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Sunday, 18 November 2012

India: RBI Needs to Evaluate Principles of Islamic Monetary System

RBI has left with the only tool (of interest rate) to control liquidity for balancing inflation and growth rate, but has so far failed to allow India grow better without inflation. Whenever with intention to control inflation, RBI screws interest rate, economic growth rate has tumbled. After all exercise of balancing between inflation and growth rate, RBI Governor said that growth rate will decline and inflation will increase. His wordings on this issue are as follows:
“On the basis of the above considerations, the baseline projection of GDP growth for 2012-13 is revised downwards from 6.5 per cent to 5.8 per cent. “
“Taking the above factors into consideration, the baseline projection for headline WPI inflation for March 2013 is raised to 7.5 per cent from 7.0 per cent indicated in July. Importantly, inflation is expected to rise somewhat in the third quarter before beginning to ease in the fourth quarter.”
So, when RBI will come to conclude that monetary system followed by capitalism from the United Kingdom and spread up by the United States has no answer to the question ‘How can we achieve anti-inflationary higher growth rate’. The Monetary Economics developed after Keynes and World War II has no answer to problems arose due to deficit finance and side effects of interest accrued in the economy. The concept of preserving currency’s purchasing power is not discussed, but it is accepted by all that growth will lead inflation. Economists are not taught about growth without inflation. Now after global financial crisis and economic recession, if bailouts and quantitative easing are not giving desired results, we must look other options including discipline of Economics and monetary system. It may not be based on any renowned economist’s theory, but could be simply based on principles of religion like Islam.
RBI has been so far not in favour of Islamic Banking. RBI Governor, following statement published in the Times of India, is appointing those who expect RBI believes in finding optional means and ways to regulate and facilitate banking services.
“The central bank had also received a proposal to consider whether it was possible to permit Islamic banking in India. Current banking regulation requires interest rates. RBI charges interest on the funds it provides banks under repo and it also pays interest. Also, we do not permit risk financing while Sharia finance takes a position on this. There is the issue of dual regulation by Sharia board and RBI. We have said that should the government want this, they should have a new law" said Subbarao.”
Countering the first excuse, we know that Section 17 (1) of the Reserve Bank of India Act 1934 states that the bank shall be authorised to accept money on deposit without interest from and the collection of money for the central and state governments, local authorities, banks and other persons.
Countering the second excuse, we should know that we all are facing trouble today because of risky finances extended by interest based banking and financial system. RBI Governor seems denying the lessons we learned from the global financial crisis and recession thereafter that banking and finance without sound principles has shifted financial risks over others and at last collapsed because no one was to share the risk. The principle behind Islamic banking promotes sharing of risks instead of shifting it to others. It does not mean Islamic banking finances risk projects. In fact, Islamic finance prohibits financing activities involving high speculations and uncertain risks. But one can only discuss and analyse the model if there is any will to do so. One cannot force any monetary regulator by adopting any new model if they are not ready to do so.
In 2005 our Prime Minster Dr. Manmohan Singh (renowned Economist), visualising the significance of Islamic Banking, had asked RBI to study feasibility of Islamic Banking in India. But the Working Group headed by then Executive Director and present Deputy Governor Shri Anand Shinha (without interacting with experts of Islamic Banking and Finance, just on basis of internet resources) concluded that Islamic banking is not possible without amending laws. This denied possibility of experimenting those products and services which do not need any amendment in any Indian Act. They have cancelled licence of NBFC experimenting Islamic financial transactions and denied registration of Islamic NBFC in India.
How one can put any sort of argument behind monetary regulators if they don’t seek any comments, arguments or advice on Islamic Banking. RBI has so far replied to the applications in one line concluding either that it is not possible under present regulatory regime or is seized of the issue. RBI has observed avoiding any scope to call a workshop or seminar to study principles and practices of Islamic Banking and Finance. This could have been done by calling upon active players and experts of Islamic banking and finance for interaction.
RBI is not only monetary regulator for India but is also Government advisor on financial and economic aspects. The Government seeks RBI advice to counter inflation, currency devaluation and target economic growth rate. RBI is not only bank for the Government but is also responsible for increased public debt. Fiscal consolidation cannot be done without RBI support. If RBI manages market loans to finance public deficit, it can also raise zero interest or equity based finance which could reduce fiscal deficit.
We seek RBI study the fundamental principles of Islamic Banking and adopt suitable principles for managing monetary and banking system if we all are benefitted. We are facing consequences of global financial crisis and recession thereafter just because of avoiding sound principles. Islamic banking in India may be termed as Participatory or Commercial Banking and must not be introduced to please any minority community. It must be studied thoroughly and adopted only by a secular institution like RBI in a secular manner if deemed fit for the nation as a whole. India adopted principles of democracy for political system, likewise we can adopt the principle of risk sharing system in banking and finance as well.
RBI seems putting just excuses for Islamic Banking as it points risk factor. Has RBI learned any lesson from Sub Prime Mortgage crisis and insulating banks from corporate losses? Is the huge lending to companies like Kingfisher and the loan waiving of Rs. 72,000 crore without indulging in risk factors? What RBI as regulator was doing when compounded NPA in agriculture sector stood to Rs. 72,000 crores and ultimately the tax payers bore those losses? If RBI wants to allow safer and principle-based banking, it may appoint its own Shariah Board for ethical guidance and technical board to control transactional activities. The NPAs in interest based banks are increasing. RBI as silent observer instead of active regulator has caused recent crisis in Micro Finance sector and collapse of Micro Finance institutions causing increased NPAs for banks. RBI hardly attempts to learn lessons from mistakes.
It is better that RBI discusses and analyses the financial merits and demerits of principle and faith based participatory banking and finance (need not call it Islamic Banking). India need anti-inflationary monetary policy stand which may be by allowing option to bank on equity instead of only interest factor. The Government needs to come out of diplomatic style by referring the agenda to RBI and make suitable changes to allow RBI frame suitable regulatory framework and infrastructure to provide diversified banking services for all.
Rupee value depreciation is devastating for the economy and fiscal deficit is worrisome for all of us. Public debt doesn’t allow common man to get benefits of growth. There are persons who are prejudiced about Islamic banking that it will help funding Islamic terrorists, but the fact is that terror has no scope in Islam and there is not a single incident of terrorist funding incident in any Islamic Bank around the world so far; and the reported incidents of money laundering had been on interest-based banking not in any Islamic bank.
If we need to let India grow for all Indians (not only for corporate sector) we need a banking system supporting anti-inflationary inclusive growth model. Call it Participatory or Commercial Banking, but let RBI hold it so that there may not be any insecurity among any community. Islamic banking will not allow black money; it would help the poor grow without debt burden and ensure sharing of fruits of development by all (instead of capital providers only). So, it is requested that either Dr. Subbarao make sure that RBI is going to reduce inflation, public debt and currency devaluation with desired increase in GDP growth rate, or must call a debate to discuss optional monetary policy (wherein Interest may not be only mechanism to control money market).
It is advisable that RBI should evaluate principles of Islamic monetary system and see whether those principles can guide India have better monetary policy to safeguard our banks, financial institutions, agriculture, industries, manufacturing industries, exports, currency value and more importantly with anti-inflationary but inclusive high growth rate.
Hope RBI will genuinely review the matter seeing it as a national matter to resolve the country’s financial and economic issues instead of counting it as a religious issue related to minority community wherein scholars can have any say. RBI can hold Shariah Advisory Board as well as other technical boards to supervise and regulate Islamic Banking in India. This would resolve threats of any misappropriation and misuse of opportunities. We need to understand that in absence of any regulation the potential Islamic investment funds are being deployed into non-productive and non-desired channels. This needs to be resurrected for the sake of national economy and welfare of people of India in general. Muslims should not be left aloof to find their own means to invest and channelize their savings in undesired projects and channels.

(Radience Views Weekly / 18 Nov 2012)

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