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Report on
National Workshop on Islamic Banking
September 16 and 17, 2006
By Mr. Shabbir Motorwala
1. Mr. Mufti Barkatullah, Sharia Advisor, Lloyd Bank & Islamic Bank of Britain, UK.
· Islamic Banking is not be construed as Religious Banking, It is ethical banking based on the shariah code.
· In UK, about 15 years ago, there was a banking license put for sale and Shaikh Saleh brought in sale and converted the Bank into an Islamic Bank – Al Barka.
· The banking law change thereafter and required opening up of shareholding. The alternatives for Al Barka were to accept or withdraw / surrender the banking license.
· In 1990, a working group of people, lawyers, bankers, etc (7/8 people) was constituted to address various issues arising from Islamic Banking situation.
· Pursuant to 9/11, there was flight of capital either ways.
· Other issues in Islamic Banking revolved around level playing field, tax, and consumers.
· The FSA website provides most information on Islamic Finance, product, background and future, etc prevalent in UK.
· Other EU Regulators, post FSA acceptance of Islamic Banking, looked upon it as constructive, innovative, helpful and with understanding. They had only one clash – loss sharing.
· In real terms, Islamic Banking is more near to Basel II
· There are eight banks in UK which have Islamic Window but there is only one full fledged Islamic bank.
· 20% customers of Islamic Bank of UK are Non-Muslim.
· In Malaysia, 40% of sukuks are taken by non-Islamic Institution and upto 40% of clients are non-Muslim.
· Islamic Banking is demand driven and not supply driven.
2). Mr. Nizar Kochery, President, Middle east Indian Management Association, Qatar.
· There exist economic and practical level differences and perceptions with respect to Islamic Banking in India.
· The use of wealth should also be social and not merely generate idle income without risk.
· Products like Medical Policies can exist where for an annual premium, free treatment is provided.
· Interest / Ribah is prohibited in Islam and therefore the financial system should be interest free.
· Islamic Banking can co-exist with conventional banking wherein the mass legitimate means of growth should be through trade, commerce, leadership and management position.
· The challenge will be to be capitalized on positive and avoid negatives in this modern era civilization.
· Qatar Islamic Bank has submitted an application to the Reserve Bank of India who is unlikely to approve it, though Islamic Banking is not specifically prohibited under Indian banking law.
· Other Options for Islamic Banking in India could be through conventional banking, NBFC, etc. which need to be discussed / debated.
3. Discussion on issues in the first Session
· Double stamp duty on buy and sale of property in Islamic Banking – needs to be mitigated through suitable statutory amendments.
· Double VAT on buy and sale of goods in Islamic Banking – needs to be mitigated through suitable statutory amendments.
· In India, there is no legal concept of right to buy in banking laws, only mortgage possible – many such legal changes need to be carried out.
· For Islamic Banking – ushering political change, opportunity highlights to government, court petitions, suggesting parallel law to be considered.
· Islamic Banking may not be specifically referred to ‘Islamic’ – this will remove religious / political perceived bias.
· Constitutional amendment / Bill in Government seem difficult – therefore, the route of NBFC supplying financial products can be explored. Such a NBFC to adopt all risk management guidelines and aim to service people.
· Clarity on shariah board vis-à-vis Islamic Banking need to be communicated– the shariah board does not participate in business – therefore regulators should not be worried out it.
· Islamic investments: A debt of 33% is construed as acceptable by shariah board and they are willing to reduce this threshold. Further, 5% of net income as Interest is also acceptable. Out of dividend, 4% to be taken to sundry account as charity. All this percentages will go down in near future.
· Conflicts between FSA and shariah board are generally manageable except fatwa exception. Conflicts between Accounting Bodies & shariah principles can be met by maintaining two sets of accounts – one for regulatory requirement and other for shariah purposes.
· In a Cairo Islamic Bank, The Central Bank of Egypt asked for interest in a run for money situation and the Shariah Board approved availing of loan on interest as one-off / temporary basis considering larger interest of survival of the bank.
· The Shariah has always suggested flexibility in times of difficulty.
4. Mr. M.A. Batki –Retired Former Legal Advisor to RBI
· Legislation Structure of banks :-
I) State Corporation II) Companies Act 1956 III) Co-operatives
SBI + Others
14+6=20 Banks 1). Old Banks(prior 1991) (State/Multi-state--Co Op Soc Act)
(80% Business) 2). New Banks
Nationalized Banks (UTI, IDBI etc)
· RBI acts as a Banker/Regulator for banks in India.
· Legal:
· No Hurdles –Islamic Banking is doable
· RBI has taken a policy decision (Central Govt) that Islamic Banking is not permissible under the RBI Act / Banking Regulation Act
· Need to get rid of this policy constraint. It could be through People representations, amendments, policy changes, etc
· One can represent to RBI/ Central Government that Article 245 list 1 44/45 of the constitution can permit Islamic Banking
· Way Forward for Islamic Banking
· Corporation - Islamic Banking Corporation regulations (Statutory Corporation) to be created. Its content to be finalized between RBI to people
· Private Company - New Private Sector Bank can be governed by the Companies Act 1956 plus the RBI Act so as to be able to do Islamic Banking.
· Co-operative – This should require amendment to Chapter V of Banking Regulation Act (Section 56)
· Consideration while setting up in either case as above:
· Sound objects
· Do’s and don’ts of banking business
· Section 5 and 6 of Banking Regulation Act (BRA) – core functions specified. Central Government can add list of business by notification. It also has powers to recommend Islamic Banking to RBI.
· Licensing
· To be obtained under Section 22 of BRA only after policy has been laid down
· If RBI decision of not to grant a license then one can appeal to 1.Central Government 2.High Court or 3. Supreme Court. The SC ruling should result in finality on the matter of application for license.
· Under Section 17, RBI act as banker to banker and lend on Interest. This part of statute needs to be amended so that Interest may not be charge.
· CRR/SLR: RBI charges and pays interest on these. This part of statute needs to be amended so that Interest may not be charge.
· Products: Interest free banking – Principles / rules need to be identified with the general law and agreed with customers.
· Practices: The appointment and operation of Board of Directors needs to be amended to consider recommendations of the Shariah Board who may also have powers such as appointment, removal of any director, employee, chairman, etc.
· Inspection: Government / RBI should agree to no compromise / infringement of shariah laws and also assist / advice on way forward.
· Wound up: M &A /wounding up should be permitted by RBI freely
5. Mr. Abdus Salaam –Retired DGM RBI Cochin
· India has a good statutory framework and legal amendment/changes thereto are not the prime concern but political will and support are.
· If Government decides and opposition co-operates, the goal of Islamic Banking can be achieved through cosmetic amendment to statutes (amending few relevant provisions or adding a new chapter).
· Deposit Insurance Guarantee Corporation to guarantee / underwrite deposits with Islamic Banks for assuring safety to Depositors.
· In case any interest income is inevitable and is received (e.g. CRR/ SLR) then the same can be used in charity.
· One may also consider bringing / dealing with one product at a time rather than all activities surrounding Islamic Banking. Each product can be referred to Shariah board for approval turn by turn and RBI is likely to have no say in it.
· As discussed earlier, a proper climate needs to be created for Islamic Banking including dealing / transparency with Regulator and non-Muslims.
· NBFC are a better option to start with as compared to a bank.
· FIIs / Funds and Foreign Investors can be then roped in within permissible regulations which would not be a problem.
6. Mr. M. H. Khatkhatay, Financial Consultant, Mumbai
· Apart from statutory aspects, Islamic Banking products such as Murabaha could also create tax issues such as taxation as Association of Person and thereby resulting in potential higher tax on the transaction.
· Interest payment / income issue with respect to CRR/ SLR/ Call Market can also be managed by Time Multiple Count i.e. by keeping friendly deposit with each other for same length and time thereby ‘offsetting financial imbalance’.
· For Shariah Board 3 models can be considered:
· Central Bank to appoint and regulate Shariah Board e.g. Iraq, Malaysia, Bahrain and Pakistan.
· Central Bank has no say in Shariah Board but lays down set criteria e.g. Pakistan.
· Central Bank has no say and the appointment of Shariah Board is internal matter of the Bank on line with Board of Directors.
· Potentially perceived conflict arises if the Shariah Board is paid / compensated by the Bank.
· There are other practical issues such as sects, ruffles, conflicts between parties teaming up.
· A statement from Government may assist the process favourably e.g. ICICI: Islamic Banking division in Bahrain. Even Islamic Banking Windows or products may be allowed otherwise.
· Deductibility of any amount / Interest / dividend paid to depositor should be allowed for income-tax purposes.
7. Dr. M. Yaqoob Khan, Former Economic Advisor SEBI, Mumbai
· In Islamic Banking, the return for the depositor is not fixed as the profit and loss sharing (Mudarabah / Musharaka) depends on business. However, the transactions are based more on principles of equity and justice.
· The required capital for a private bank is currently Rs. 300 Crores which can be raised as 40% promoters and 60% Public/Private issue subject to lock in of five years wherein NRIs can participate, say upto 40% and other Individuals say upto 10%. NBFC require much lower capital at Rs. 2 Crore but have operational restrictions.
· A Bank will need to ensure compliances such as 25% branches in rural areas, CRR (5%) and SLR (25%), Capital Adequacy Ratio (9%), dividends, Priority Sector Finance (40%), schedule bank conditions, etc. There will be a need to suggest alternatives for items that an Islamic Bank cannot comply with.
· The Bank will need to be a member of a clearing system.
· A bank cannot deal in goods as traders whereas in Musharaka the profit arises only on the basis of sale and purchase. Also, buying and selling on behalf of others is prohibited. Istisna, Salaam perhaps therefore cannot be done. Leasing Finance is however permitted by RBI. Indian banks may also not be able to a hire purchase arrangement. The principle in India is that a bank cannot be a partner but can only finance a transaction.
· RBI norms relating to prudence, operating / credit risk, internal operations, capital adequacy, etc would need to thought through for an Islamic Banking operation.
· Other items that could require attention are Second Basel Committee- Bank II, Standard Sub-standard, doubtful provision items.
· Islamic Banking introduction will obligate development of a model which can predict fund crisis, insolvency, capital adequacy crisis, market risk, macro risk, management plan, challenge from globalization, etc.
· Islamic Banking will also require a competent board of directors with no vested interest.
· Islamic Banking will require adherence to creation of Asset Value Fluctuation Reserve for securities held for trading, sale and maturity.
· Income Recognition norms to be developed e.g. accrual, cash, quarterly statements, profit and loss statement for visible financial position.
· Islamic Banking will also require compliance with annual / offsite RBI inspection, filing of required reports, etc.
· Interest rates (e.g. on CRR) are going down. Interest income is also likely to arise from lending to Priority Sector as per RBI norms. Alternatives such as Mutual Fund, etc to be evolved. If Mutual Fund also invest in equity, then Islamic Banking principles for that investment should also apply. Most Mutual funds may perhaps not suit Islamic Banking.
8. Mr. M. H. Khatkhatey
Comparing conventional and Islamic Banking
Particulars
Conventional Banking
Islamic Banking
Equity
Yes
Yes
Current Account
Yes
Yes
Fixed Deposit
Yes
Yes – but with fluctuating returns
Earmarked funds for specific investment
Yes
Yes
Mutual Funds
Through a separate entity
Same but Mutual Fund to invest only in companies that have no debt and carry out permitted activities
Real Estate Fund
Possible
Same
Debt and equity combination
Yes
Yes but within shariah compliant ceiling
Equity investment
Yes
Yes but in shariah compliant companies / entities
· There are compliance aspects with respect to all of the above.
· Real estate fund e.g. ICICI Real Estate Fund model to be followed.
· Other options could be International Islamic Bonds e.g. Qatar bonds are listed on Luxembourg stock market.
· Dividend bond can be issued (as by government giving return per GDP).
· Floating a Mutual fund requires five promoters, Rs. 20 Crore fund, meeting other investment condition criteria, etc.
1. Mr. Syed Zahooruddin–(M.A.,LLB), Chief Promoter, Secunderabad Coop Urban Bank Limited, Hyderabad
· The process of setting up an Urban Co-operative Bank is not simple and the process involves the State and RBI approval and can take upto two years.
· The model is also difficult to sustain and run e.g. Charminar Co-op Bank with deposit of more than Rs 500 Crore and political support collapsed in half an hour and out of the 15 people on the Board of Directors not a single person took responsibility.
· The earlier entry norms were 30 lakhs entry capital plus 15 promoters and plus about 2000 members. It requires mobilization of share capital with guidance. The limit is now Rs. 1 Crore.
· Interest is recognized from small borrowers and expended as donation. In case of common group keeping deposit and taking loans, interest can be merely a book entry for accountancy purposes.
· Tie-up with big banks e.g. ICICI, HDFC, etc is required for demand draft, outstation cheque clearance, etc.
· Margins in such model are lower than nationalized rates.
· CRR / SLR were / are required to be maintained.
· Deposit mobilization / pygmy deposit offer commission return.
· The average interest rates in such cases are 12% loan and 9% for deposit.
2. Mr Nurullah Siddiqui:-Former CGM-NABARD - Expert in rural/agri finance
· Banking came to India through Bank of England / Imperial bank of India and RBI (1934/35) and Banking Regulation Act 1949
· Co-operatives are primarily a State Subject in India even when engaged in banking.
· In 2002, the Central Co-operative Act 2002 was enacted which removed many operational hurdles.
· In Co-operative, one member has one vote. This affects its functioning significantly but it has more democratic setup. Corruption is generally rampant but can be controlled through discipline.
· Co-operative-felt that they would be able to mobilize more deposit as banks.
· Earlier only state government controlled such banks but the statute was amended by RBI to regulate these banks also and banking norms applied to Co-op Banks thereafter. However, concession /incentive were given to them to develop this sector.
· Overall experience in this field is that Co-operative sector did not take full responsibility and therefore only some such banks did well. However, the sector is still growing and is owned by many leading business houses.
· When an Islamic Bank accepts deposit, the purpose is to safeguard it and also give some return as profits. If a bank does not earn interest, it may also difficult to meet expenses entirely from other incomes.
· Dividend distribution rules and transfer to reserve rules in this sector also impact the model significantly.
· Other restrictions / provisions to be considered are mandatory investment of fund in interest earning securities, restriction on contribution to political parties, borrower ceiling and restrictions, acceptance of deposit ceilings, etc.
· Amendment to various statutes as above will be required if Islamic Banking was to be carried out under Co-operative banking model.
3. Sharing of views/ issues
I ) Mr. I. H. Zaki –secretary-Biggest Muslim fund Nazibadad Nidhi (CH-society Register)
· Started in 1971 under Society Act with charitable objects.
· The model was to accept pygmy deposits and give loan against Jewellery with about 4% charges. This provided relief from money lenders charging about 38% to 120% to poor people.
· The initial 4% charges were later not found sufficient and this caused a big system failure and liquidity issue.
· The Society could not keep it funds with banks as prescribed / stipulated / required from a financial prudence perspective.
· A Muslim Fund can also explore taking recourse to Nidhi legislation
II) Dr. Muhammad Talha
· Political will needs to be created in India.
· Outside players to meet and push RBI (e.g. UK experience).
· Emails could be sent to members of parliament on how to benefit from Islamic Banking citing developments in China as an example.
· Approach RBI professionally and Solicit support
· In such and next session –Non Muslim brothers to be involved – Islamic Banking is for all needs to be conveyed clearly.
· Committee that will work from home to home –media highlights to be set-up.
· Expertises in India are plenty – One can therefore straight form a new bank with good capitalization jointly with a foreign bank. Investment can come from UK or Malaysia or Singapore
III.) Mr Bagsiraj
· Present depressed atmosphere of Islamic Banking Entities Operating without regulatory compliance / system needs to be regularized.
· Failure of earlier of Islamic Entities is a bad example.
· One can set-up working group to:
1-- Studying to strengthen existing Islamic Fin Inst –positive Atmosphere
2-- Identify diff model J/V, Gulf, etc (society requirement to be met)
3-- Resource /professional-Economy,1st fin, global
IV) Mr Abdus Salaam
· Local training on Islamic Banking is critical
· One can opt for NBFC route for first five years or so.
· Put evidence before the Govt that Islamic Banking is better option.
· In Parliament, Target Muslim M.P. and present our view t o FM and PM
· Create list of statutory amendments that will be required.
· Keep Patience as the progress will be slow and steady.
V) Dr. Mufti
· Lobbying ,amendment & approval itself should be the business plan
· Utilize resources such as professional firms, lawyers, accountants etc
· Feasibility report to position a viable business model e.g. Lloyds of London, etc.
· People to speak on Economic/financial/ beneficial rationale and not on religion
· Sceptics in Muslim to be eliminated through mass awareness /education
· Impact analysis –quantifiable Sciences, statistical analysis etc.
· Seed money can come from a big player in UK/Qatar
VI) Mr. Kochar
· E & Y in Bahrain / KPMG can be engaged to initiate / study feasibility aspects.
· Create professionals e.g. training in Malaysian Institute of Islamic Banking certified Islamic Banking programs. Correspondent program with tutorials also feasible.
· A full fledge bank should be the target and not a cooperative or NBFC.
· One can set-up committee to do research
· Bilateral relationship e.g. Qatar FM to speak to Indian FM
· Use Domestic or Foreign players
· Islamic Banking to be positioned as innovative Banking –UK approach to Islamic Banking
3. Recommendations of End Future Course / Action
Chairman remarks on absence of women - “of the Men, for the Men and by the Men” will not work. The sessions should also involve “non-Muslim” brothers as well.
I) Mr. Batki
Where do we go from here:
Q 1) Relevance Islamic Banking : Ans: Yes
Q 2) Regulations whether permit Islamic Banking: Ans: No
Q 3) Steps – create
Q 4) Concerns – identify and find solution.
Starting Point:-
· Take up the matter with central government and Simultaneously with RBI
· This issue should be in public domain generally as such matters are to be treated confidentially but through healthy debate
· RBI will then become more alert, responsiveness and take timely action
· Other trade /finance organizations will also debate on Islamic Banking - favour / against – including impact on conventional banking
· Foreign banks – they are waiting to come to India so as not to loose out
· Islamic Banking will benefit lower masses –drive merits of this proposition to all.
· Identify flaws and reach consensus on broad basis.
· Govt to formulate legislation- Co-op bank /NBFC small changes (par on commercial banking and aligned to the banking sector).
· Legislation may come / be amended in piece meal –the “Vision” should be to have Pan India Operation
· Invite Funds domestic/Overseas – they are waiting for opportunities to be tapped
· Islamic Banking can come in India only after legislative Charges.
· Branches/Corporation/Subsidiary / foreign companies can operate side by side either conventional banking or an Islamic Banking window.
· India has the potential to become a hub for International banking for East, EU, Americas, etc.
· Disbursement of funds can be to non Muslim also – the world needs to be treated as a village.
· Goal –India can become a national / International hub of Islamic Banking as it has a very large Muslim population.
· Other Advantages for India — High rating of regulator, Infrastructure, Technology, etc.
II) Mr. Nurulla Siddique
· There are difficulties in Islamic Banking but it is possible to get relaxation from RBI/Government.
· Islamic Banking may not be able to give security to depositors.
· Best way is to go through Co-op-state/central Act as fund mobilization is easier
· Asking Govt/RBI Reaction should be through a modest approach for few Co-op to achieve Islamic Banking Goal.
· Cooperative banking can be increased from small unit to big/large units.
· Cooperative banking seems to be best suited model to achieve Islamic Banking.
III) Mr. Ausaf Ahmad
· Islamic Banking in India can be introduced through
· Full Islamic Banking
· Windows of Indian banks
· Windows of Foreign banks operating in India
· Foreign Bank to set up branch doing Islamic Banking
· Islamic Banking cannot neglect non-Muslim and must benefit all
· One needs to be unanimous and propagate the idea through public discussion
· Lobbying with legislator/Regulator is imperative.
· One can aim high (Mr. Batki) as hub of Islamic Banking or one can have a more modest approach.
· 2 or 3 committee of 2/3 selected people can make blueprint for India.
· How the final product will look thereafter will require detail studies, meeting, debate with community/scholar and only then one can approach RBI.
IV) Dr. M. Y. Khan
· Globalization and convergence of financial services is set to give tough competition to Indian banks even conventional bank.
· India is democratic and thus nothing can be emended / enacted before parliament approves.
· Lot of fun-fare will invite negative reaction from other group (e g. note on papers, BJP)
· Islamic Banking to be positioned as professional banking and not religion banking.
· Indian regulatory system/Financial services to dealt with patience and logic.
· Vast scope for Islamic Banking exists in India as it requires large funds in Infrastructure Sector.
· Indian capital market is most liberalize in the world and it has good financial infrastructure
· Products for Islamic Banking to be positioned on dividend bonds by PSUs and not profit and loss sharing theory.