception. Arab Times, a leading daily in Saudi Arabia, devoted a page on 27 April 2011 to news related to Islamic finance, with a lead story titled UK Promotes City as Centre for Global Islamic Finance by Mushtak Parker. Terry Laceys report on the Fifth World Islamic Economic Forum in Jakarta, Indonesia, titled Islamic Finance in a Changing World, which was published in The Milli Gazette, New Delhi (16-31 March 2009: 16), was an example of the debate on the subject in an Indian Muslim newspaper. For the campaign against mainstream banking among the masses, a good amount of material is distributed. The

propagators turn a blind eye to the so- called Islamic banking prevailing in almost every locality with a substantive Muslim population simply because these banks help Islamists consolidate their constituencies by polarising them in the name of Islamic banking.1 Financial institutions in India are commonly categorised as banks and nonbanking financial institutions. The definition of banking, according to the Banking Regulation Act of 1949, is accepting, for the purpose of landing or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise. Banks in India are governed by the Banking Regulation Act 1949, the Reserve Bank of India Act 1934, the Negotiable Instruments Act 1881 and the Cooperative Societies Act 1961. The existence of so-called Islamic banks is not covered under these Acts. In 2005, the Government of India asked the RBI to examine Islamic banking instruments and the RBI constituted a working group in June that year that comprised five members representing the Department of Banking Operations and Development, Foreign Exchange Department, State Bank of India, ICICI Bank and Oman International Bank. This was an informal group and no formal terms of reference were drawn up. In its five meetings, the group concluded that in the current statutory and regulatory framework, it would not be feasible for banks in India to undertake Islamic banking though it made no specific recommendation warranting any action by the RBI. A copy of the report was forwarded to the ministry of finance in July 2007 and no action has been taken so far to the best of public knowledge. Note 1 For an extreme, orthodox interpretation of the concept of riba, usury and interest, seeProhibition of Interest, Does It Make Sense by M Umer Chapra (2005): Markazi Maktaba Islami Publishers, New Delhi, p 46.