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Sharia Banking and Fintech

As indicated by several financial services professional firms such as Ernst and Young, KPMG, PwC etc., no other viable alternative exists for the banks, but to adapt to financial technology. The age old concept Islamic banking is no exception to it. No wonder, if any startup or bank canvasses exposure in the field of Sharia compliant banking, it would have a massive business to take care of.

As of now, it is very unfortunate that most of the Islamic countries are not inclined towards fintech. Despite the fact presence of strong infrastructure and educated consumers is there, most of the widely Islamic nations have had very little to do with Fintech, owing to institutional reluctance, and lack of infrastructure and venture finance. While Islamic finance conceptually closely replicates conventional finance, just 1% of the global fintech investment pool has been directed to the Middle East and North Africa (MENA) region. And this is despite the fact that the region houses close to 25% of the global Muslim population. Fortunately, for the financial services landscape, this scenario is poised to change, thanks to concerted efforts from Regulators, Governments and Organisations.

As per Malaysia International Islamic Financial Center, Islamic Banking, which is governed by Sharia law, has been gaining momentum in over 600 Islamic financial institutions operating in 75 countries around the world. It has evolved from an ethical niche market to a mainstream financial services category, especially in the Gulf and the Asian and African continents. The Islamic Financial Services Board (IFSB) estimates the Islamic finance space to be worth US $2.1 trillion in 2017. The concept is largely propelled by three foundational pillars – Financial inclusion, acceleration of economic activity, and infrastructure and development finance.

For the purpose of standardisation and ensuring compliance of sharia law, Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) and the Islamic Financial Services Board (IFSB) have issued 26 Accounting standards and 11 prudential standards in Islamic finance. Additionally, Dubai Financial Services Authority (DFSA)introduced a framework for fintech companies to operate in the UAE while striking a regulatory balance between risk management and innovation in Islamic Banking.

Islamic countries are progressively leveraging the power of Sharia-compliant fintech, having established a supportive ecosystem or fintech hubs, incubators and accelerators, and even a regulatory sandbox.

Cairo (Egypt) has launched two accelerators while Abu Dhabi established the region’s first regulatory sandbox facilitating exploration of new products securely without full regulatory compliance. Malaysia, for instance, formed the first Islamic Fintech Association in April 2017 while the UAE initiated Fintech Hive to enhance the country’s Islamic fintech initiatives through collaboration between financial institutions and innovators. Dubai also hosted the Private Equity Fintech Forum in partnership with the MENA Private Equity Association to explore business expansion prospects and innovative approach of fintech participants. Widely regarded as THE Asian fintech Hub, Singapore has also invested in Islamic finance through wealth management and asset management tools.

Private fintech players like Kapital Boost and ClubEthis have also developed customised products for Islamic finance. Kapital Boost helps SMEs raise funds from investors through peer-based lending based on Islamic principles. While, ClubEthis helps investors discover social impact and real estate investment opportunities via crowdfunding.

We must try understanding with what exactly does Sharia Banking means. “Sharia” is actually the word for Islamic law and Islamic Banking or Islamic finance is known as Sharia-compliant finance. This type of banking is a practical appliance for the development of Islamic economics. So what basically in India we are doing wrong, which is kind of illegal in Sharia Banking that Islamic people need the Introduction of Sharia Banking in India

Starting with the first basic thing, and the most prohibited thing which is riba, which is defined as interest to be paid on the loan of money. Another thing is that in Islam there is no intrinsic value of Money.  Hence we cannot sell the money for profit, and this actually also prohibits of lending of money. Sharia also prohibits investing any money in businesses which are related to services and goods and is known as haraam, i.e. which is against Islamic principals.

How Sharia banking evolved

The very first Sharia bank which came into existence is the Tabung Haji in Malaysia. This was the first bank which came in high demand just for the cause of interest-free money for pilgrimage. As we all know most of the banks function via the interest that they charge for a certain amount of loan. So this was not possible for Sharia banking to work this way, and hence back in 1963, Tabung Haji got a certain number of depositors which keep on increasing and deposited over one billion Malaysian dollars. This investment actually enabled them to create more Sharia Banks in Egypt.

Another main concern for us will be how the bank will function if the bank is not charging interest.

These Sharia banks work on an interest-free structure. As we discussed earlier Riba or interest being prohibited, hence these bank does follow all the rules of Sharia. So in order to get some profit and keep the bank running, the person who opens a bank account, they provide them with profit or loss schemes instead of interest rates. Bank uses this money to invest in some business which doesn’t involve services and other things. Now the bank will either share profit with the customers or will share losses, hence the people who open up the bank account, always have a bit of risk in the same.

Now one of the most important thing that you might be thinking, why do we need such Islamic banks here in India. Starting with other countries, then they started to support the same, and respect the views of Islamic people by giving a window in the conventional banks for these types of Sharia Banking facilities. Countries like China, UK, US, Germany and some other countries are doing the same. United Kingdom became the first non-Islamic country to actually permit a complete Sharia compliant bank in their country which named as Islamic Bank of Britain.

Will India be benefited from the Sharia banking schemes?

Raghuram Rajan back in 2008 introduced an idea to get the same Islamic banking feature of interest-free banking i.e. Sharia banking schemes, to be operated on a much larger scale, and with this, they will be giving access to many other people who are not able to access such banking services.

There are tons of advantages of introducing an Islamic window in the traditional banks of India. Say for instance there are many Sharia compliant stock exchanges, and this will enable to attract a lot of funds in the domestic markets which will be a great move for the Indian economy.This will even allow Muslim community to invest in more projects, hence a larger amount of capital will be there for investment.

But there are a couple of reasons on why we must not encourage Sharia banking in India. Let us read a bit about the same

As we all know India is a secular country, and hence we must not encourage a banking system which is basically emerging from a specific religion. From past many years, we have our own banking system and we are quite ok with the same. But even the step of looking forward to actually establish an alternative in the form of the Sharia banking is an alarming move from the Indian government.

Another worry we must have for this bank is that it must be in profits so as to keep lending money to people, this can be attained as a practice as in, if someone needs an item of say x amount, then the bank must buy the item from the store, and then upscale the price of the item and sell the same, and hence it will be a much better option because it is not going to hurt the sentiments of the Sharia law.

Quranic verses that address the question of the role and the question of loans and debts include:

Al Baqarah (2:275): “God hath permitted trade and forbidden usury.Those who after receiving direction from their Lord, desist, shall be pardoned for the past; their case is for God [to judge, but those who repeat (the offense) are companions of the Fire: They will abide therein (forever).”

Al Baqarah (2:276): “Allah does not bless usury, and He causes charitable deeds to prosper, and Allah does not love any ungrateful sinner.”

Al Baqarah (2:278): “O you who believe! Be careful of (your duty to) Allah and relinquish what remains (due) from usury, if you are believers.”

Al Baqarah (2:280): “If the debtor is in a difficulty, grant him time Till it is easy for him to repay. But if ye remit it by way of charity, that is best for you if ye only knew.”

Al Nisa (4:161): “And their taking usury though indeed they were forbidden it and their devouring the property of people falsely, and We have prepared for the unbelievers from among them a painful chastisement.”

Ar Rum (30-39): “And whatever you lay out as usury, so that it may increase in the property of men, it shall not increase with Allah; and whatever you give in charity, desiring Allah’s pleasure — it is these (persons) that shall get manifold.”

These verses clearly mention about the rich people who lend money to be a bit on a softer side with the people who take loan, but still the new Sharia Banking window which RBI is thinking to put aside the traditional banking, is kind of still debatable, and must be thought thoroughly before any action on the same is taken.