Transcript Interest Free Banking- A Complete Social Responsible Banking

Interest Free Banking
A Complete Social Responsible
Banking
Dr. Abdul Majid Ansari,
Dr. Sirajuddin H Chougle,
Dr. Mohammad Moghess, (HoD).
Associate Professors, Department of Commerce,
Maharashtra College, Nagpada, Mumbai. 8
Statement of scientific question
addressed
1. Why Interest Free Banking is
Complete Social Responsible
Banking?
2. Why Interest Free Banking in
India?
3. How will it work?
Or will it survive?
2
Brief Description of Methodology
Secondary
Source
3
Why Social/Ethical deficit?
Types of Banks
Possibility of CSR
1. The banks based on
only commercial
principles
2. The banks based on
ethical/social plus
commercial principles
May or may not
become socially
responsible
Sure to become
socially
responsible
4
1. How Interest Free Banking is
Complete Social Responsible Banking?
Finances only for fully social and ethical business.
Works on the SHARIA (Islamic rules) principles:
• No finance for:
1. Alcohol/wine business
2. Interest based business
3. Drugs
4. Speculation
5. Lottery
6. Black-marketing
7. Hoarding
8. Vulgar/ anti-social activities
9. Prostitution
10. Gambling
11. Music and dance
5
2. Why interest free banking in India?
Two major socio-economic problems:
• Social/Ethical deficit
• Acute poverty (widening
gap between rich and
poor).
6
A Reason for widening
gap between rich and
poor
INTEREST
7
What’s wrong with interest?
• Interest system is not just. One party is assured
returns (interest) and the other is left with
uncertainty.
• Interest accumulates money in a few hands,
resulting Rich becomes richer and poor becomes
poorer.
• Interest based loans may create feelings like
jealousy, selfishness, greed, misery, narrowmindedness, and revenge.
• Capital itself alone is not a productive factor of
production, unless combined with others.
8
3. How will it work? Or will it survive?
Arguments against IFB:
• Zero interest means infinite demand for loanable
fund and zero supply.
• System would be incapable of equilibrating
demand and supply of funds.
• Zero interest would mean no savings.
• Zero saving means no investment and no growth.
• There could be no monetary policy since
instruments for managing liquidity could not exist
without a pre determined rate of interest.
9
The Experts Speak
1. “While IFB is provided in a limited manner
through NBFCS and co-operatives, the
committee recommends that measures be
taken to permit the delivery of interest free
finance on a larger scale, including through
banking system.”
(High level committee of planning commission of
India, report submitted to chairman, Dr. Manmohan
Singh, on 12th September 2008)
10
The Experts Speak
2. “Another area that falls broadly in the ambit of
financial infrastructure for inclusion is the
provision of interest free banking.”
(Dr. Raghuram Rajan Committee. (financial sector reforms
committee report)
3. “The ethical principles on which islamic finance is
based may bring banks closer to their clients and
to the true spirit which should mark every
financial service”.
(The Vatican official newspaper L’Osservatore
Romano, said in an article dated 5th march 2009.
11
The Experts Speak
4. Islamic banking may be the solution
to farmer suicide crisis in Vidarbha.
(M S Swaminathan, Father of Indian Green Revolution)
5. It (Islamic Banking) is an idea, whose
time has come.
(MBN Rao, Chairman, Indian Bank Association, spoke in
august 2007
12
The arguments in favour:
• IFB are for all and not only for Muslims.
• There are 265 successful interest free banks in 40 countries with an asset
of $ 400 billion.
• UK, Hongkong, Singapore and France have incorporated Islamic banking.
• No fixed rate of interest does not mean zero returns on capital.
• The return on capital is determined ex post and the magnitude of the
return on capital is determined on the basis of the return to economic
activity.
• This expected returns determine the investment.
• The expected returns and incomes determine savings.
• Positive growth is possible in such a system.
• Monetary policy would function as in the conventional system, its
efficiency depending upon the availability of the instruments designed to
manage the liquidity.
13
Indian situation for Islamic Banking
• The first Islamic Bank with active involvement of the Kerala
government is likely to start operations in Kochi very soon.
• Out of 6000 listed BSE companies, 4200 are shariah compliant
• BSE has a shariah compliant index called BSE TASIS shariah 50
index.
• Reliance Capital Asset Management has two Islamic Funds
which are managed from Malaysia.
• Bechmark Asset Management launched India’s first shariah
compliant exchange traded fund on 4th February 2011.
• Reliance Mutual Fund, UTI Asset Management, Way2wealth
and Edleweiss Mutual Fund are shariah compliant.
14
Why interest is Haram (prohibited) in
Islam?
1. Economic
2. Moral
3. Social
15
If interest is banned
•Effects on Savers
•Effects on Banks
•Effects on government
finances
16
Why Conventional Banking may not be
Complete Social Responsible Banking?
• It finances all types of
business (social or antisocial).
• By charging interest, it directly
helps in widening the gap
between the rich and the poor.
17
How do interest free banks work?
• On profit and loss sharing basis
(principle of equity and justice)
• Can collect deposits, directly invest in
business or give loan to businessmen
on P & L basis.
• Musharika (Partnership) and
Mudariba
18
The Islamic Financial System,
perfectly suitable for CSR
1. Trusteeship
2. Care for Others
3. Productive effort as a means of serving God
4. Application of the Shariah Rulings
5. Treating Wealth as a Means and not an End
6. Proper Functioning of the Market
7. Protection of Consumers
8. No monopolies
9. Zakat
10. Qard-e- Hasana
19
CONVENTIONAL BANKS
INTEREST FREE BANKS
1. The functions and operating modes
of are based on RBI guidelines.
1. The functions and operating modes
are based on RBI guidelines and
Shariah.
2. The investor is assured of a
predetermined rate of interest.
2. It promotes risk sharing between
provider of capital (investor) and the
user of funds (entrepreneur).
3. It aims at maximizing profit without 3. It also aims at maximizing profit
any restriction.
subject to Shariah restrictions.
4. It does not deal with Zakat.
4. It has become one of the serviceoriented functions of the Islamic banks
to be a Zakat Collection Centre.
5. Lending money and getting it back
with compounding interest is the
fundamental function.
5. Participation in partnership business
is the fundamental function.
20
CONVENTIONAL BANKS
INTEREST FREE BANKS
6. It can charge additional money 6. These banks have no provision
(penalty and compounded interest) to charge any extra money from
in case of defaulters.
the defaulters. Only small amount
of compensation and these
proceeds are given to charity.
Rebates are given for early
settlement at the Bank’s discretion.
7. Very often it results in the
bank’s own interest becoming
prominent. It makes no effort to
ensure growth with equity.
7. It gives due importance to the
public interest. Its ultimate aim is
to ensure growth with equity.
8. Borrowing from the money
market is relatively easier.
8. Borrowing must be based on a
Shariah approved underlying
transaction.
21
CONVENTIONAL BANKS
INTEREST FREE BANKS
9. Since income from the
advances is fixed, it gives little
importance to developing
expertise in project appraisal
and evaluations.
9. Since it shares profit and
loss, the Islamic banks pay
greater attention to developing
project appraisal and
evaluations.
10. Give greater emphasis on
credit-worthiness of the
clients.
10. Give greater emphasis on
the viability of the projects.
11. The status of a
conventional bank, in relation
to its clients, is that of creditor
and debtors.
11. The status of Islamic bank
in relation to its clients is that
of partners, investors and
trader, buyer and seller.
22
The challenge of adopting an Islamic
Financial System
•The challenge of
adopting an Islamic
financial system
•The challenges facing
individual Islamic banks
23
Suggestions and Recommendations
• Permission from the RBI is required.
• Ethical aspects should be highlighted.
• Detailed need based Research and
Development should be undertaken.
• Willingness to discuss various issues.
24
Thanks a lot.
A dishonest rich
businessman or
organization is greater
liability to a nation than a
poor man or organization.
25