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With no official nod for halal funds, money scams arise

Some finance experts have been campaigning for the formal recognition of Islamic banking, arguing that it will bring more Muslims into the financial mainstream

Investigation authorities are probing complaints that a Bengaluru-based company, which promised to route investors’ savings into ‘halal’ investments, cheated them of ₹2000 crore.

Halal or Sharia-compliant services are run on religious principles that consider the taking and giving of Riba (interest) a sin. While investors earn no interest, they get a share of the business profits through equity, lease rents and dividends.

Many countries, some of them non-Muslim, have companies offering financial services that are compliant with Sharia laws. India, regulated by the Banking Regulation Act 1949, does not recognise such banking, but there are investment options for those who do not want to violate religious laws while investing their savings. There are mutual funds that work according to religious principles though they are classified by the religiously-neutral term ‘ethical’. The first such fund was created in March 2009. The fund explicitly excludes stocks of companies that deal in interest-based banking, tobacco, alcohol, gambling, processing of pork and other non-halal food products. The manager of one of these funds told this reporter that when the product was launched a large proportion of investors were non-Muslims who were attracted by the term ‘ethical fund’. There are also co-operative banks that offer such services, but India’s experiment with Islamic finance has been fickle.

In 2008, the Committee for Financial Sector Reforms, chaired by the then Reserve Bank of India (RBI) government Raghuram Rajan, recommend the idea of interest-free banking. A few years ago, a public sector bank announced that it will start Islamic banking if the RBI approved the idea. The plans never took off.

Some finance experts have been campaigning for the formal recognition of Islamic banking, arguing that it will bring more Muslims into the financial mainstream. Studies have revealed that Muslims are not well represented in the banking system. The community forms about 14% of the country’s population, but the Rajinder Sachar Committee, which reported on their social, economic, and educational conditions, estimated that their share of bank deposits was 7.4% in 2005 and just 4.7% of the loans.

More recent studies show that the community’s presence in formal banking is still marginal. The National Sample Survey Office survey on debt and investments in 2013 reveals that 62.69% of Muslims operated a bank account compared to 73.57% Hindus, 80.26% Christians and 96.99% Jains. Only 8.72% of Muslims had post office savings accounts compared to 14.11% Hindus.

The idea has also faced opposition from Hindu political groups that looks at the introduction of Islamic banking as another attempt at Muslim appeasement.

Shafeeq Rahman, a researcher in Islamic economic thought, said that Muslims have an unmet need for Shariah-compliant investments. “Whenever they receive any such venture they are attracted to it because they want to avoid traditional banking (that involves interest),” said Rahman. “These companies also offer higher rates of return, sometimes around 15-20% annually, compared to traditional banks. Even IMA (I Monetary Advisory – the company accused in the Bengaluru scam) gave such returns initially.”

The Sachar Committee report says that 20.5% of Muslim workers are in manufacturing, compared to 12.4% among Hindu upper castes. Because they are more likely to run their own businesses, Muslims have more need for credit and go to groups that offer halal financial services.

The problem is that these institutions use the claim of Shariah investments to lure depositors, but these groups are not regulated by government agencies. “This has not happened with Shariah funds in South Africa, UK and other non-Muslim countries. If the investments are not regulated by the government there will be an IMA,” says Rahman.