Pic used for representational purposes ( Google)

In these ‘Halal’ offers,  even more attractive than the Halal factor was the ridiculously-high returns they promised to their investors. This, coupled with religious scholars who were too happy to promote such companies, meant that Muslim investors came in hundreds. Such smart marketing embedded with lies and deceit meant that these companies were easily able to fool people.

In this five-part series, TwoCircles.net will look at how companies like Heera Gold, now at the centre of a confirmed Ponzi scheme, used a combination of religious symbolism, Ulemas, fake propaganda and political tools to attract investors in Hyderabad.  

In the last of the five-part series, certified Islamic Finance expert Syed Mohammed Abud Asif explains why it is easy for Muslims to fall for such fraudulent companies and how the Indian government passively encourages such companies by not providing adequate Shariah-compliant banking avenues for the country’s Muslims. He also lists the basic mandatory checks that Muslim investors must make before investing in any company that claims to be Shariah compliant.

I have watched in part amazement and part despair as over the past year, thousands of Muslims have lost their hard-earned money at the hands of fraudulent companies who promise ridiculously high returns in the name of ‘Halal’ investments. I sometimes wonder why people would willingly walk into such traps without double-checking on the companies, their ‘Halal’ label, their books and accounts etc. But then I also realise that the answer is right in front of me.

Take, for example, a student who gets recruited to, say, a software company through campus recruitment and is able to save Rs 25,000 per month. A year later, he/she is able to save Rs 3 lakh per year. At different stages, all his classmates manage to get started with business or secure a decent job and continues to invest in some form or the other through mainstream banking routes. Meanwhile, the Muslim student remains confused because as a pious Muslim, he is not encouraged to invest and/or earn interest. When he/she thinks of an investment options, depositing with the conventional bank or insurance with insurers would not be an option.

It is also important to point out that over the past few years, a certain image of Shariah-related investment has developed which makes it sound like Shariah is anti-profit. However, this is an utter myth. A huge number of companies in India are Shariah-compliant and equity is the preferred mode of investment in Shariah. Hence, stocks should wide acceptance among Muslim investors as long as these stocks follow Shariah rules. In fact, even the National Stock Exchange and the Bombay Stock Exchange have a Shariah index which allows you to keep track of investments and companies that follow Shariah principles. The moot point, however, is this: how do you encourage a population that is economically and socially backward to invest in something as technical as equity investing? Plus, talks of stock investments ring premature when seen in context of the large-scale marginalisation of Muslims when it comes to having access to Shariah-compliant banking.

The only option left, then, is to either to start new business with the help of relative or friend or invest in real estate. And we know that starting a business is neither possible for everyone nor ideal. In the case of real estate, the investment amount is high and it is illiquid (cannot be converted into cash immediately).

Where then, does the money saved by Muslims go? Either it lies unattended in banks (which banks use to further the loan-anti Shariah business) or the money lies at home losing value). Who is to be blamed for this? Our savings are not used by ours and not used for our cause – either business, education, insurance or any needs. And despite several proposals, suggestions and ideas, the Reserve Bank of India and the Government are not in favor to allow full-fledged interest free banks and Takaful (insurance) companies to operate. And when even the ‘pro-Muslim’ Congress/UPA government did not allow it, do we honestly expect this NDA government to do so?

As a result, India finds itself in a rather unenviable position. The world’s third-largest Muslim population has less than 3% representation in financial system. This is even less than their representation in the Indian bureaucracy (4.7%) which itself is hardly a number to feel good about.
 

Pic: Google

No wonder then, that the cases of Bangalore and Hyderabad have become common these days. Companies which claim to do business in terms of Islamic rules of transactions have failed miserably in terms of performance and hence couldn’t sustain over period of time. They pool investment from small savers, business organization and retired individuals and promise an expected return which they can’t provide for. The Ponzi schemes played the same game, only adding to the image that interest-free financial institutions are not to be trusted. What we need is a an interest free financial model which is legally sound, financially robust, commercially viable, socially inclusive and shariah compliant.

It is true that many companies have tried to do that due to many internal and external factors. Mismanagement of funds, Excessive exposure to real estate and dubious financing practice are just a few of the problems. The massive rise and the subsequent fall of ponzi companies have once again necessitated the task of reformation of real alternative. In this context, companies like Rehbar, Mount Judi, Secura, Cheraman and TASIS (shariah indexes) are some of the ground breaking efforts furthering the alternative option.

In the cooperative societies level, there are institutions like Janaseva, Sanghamaum, Al khair, Bait un Nas, Sahulat Microfinance and Islamic Welfare Society which have earmarked trust in the public in terms of their performance and sustainability. On the stock exchange, there are Tata Ethical Fund and Taurus Ethical Fund which will appeal to the faith-based investor. There are no capital market instruments (stock and bonds, debentures, treasury bills, fixed deposits) available so far that claim to be Shariah-compliant.

Any business/finance or investment in accordance with Islamic Principles is called Shariah-compliant. There are research reports, books and many speeches available on the issue, but essentially there are four principal rules/criteria to check the Shariah permissibility:
The first and foremost is the business activity screening. Before investing, make sure that the company doesn’t violate any shariah prohibition. Accordingly, any involvement or investment in business of alcohol, pork, gambling, tobacco, and any interest-bearing transaction and all those that are prohibited under Islamic law are to be avoided.

Second, all the business undertaking or investment commitment needs to be thoroughly written down between the parties and the witnesses are sought to form a contract. While contracting, all terms and condition should be in clear guideline so that no disputes arise in the future. Any uncertainty as to the subject matter, price, delivery date etc shouldn’t jeopardize the true and actual performance of the contract.

Third, any partnership or co-venture between parties must have equal chances of profit or loss. Any investments that claims to make a fixed sum of money as returns are void under Islamic law. As with any investment, there is a chance of making losses the same applies to Shariah-compliant business/ investments as well.  Reporting losses doesn’t mean non compliance with Shariah.

Fourth, any investment that doesn’t disclose their business in terms of nature and accordingly their accounting fails the test of compliance. This demands the accounting and auditing of the whole business.

These are the prerequisite notes that can be controlled if external body legitimately have supervision both from commercial and legal (including Shariah) point of view. And this is where the fraudulent companies were able to get away. Insurance companies have the Insurance Regulatory and Development Authority of India (IRDAI); the stock market has the Securities and Exchange Board of India (SEBI); banks have the Reserve Bank of India (RBI) and Halal-compliant companies? There is Ministry of Corporate Affairs and the Registrar of Companies but that is for all registered companies. However, there is no single body or authority that investors who have lost money in these companies can approach. This was most visible when complaints against Heera Gold surfaced; it was between the Crime Branch, the Economic Offences Wing, the Enforcement Directorate and the Serious Frauds Office of India to decide. No wonder then, that the people who have lost money have little hope of ever getting their money back.

pic used for representational purposes only

The most fundamental yardsticks to consider is the shariah-compliant actual business performance, growth and development and its impact in the economy and its future course of business. It is becoming increasingly clear that in the absence of a regulatory authority and any offering of an alternative from the government regarding investments and banking, Muslims are caught between the devil and the deep sea. And these fraudulent companies are making millions by acting like saviours.

(The author is a Certified Islamic Finance professional based out of Bhatkal, Karnataka)

Courtesy: Two Circles

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Fintech is easy to explain: It is the new technology and innovation that aims to compete with traditional financial methods in the delivery of financial services. The use of smartphones for mobile banking and investing services are examples of technologies aiming to make financial services more accessible to the general public. This sits perfectly well with Islamic finance as long as it’s fundamental principles are not breached. To that extent, Fintech is not a new product per se, it is simply a new delivery channel.

But bitcoins are different animals – and look pretty scary at the moment! This is why I was reluctant to express any opinion until there is more clarity. But last night I came across an article written by a certain Akash Anand on this subject in a well-regarded portal islamiceconomist.com which is run by an old and dear friend Dr Humayon Dar – a PhD in Islamic Economics from Cambridge University. What surprised me is the audacity of the author advocating a synergy between Blockchain-based system (bitcoin) and Islamic finance! No background of the author is found near his piece. From the language used, I guess he is a pure-techy. And as a matter of principle, pure-techies should refrain from writing on ideology-based financial systems like Islamic banking as much as Islamic bankers like me should not touch upon the topics related to cutting-edge technologies!

Anyway, let’s briefly examine the basic building blocks of this new currency which has been making headlines recently. The first distributed Blockchain was conceived by an anonymous person or group known as Satoshi Nakamoto in 2008 and implemented the following year as a core component of the digital currency bitcoin! The concept itself was born in anonymity whereas full structural transparency is a core Islamic finance requirement. So it fails the test right at the root! The Blockchain is a public ledger that records bitcoin transactions. A novel solution accomplishes this without any trusted central authority!! Bitcoin is pseudonymous, meaning that funds are not tied to real-world entities but rather bitcoin addresses. And owners of bitcoin addresses are not explicitly identified.

The risks of dealing in bitcoin were laid bare in 2013 when Tokyo-based exchange Mt Gox collapsed after admitting it had lost the equivalent of hundreds of millions of dollars of investor funds. The currency’s earlier ties to gambling and criminal websites did not endear it to traditional investors.

Akash, in the article, bats for Blockchain technology because it “incorporates the [Islamic] principle of maslaha (social benefits of positive externalities) as it can potentially provide banking services to those unbanked segment of the population”. It is quite obvious that those who are “unbanked” among us are the ones who have no surplus money to bank! So when folks like Akash talk about brining that segment into the banking sector, they essentially mean trapping them by offering loans!

Ideological arguments apart, some of the Wall Street and the financial world titans have strong reservations against bitcoins:
In early September, the world’s largest bank JP Morgan CEO Jamie Dimon said that the currency “will not work” and said he would fire any JP Morgan staff who traded it. Speaking at a bank investor conference in New York, Dimon said, “The currency isn’t going to work. You can’t have a business where people can invent a currency out of thin air and think that people who are buying it are really smart.”

In November, CEO Tidjane Thiam of Swiss banking giant Credit Suisse airs similar views. ”Bitcoin presents a number of challenges. The first of them is really the anonymity,“ and calling the digital currency “as the very definition of speculation and the very definition of a bubble.”

Laurence Fink, founder and chief executive officer of BlackRock, Inc. that manages nearly $6 trillion of assets is not bullish either. At the Reuters Global Investment 2018 Outlook Summit in New York this month, he called bitcoin a “very speculative instrument. More importantly, it is an instrument that people use for money laundering”!

These three gentlemen are movers and shakers of global financial markets. Their words – rightly or wrongly – are taken as gospel truth. Traditional investors view bitcoin as opaque and highly speculative with potential to collapse even though so far this year bitcoin has soared nearly 580 percent – a meteoric rise not appreciated in the Islamic finance circles. Bitcoin surged on earlier this week to $6,487, recovering more than $1,000 after losing almost a third of its value in less than four days – nor is such a sudden fall acceptable in an ethical banking system!

The investors who are active and bullish on this digital currency have dodgy background. For instance, Novogratz, a former Princeton University wrestler, U.S. Army helicopter pilot, and Goldman Sachs Group partner, is among them. Novogratz worked at Fortress from 2002 to 2015, where he was a principal and ran its macro hedge funds. They grew to manage billions of dollars and made him a Wall Street star. But the funds were shut in 2015 following investment losses. Novogratz then retired from the firm. But he is now back with a bang; promoting and investing heavily in bitcoins!

Fiat currency (the paper currency we use without the gold backing) itself is causing devastation in global economy because Central Banks are able to print and circulate unlimited amount of money. The consequences of a widely acceptable digital currency – where no Central Bank or other regulatory authorities exist – can be catastrophic!

So my sincere advice to friends like Akash is to hold the verdict on bitcoin’s synergy with (and benefits for) Islamic finance. We have a long distance to cover before reaching a firm conclusion on this!

Courtesy: Two Circles
 

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Faith based banking in a country which has secularism enshrined in its constitution! Does not it sound anachronous?

Well, as far as the present dispensation at the Centre led by BJP is concerned – which has an altogether different take on secularism – it does not seem to think so. And that’s why it has gladly accepted the proposal by the Saudi Arabia based Islamic Development Bank (IDB) – an international investment organisation – to start its operations here.

In fact this proposal is considered a positive outcome of PM Modi’s visit to Saudi Arabia sometime back (April 2016). Although a date has not been announced when the Bank would start its operations here, all the formalities regarding its launching have been completed and even the city for its first branch in India has been identified. Ahmedabad would see the first branch of this Bank.

We are also told that India’s state-owned Exim Bank would extend around US $100 million as credit to IDB to facilitate exports to its member countries. The bank – which has 56 Islamic states as its shareholders, while Saudi Arabia holds around a quarter of its shares, UAE is its fifth biggest shareholder – also plans to contribute towards medical treatment of rural poor in India. It plans to donate 350 medical vans as part of its social initiative

How is India which is definitely not part of the Islamic World being considered by IDB to start its operations? The deciding factor is its 180 million-strong Muslim population which has made it an attractive place for the IDB to set its shop here. The Reserve Bank of India has already given a green signal to this proposal sometime back and paved the way for Sharia-compliant, interest free or Islamic banking in the country. In fact in late December last year itself an RBI committee on ‘Medium-Term Path for Financial Inclusion’ headed by Deepak Mohanty had recommended that there should also be “interest free windows” in existing banks.

The main argument put forward by the committee was that globally interest-free banking, which is also known as Islamic banking has witnessed a significant increase, especially in the wake of the financial crisis. Islamic finance assets have seen a ten-fold increase from a decade ago and today are estimated at around US Dollars 2 trillion.

It had explained that the “central concept in interest-free banking and finance as justice” is supposed to be achieved mainly through the “sharing of risk”. Under it different stakeholders share profits and losses and charging interest is prohibited.

Explaining the key elements which give interest free banking a distinct identity it had talked of the following:
 

Remember, till date interest-free banking has witnessed a lukewarm response in India. During the UPA regime, RBI had clearly declined to move further on the issue. In fact, in the year 2007 the RBI working group under the then executive director, Anand Sinha, had recommended that India must not permit Islamic banks to operate in the country. It had emphasised that current regulations do not permit the model.

However, internally a debate was already on within the banking establishment about the prospects of such a scheme. A report published in the April-June 2005 issue of RBI Legal News and Views outlines the fact that “interest-free banking is an attractive proposition gaining currency all over the world and so it was time India introduced it:
 

What are the regulations which seemed to obstruct the establishment of Islamic banking?

The Banking Regulation Act (1949) has provisions which clearly prohibit operation of banks on a profit-loss basis (5b); they also forbid what is known as murabaha, or, the buying, selling, or barter of goods (8), impede ijara, or, bar the holding of immovable property for a period greater than seven years (9), and requires the payment of interest (21).

The idea to start Islamic banking in India received a fresh boost when the National Minorities Commission, then under the chairmanship of Wajahat Habibullah, asked the finance ministry to take a relook at it. It is a different matter that RBI, then under the governorship of D Subbarao, again declined to move further on the issue, once again underlining the fact that existing banking rules do not allow interest free banking.

Towards the end of UPA II regime, the scenario witnessed a change with the RBI allowing a non-bank finance company in Kerala to start its operations in Sharia-compliant mode. Looking back one also discovers that ‘The Raghuram Rajan Committee on Financial Sector Reform (2008)’ had also considered interest-free banking,

It was the same period in which a petition was filed in the Kerala High Court challenging the operations of this finance company on the ground that a “[f]inancial services company set up with government participation which would follow the canon law of a particular religion is a clear instance of the state favouring a particular religion”. (Dr. Subrahmaniam Swamy v. State of Kerala represented by chief secretary and others, W.P. (C) No. 35180 of 2009, High Court of Kerala, Ernakulam).

A counter-affidavit was filed by TP Thomas Kutty, the then deputy general manager (Projects) of KSIDC which argued that the establishment of such an institution is “aligned to industrial development in Kerala”. It also stated that it is basically meant to target untapped Gulf money which could only be invested in a Shariah-compliant bank. Although the high court initially stayed the government move broadly concurring with views of the petitioner, in its final decision it dismissed the petition observing that “although the institution was based on the principles of a religion, its motive was not to propagate the religion and the state’s participation in it was purely based on commercial prospects.” (The Times of India, February 4, 2011, p. 1).

2.
As of now, barring some rabid rightwing commentaries there is not much discussion in the mainstream media about introduction of ‘faith based banking’ in the country. Instead we witness purely economic arguments being put forward supposedly to justify this debatable move. It is being argued how leading multinational banks are also engaged in tapping this ‘market’ and introducing products suitable for Islamic banking or how worldwide it is growing at a faster rate vis-a-vis standard banks. Sample this report which appeared in a publication:
 

Would it suffice if the debate continues in similar fashion, where rabid right-wingers – who have no qualms equating Islam with terror, challenge it on similar grounds – or at the other end of the spectrum economists singing paeans to its advantages of attracting hitherto untapped funds? Perhaps there has to be a third way to look at the whole phenomenon.

And it should begin by raising broadly three categories of questions:

It is important to note that the very idea of Islamic banking and promoting it as a parallel to conventional banking – which is being portrayed as un-Islamic – and which has caught the imagination of a section of god-fearing Muslims, is a clear manifestation of shifts in Muslim politics the world over. One can look at the debates in colonial India between Muslim scholars when modern banking was being introduced and a section of the ulema who objected to it on the basis of their understanding of Islamic principles. In his important intervention on the subject Ather Farouqui tells us (Islamic Banking in India at the Service of Pan-Islamists, MAINSTREAM, VOL L, NO 11, MARCH 3, 2012):
 

He also quotes,
 

A major exception to the unfolding discourse seemed to be Maulana Abul Ala Maududi (1903-79) founder of Jamaat-e-Islami. For him Shariah-compliant financial practices were part of the larger project of Islamism who sought to overwhelm every aspect of the state and society by the medieval norms enshrined in Shariah law. The idea had not many takers till late sixties or early seventies which received a boost by Saudi oil wealth in the 1970s.

According to Sadanand Dhume,
 

Dhume’s article which was written when SBI had initiated a Sharia-compliant fund (end of 2014) also poses few basic questions which cannot be brushed aside easily. He asks:
 

3.
Faruoqui’s article also discusses the experience of Islamic countries. According to him in Saudi Arabia, banks are involved in charging and paying interest. The only difference from other modern/conventional banking is that they ‘employ semantics’; instead of using the term interest they use the terms profit-loss sharing. Looking at the fact that it is an oil-rich economy, banks there rarely face losses and the depositors ‘share the profits’ which is not considered ‘riba’ (usury).

The most interesting case vis-a-vis Islamic banking pertains to Pakistan. Here few years back Islamists demanded to overhaul the conventional/modern banking system for an end to the interest paying system. The Federal Shariat Court also ruled in favour but the government did not take it up in the legislature. When the matter went to Supreme Court, it set aside the judgement and the matter is still pending. Ather Farouqui writes,
 

Providing details of judicial intervention he further tells us that Pakistan’s Supreme Court in a judgement (PLD 2000 SC 225) held that the country’s current interest-based system needs to be replaced with one that is Shariah-compliant, but when a review petition was filed (PLD 2002 SC 801) this judgement was suspended and the courts forwarded it to the Federal Shariat Court for reconsideration, which is still pending there. The challenge to deal with the issue is not theological; it is pure economic.

Unlike Saudi Arabia, Pakistan is not oil-rich and is dependent on international aid like its many other third-world counter-parts. And thus the ulema may cry hoarse about replacing an interest-based economy with a Shariah-compliant one, but for Pakistan to remain part of international financial system it will have to service the debts from time to time and it cannot be done if its economy fully switches to interest free regime. Justice Wajihuddin Ahmed clearly spelled it out in PLD 2000 SC 780–1. (Excerpted from Islamic Banking in India at the Service of Pan-Islamists, MAINSTREAM, VOL L, NO 11, MARCH 3, 2012)

4.

Last but not the least one also needs to look at the claim that Islamic banking would augment financial inclusion of those (Muslims) who have remained aloof from conventional banking systems for various reasons. It is true that a huge section of the Muslim population has been left out of the ambit of banking services. Sachar commission had rightly noted,
 

This financial exclusion could be considered a culmination of various factors. It has to do with the fact that majority of the population is poor and engaged in informal sector. It is also because of a certain mindset prevailing in the banking sector, which has categorised Muslims and Muslim-dominated areas as “negative zones” (which is documented in the Sachar report) and also for reasons of faith.

It is worth noting that because of educational backwardness of a large number of Indian Muslims or the stranglehold of Islamist thinking even among a section of the educated ones, this particular issue of bank interest has become a live issue among the community. A measure of it can be had from a report of the Reserve Bank of India itself (April-June 2005 issue of RBI Legal News and Views) which has rather prompted it to revisit its earlier policy of not having anything to do with Islamic or interest free banking,
 

An important fallout of this thinking is that a number of ‘Islamic banking’ organisations have come up in areas where the population is predominantly Muslim where unscrupulous elements – who are able to derive support from a section of the clergy – are able to hoodwink the ordinary Muslim masses in very many ways. For example, the simplest way in which they do this is by gathering monies from gullible masses, investing a significant portion of the same in conventional commercial banks, and use the interest for personal aggrandisement and return the original amount back to the investors when needed or demanded without any addition.

The Milli Gazette has time and again reported activities of another type of fraudsters who had robbed ordinary Muslims of their precious savings under the name of ‘Islamic investment’.
 

Four years later it reported about another incident:
 

Perhaps one needs to revisit the claim that Islamic Banking would prove to be an antidote to financial exclusion of Muslims from conventional banking. As the above examples – which have been randomly selected – demonstrate, there is a greater possibility that it can instead become a new vehicle for further squeezing them of interest (from their hard earned money) or in worst cases of the money itself.

To conclude, the not so silent introduction of Islamic Banking in India has once again exposed BJP’s double standards.

There was a time when BJP attacked the Congress for its tendency to equate secularism with pandering to the concerns of the most orthodox elements among Muslims. It had even coined a term for it: ‘appeasement’. If one goes to the kernel of the argument regarding Islamic banking one can similarly see that, stripped of financial complexities, at its core this is what it represents. Yet today the BJP is going gaga over it and has no qualms in becoming a pall bearer of Maududi’s worldview, rather vindicating the oft repeated dictum that fundamentalisms of various kinds feed on each other.
 

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