Almost 90% of Those Who Save in Banks never Get Finance from Banks

In an exclusive interaction with The Policy Times, Dr. Shariq Nisar, Director, Octaware Technologies Ltd. and expert on Islamic banking shares his views on what is Islamic banking, problems of the current financial system, and why there is a need of alternative banking.

Almost 90% of Those Who Save in Banks never Get Finance from Banks

Dr. Shariq Nisar is Professor at Rizvi Institute of Management Studies and Research (RIMSR). Also, he is Adjunct Professor at ITM Business School where he has setup India’s first Center for Alternative Finance. Prior to joining RIMSR he worked at the Harvard Law School, USA as Senior Visiting Fellow. Before moving to academics Shariq spent over a decade and a half in the Indian finance industry developing financial products and services that aimed at improving financial inclusion and increased investment in socially responsible sectors.

He made some seminal contributions to India’s financial sector by launching India’s first shariah index with the Bombay Stock Exchange, first mutual fund scheme and first venture capital scheme approved by the Indian capital market regulator, SEBI. He also played key role in the design and launch of Shariah Index at Chittagong Stock Exchange, Bangladesh. He was invited to make presentation before the Select Committee of Indian Parliament during the discussion on Insurance Amendment Bill 2015. Shariq is recipient of PhD in Economics from AMU Aligarh and he holds board positions at many companies.

In an exclusive interaction with The Policy Times, Dr. Shariq Nisar, Director, Octaware Technologies Ltd. and expert on Islamic banking shares his views on what is Islamic banking, problems of the current financial system, and why there is a need of alternative banking.

Q.What is wrong with the current global financial system?

Answer:- Financial system is primarily needed to mobilise savings and pass it on to businesses to help in economic growth and development. Looking at this purpose there are many issues faced by the current financial system. First of all, in most countries the system is not able to mobilise savings from a vast section of society who save in smaller amounts. Another issue is the business financing model, especially the banking system has proven itself incapable of supporting the entrepreneurship. Banks all over world prefer to give bigger loans to few selected set of people. Almost 90% of those who save in banks never get finance from the banking system. Consequently, there is huge financial exclusion and disparities in income and wealth exacerbated by the financial system. Over the years we have been observing disproportionate concentration of human talent into the financial system at the cost of other and more important sections of the economy. In quest to make money the system appears to have lost the sight of its purpose and added to its list products that are exotic but hardly useful to the society at large. In India banks regularly get capitalized by government using tax payers’ money.

Q. Why the world needs alternative banking or financial system (Islamic finance)? What does it offer unique that the current financial system isn’t offering?

Answer:- Uniqueness of Islamic finance (it’s also known by ethical, special, PLS, participatory finance etc.) lies in it staying true to the objective of financial system. Wealth is not created in the financial system, it gets only redistributed there. Wealth is created in the real economy. Wealth creation in the financial system is notional. Unless the economy grows even the interest burden created by the financial system keeps piling up and becomes unsustainable in few years. Dozens of countries earlier and in recent past have suffered heavily for their inability to channelize savings to real economy. The basic philosophy of Islamic finance is money cannot earn money by itself. To earn wealth capital must be applied to economy or an asset. This requirement addresses many serious flaws in the present financial system.

Q. How is the Islamic banking sustainable when its founding principle is interest free?

Answer:- When we say, “interest free” it does not mean that it will become a charity. In economic theory “interest” is the return to the capital provider but in today’s context interest only means return on money lent while guaranteeing the principal amount. This is a narrow definition of interest. Islamic philosophy requires the capital provider to share the enterprise risk along with the entrepreneur. Not doing so exposes the entrepreneur to even more risk which hampers entrepreneurial activities in the society.

Islamic banks and financial institutions earn profit by partnering with the entrepreneurs and trading in goods and services required by their clients.

Q.How do you see the western and non-Islamic world accepting the alternative banking?

Answer:- There are many factors. Some of them are attracted purely for business reasons. But a sizeable portion of the society has begun to appreciate the values behind Islamic finance principles. No egalitarian society or government would want to let all the financial resources of a country used only by a small group of people. Democratization being today’s trend, governments in many countries have shown commitment to make the system also cater to the vulnerable, excluded and marginalized sections of society. Financial inclusion, ethical investments, green bonds, ban on harmful financing is the trend inspired by Islamic finance principles.

Q.Kindly share your experience and contributions in India in the field of Islamic and alternative banking

Answer:- I will talk about my experience but would not talk about my own contributions. My own contribution is best left to others to write if they will. India is a very typical case for Islamic finance. Economic historians caste India as the birth place of Islamic economics and finance but when we see around we find India the most backward in the field of Islamic banking and finance. There are many reasons for that backwardness but most important among them is the historical legacy of country’s partition on religious lines. Indian policymakers are suspicious of supporting anything that comes with a religious tag. There is a general lack of trust about Muslims and their religion in the minds of majority community. Politicians thrive on this lack of trust and therefore there has never been a serious attempt by policymakers to improve inter community relations. Muslims are also to be blamed for this lack of trust. Better of segment of the community still carries a sense of superiority over others. There is also an understanding that Islamic banking, as the name suggest, is a communal issue. This is not. This is a business issue in my opinion and I have always been pursuing it like that. Justice is the corner stone of any stable society. Justice in economic and financial matter is not just the requirement of Muslims, it’s the requirement of all. In fact, Muslims are not even present in the financial sector to avail the benefits of Islamic banking, even if it’s allowed. It’s the mainstream financial sector that will benefit from this. Don’t we want Indian financial institutions to go and get business from the middle east, far east, south east Asia etc. By not allowing Islamic banking we are causing harm to none but our own financial institutions. We are reducing their business prospects. When GICRe lost many businesses in the Middle East owing to its lack of offerings we helped them stabilized through a product that made them competitive in the Muslim market of the middle east and south Asia. Now the company is getting Islamic finance business even from Sri Lanka.

Kerala Government wanted to promote an Islamic finance company to raise financial resources to develop infrastructure in the state. The company was taken to the court and after lot of struggle and expenditure the company won the case in the Kerala High court but it lost the enthusiasm to capitalize on the opportunity. We had procured USD 500 million commitment but the investors got scared.

In the globalized financial world it’s against our own interest not to allow our own institutions to offer products and services offered by others. It comes at a great economic cost!

Some private sector players have been sympathetic to financial exclusion and also aware of the opportunities available but owing to the politically charged environment they are unable to push it hard.

There is a miniscule population of Muslims engaged in running some small banks and financial institutions but they cannot be expected to lead any change. They are too incompetent to run their own financial institution lest they generate any hope and confidence either in the regulator or the community. Muslim mass has other important priorities at hand than to get mobilised for this.

Despite all there are many efforts that are under experimentation at many places in the country. Good thing is some of the bright members of the community have started focusing on this aspect and it’s hoped they will help bring some worthwhile changes in the attitude of our countrymen.

Q.How do you see the potential growth and opportunity in India and across the world?

Answer:- It is not good to look at opportunity just in terms of numbers. Islamic banking is an idea whose time has come. It will be ignored only by people who are biased and prepared to compromise on people’s welfare. Those who are rational and have empathy will not ignore this and I am an optimist.

Q.Please brief us about BSE TASIS SHARIAH INDEX. How is its performance recently and see future of such indices in India and other countries?

 Answer:- The index is no longer active, it was closed in 2013. BSE now has other shariah index and so does NSE. Nifty500 Shariah has year on year performed better than Nifty 50. Shariah filters get stronger stocks and naturally their performance is always superior. Indian capital market regulator Securities and Exchange Board of India (SEBI) has allowed many shariah compliant products in India and we should capitalize on that.

Q.What is the government position on Islamic Banking in India?

Answer:- GIC Re is actively offering Islamic Reinsurance services in many countries but domestically it’s inconvenient for the current government to support Islamic banking. They want to live by their image.