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Sunday, 30 November 2014

Small-ticket Islamic banking may become possible with payment banks

mild form of Islamic banking - where the key tenet is that interest will neither be paid nor received - may become possible if one reads the fine print of the Reserve Bank of India's (RBI's) new guidelines for the setting up payment banks.
A key guideline for payment banks is that they can only invest in government securities upto a year's maturity - which means treasury bills. T-bills upto 364 days' maturity carry no interest; they are essentially discounted instruments where the face value is paid on maturity. For example, a 91-day T-bill of Rs 100 face value may be bid for (or offered) at Rs 98. No interest is payable, but one can deduce an in-built yield rate from the discount (Rs 2, in this case) and the holding period (91 days).
This means any Muslim non-bank financial institution can strictly follow the Koranic injunction on non-receipt of interest (called riba, which also means usury) - at least at the investment end of banking.
That leaves us with the question: what about deposit rates? Is that not riba, and thus sin in some Muslims' eyes?
True, but payment banks can get around this by offering interest-free deposit accounts - where the gains are given in the form of transaction discounts. A payment bank account, in any case, is not a big-ticket savings bank account; it is intended largely for settling transactions - paying bills, making purchases, making small payments to third parties, etc.
Two possibilities exist: one way is to offer those who hold zero-interest accounts to be compensated through discounts. For example, if the normal interest rate is, say, 5 percent on a deposit account, discounts equal to the value of 5 percent can be offered by the bank on bills payable to, say, a mobile company, a power company, or on a Flipkart/Amazon purchase, etc.
The other way is to allow depositors to also become shareholders or profit sharers. This would need the RBI's indulgence and permission, but if a proportion of the profits of the payments bank can be earmarked as dividends for depositors, this issue can be sorted out. A simple tweak of the guidelines, where the bank will be allowed to pay dividends annually on zero-interest accounts would do the trick.
Beyond Islamic banking, which is actually nothing but interest-free or profit-and-loss share banking that has been given a sectarian title, it is possible for e-commerce or mobile companies to offer customers discounts on bills in addition to their normal interest earnings on savings deposits.
The RBI has not been too keen on Islamic banking for the simple reason that you can't run two separate regulatory regimes in one integrated banking system. However, payment banks are an option that NBFCs who want to tap the sharia-conscious customer can look at closely.
(First.Biz / 28 October 2014)
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