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Mainstream, VOL L, No 11, March 3, 2012

Islamic Banking in India at the Service of Pan-Islamists

Sunday 4 March 2012



The author has sent the following article explaining the background of its evolution that reads: “This article in its present form has evolved out of a previous one published in EPW (May 7-13, 2011) as Commentary and an even earlier opinion piece that appeared in The Times of India (July 28, 2008). While updating the present article I undertook further research in this field by taking into account a wide range of literature that has been published on the subject as well as the final decision of the Kerala High Court (February 3, 2011) relating to the issue. Also, since a commentary in a national daily has its limitations and specific style and as considerable time has elapsed since its publication, the present article varies a great deal from the commentary published in The Times of India. The resultant essay, therefore, is a much expanded and detailed work. Both advocates and opponents of Islamic banking may find flaws with my views, which I welcome wholeheartedly keeping in mind the best traditions of democracy in this country. I also hope that in keeping with the same spirit they will accept the need for a debate on the issue and welcome my take on Islamic banking as my attempt to understand and contribute to its literature.”

The debate relating to the practical application of Islamic principles in the context of the modern world and the current state of geopolitics is a vexed one for Muslims. Islamic banking or Islamic finance is central to the enterprise of those within the community who wish to wield power in the name of Islam and alienate Muslims from the rest of the world. They certainly want to construct an imaginary Muslim world not around any positive or constructive values, but rather around the derogatory issue of Muslim bashing. The debate on Islamic banking, thus, is one that brings the tension between Islamists and others quite nakedly to the fore. In this tension, the everyday humiliation that the ordinary Muslim faces in the current scenario, especially in the aftermath of the 9/11 attacks and growing Islamic terror and its repercussions, helps Islamists consolidate their arguments and forces.1
A writ petition filed in the Kerala High Court [W.P.(C) No. 35180 of 2009–7 December, to be precise], and the court’s subsequent stay order given on January 5, 20102 by the Chief Justice S.R. Bannurmath and Justice Thottathil B. Radhakrishnan and the final judgement delivered by Chief Justice J. Chelameswar and Justice P.R. Ramachandra Menon dismissing the petition on February 3, 20113 has brought the issue of Islamic banking into sharp focus, necessitating a public debate on its various aspects. In this context, the proselytising efforts of certain religious organisations also comes to mind, particularly due to their belligerent mission to propagate a radical interpretation of Islam from which also stems their rejection of conventional banking practices as haram, implying that they are incongruous with the tenets of Islam. This just forms part of their strategy to mobilise more Muslims into their ranks. Politics always revolves around economics, which explains the ploy of radical Islamic groups attempting to implement one or the other model of Islamic banking as part of their agenda.

This particular case started after the Kerala Government’s plan to set up India’s first Islamic interest-free bank aiming to attract investors primarily from the Gulf. The Kerala High Court’s stay order was a welcome intervention as it reiterated the secular principles of the nation and halted, even if provisionally, the attempt to introduce a system of banking favouring a particular community in a secular state such as India. This came after a slew of arguments and counter-arguments on the issue of Islamic banking, primary among which was the aforementioned writ petition filed in pubic interest by former Union Law Minister Subramaniam Swamy against the registration of the state owned Islamic finance company, Kerala State Industrial Development Corporation Limited (KSIDC).4 His objections were twofold—one, that such an interest-free Shariah-compliant financial company was contradictory to the operating banking laws of the country, and two, that “the Shariah is the canon law of Muslims. A financial services company set up with government participation which would follow the canon law of a particular religion is a clear instance of the state favouring a particular religion.”5 This was challenged by a counter-affidavit filed by T.P. Thomas Kutty, the then Deputy General Manager (Projects) of KSIDC on behalf of the company, who aligned the establishment of such an institution to industrial development in Kerala and alluded to targeting untapped Gulf money that could only be invested in a Shariah-compliant bank. He remarked that “…mega projects cannot be implemented without the required source of capital…” and in such a scenario “it was decided to avail of funds from the huge unutilised funds in Gulf countries and with Non-Resident Indians who are averse to collecting or receiving interest on deposits or loans of any kind in accordance with Shariah Principles followed by them”.6 The latter opinion had the underlying assumption that investors, at least a section of foreign investors, need not comply with the law of the land and that rather the law of the land would be bent to suit such investors.

The final judgement, nonetheless, went in favour of KSIDC: “… a division bench comprising Chief Justice J. Chalameswar and Justice P.R. Ramachandra Menon dismissed petitions objecting to the creation of an Islamic financial institution and said the proposed body was to work in accordance with financial laws of the country even while it complied with Shariah rules.”7 Further, “Dismissing the petition, the court observed that although the institution was based on the principles of a religion, its motive was not to propagate the religion and the state’s participation in it was purely based on commercial prospects.”8 Most media reports welcomed this with effusive, positive headlines as a step in the right direction after a continued pro-Islamic banking struggle by Islamic scholars.

The problematic aspect of this analysis is that the media has erred once again in over-simplifying the matter assuming that all Muslims are in favour of introducing Islamic banking in India and that the so-named ‘Islamic scholars’ are the true representatives of the Islamic voice in the country if such a thing is at all possible. The current state of geopolitics necessitates that we do not repeat the same mistake of assuming that Muslims are an amorphous, ambiguous group represented by self-appointed ‘scholars’ who proscribe to a radical and strict interpretation of Islam completely subject to a Shariah-compliant way of life. Liberal Muslims and members of the community, who ‘God’ forbid may have divergent or even subversive views, are not even considered representatives, let alone true representatives of the community and are left on the fringes by the media which, on the contrary, gives ample voice to the radical wing of the community.

A more impartial and enlightened view of the community’s take on the issue and other issues can emerge if the media and civil society alike make the effort to delve deeper into a cross-section of Muslim opinion, subversive and submissive alike. The community’s interests will be better served if the media takes notice of not just the proclamations of self-appointed Islamic scholars but also the secular voices, however subdued, scattered, unorganised and divided they may be. Conversely, it is high time that these voices also come out in the open and reiterate that the community and, at least, sections within the community are willing to participate in the globalised economy as equal citizens and do not want any concessions and mollycoddling to make this shift. Notwithstanding the High Court’s decision, which can be viewed as an individual case at best, we must not take this decision to be the final word on the broader issue of introducing Islamic banking in India. In fact, civil society needs to reinforce the nation’s secular values against any developmental initiative that has religious overtones and cannot be beneficial in the long run.

The present article deals with the issue of Islamic banking with special reference to the Indian banking system and within the wider ambit of contemporary social realities. A conscious attempt has been made to avoid confining the present argument to merely Islamic principles vis-à-vis banking, which is usually the premise of academic discussions on Islamic finance, in order to provide a broader and alternative perspective of the issue.

My take on the issue is informed by the goals and secular spirit of the Constitution of India and not just its letter—which is interpreted by different vested interest groups as and when the need arises. The state as a secular entity has always been anathema to religious forces, notwithstanding those that particularly practise politics in the name of Islam. Islamic political parties, for decades, stridently opposed the word ‘secular’, misinterpreting it as atheism. This raucous hatred of the word and its proponents was, however, toned down as a political ploy in the 1980s when the Hindutva forces gained decisive strength and the Islamic ones badly needed the support of secular voices. It is a different debate altogether as to what extent this marriage of convenience between the Islamist and secular forces, particularly the Left parties of late, have damaged the cause and fibre of secularism and the formation of a healthy civil society. By forging an alliance with Right-wing Islamic forces, the secular enterprise has been unable to widen its appeal and has opened itself to censure by other Right-wing forces.

TO return to the central theme of my essay, the issue of interest-free banking is drawn from the Qur’an, which prohibits levying interest. How-ever, it must be specified that this prohibition applies to the practice of usury and not bank interest as we know it now, as modern banking was, of course, unknown when Islam came into being. The rationale behind the abhorrence of usury and of any business dealing solely in money in Islam is based on the exploitative nature of such practices. The rapacity of usurers and moneylenders in their dealings with borrowers has been recorded throughout history and from all cultures of the world. Conversely, usury was also exploited as one of the premises on which anti-Semitist propaganda was built in the Western world, that contributed to the stereotyping of the Jewish community and led to the holocaust. One therefore needs to exercise caution before drawing parallels between usury and modern banking or aligning any one community to a particular social or economic practice that can extend into the common civic space.

In the modern globalised economy, however, financiers and circulation of money play a very important role, which have a wider reaching effect on social and political factors as well. Switching from such a deep-rooted interest-based economy to an interest-free one cannot be made prematurely and will no doubt inflict more damage than can be fathomed. If today, however, any Muslim Government were to provide a feasible paradigm and successfully introduce an interest-free economy taking into consideration both social and political repercussions, it would certainly lead to a new economic order. As of now, this is still an idyllic dream.

Nonetheless, given the Islamist propaganda against modern banking, the majority of Muslims, mainly poor and lower middle class, who want to avail of modern banking facilities but do not want to appear to be doing so, deposit their savings in a bank while refusing to accept interest in the belief that they are conforming to the dictates of Islam. According to a report published in the Journal of the Reserve Bank of India (RBI), “it is reported that in India, thousands of crores earned in interest is kept in suspended accounts, as believers do not claim it…”9 A different aspect is brought to the fore in a 2009 article in the Frontline on the fraught issue of Islamic banking: “Muslims constitute over 15 per cent of the population in India but they hold only 12 per cent of the accounts in the 27 public sector banks…This financial exclusion could be because of a certain mindset prevailing in the banking sector, which has categorised Muslims and Muslim-dominated areas as ‘negative zones’ (this is documented in the Sachar Report), and also for reasons of faith.”10 Whether this exclusion of Muslims from the benefits of banking is a flaw of modern banking or its misconstrued alignment with traditional usury is an open-ended question, a problematic aspect of which remains the blanket rejection of conventional banking by Islamists. This, the common gullible Muslim takes in good faith to be true and avoids accepting the aforementioned interest and thereby remains on the fence so to speak—s/he is neither the beneficiary of the common economy nor, in the absence of any parallel Islamic bank, the recipient of any profit shared with such a bank. The loser in all this, as can be expected, is the ordinary Muslim citizen.

With the shift in Muslim politics, the idea of promoting Islamic banking as a parallel to conventional banking terming it as un-Islamic has emerged in recent years11 and has further complicated the issue in the context of the Indian economic system which is anyway full of contradictions. For a common Muslim, as a result of the consistent propaganda, the interest-giving by banks is haram, which is quite a strong word in the Islamic vocabulary, and most Muslims, even the most modern and educated, will, as a rule, abstain from committing haram. This is often the modus operandi of Islamists—exploiting the unwillingness of Muslims to commit haram and propagating the view that conventional banking is nothing but usury.12
Broadly speaking, in the modern Indian banking system, banks are financial institutions that charge and pay interest in business dealings. Besides, modern Indian banking is not just about interest; it is a tool for organising life in many ways and there is no escape from it. In the common civic space every citizen, including Muslims, whether directly or indirectly, is involved in modern banking. The case of Islamic banking is a tricky one, even in the context of Islamic nations. This will be clearer if one examines and enumerates the banking policies of a few Islamic nations and their take on interest-free banking.

Interestingly, in Saudi Arabia too, banks, as part of the international economic system, are involved in the practice of charging and paying interest. Saudi banks, however, employ semantics and use the terms profit- and loss-sharing in place of interest. Since banks in Saudi Arabia, an oil-rich economy, do not usually suffer losses, the depositors share the profits as a matter of course, and it is not considered riba (usury).

To state another example, a few years ago, Islamists in Pakistan demanded an end to the interest-paying system of banks. They lobbied against this with the result that the Federal Shariat Court pronounced judgment in their favour but the government did not pass it in the legislature. Later, the Appellate Bench of the Supreme Court of Pakistan set the judgment aside and the matter is still sub judice.13

Even in an Islamic state such as Pakistan, therefore, interest-free banking has till date been unsuccessful largely due to the lacunae in the existing system but also as a result of the dichotomy between overemphasis on religious principles while trying to find one’s place in a globalised market economy.

This can also be discerned in nations such as Indonesia where leaders are cautious even as they seek to move towards an economic system supposedly in keeping with Islamic principles. Commenting on the Fifth World Islamic Economic Forum (WIFE) held in Jakarta in March 2009, development economist Terry Lacey detects this concern among Indonesian policymakers and commentators, “…participants and commen-tators at the Jakarta Forum warned that Islamic banking and finance was a young industry and had not yet been truly tried and tested…The Indonesian case illustrates there is a global gap between aspirations for Islamic banking and finance, and realities.”14

Within the Muslim community of India, conventional and reformist approaches to Islam exist side by side. The reformist approach is, of course, based on the compulsions of modern life. According to eminent Muslim thinkers of the twentieth century including Maulana Shibli Nomani and Allama Iqbal,15 bank ‘interest’ is a profit on investment or charge on capital and when it is not exploitative, it is not riba. But both classical and contemporary Quranic commen-taries, mainly of the scholars whose followers comprise and propagate the atavistic school of thought, popularly known as radical Islamists, are opposed to modern Islamic banking and use the word riba as synonymous with interest.

WHILE in the oil-rich economy of Saudi Arabia and even, in the ultimate analysis, in Pakistan, a practical approach to the issue of interest is the majoritarian one, in India, because of the educational backwardness of a large number of Indian Muslims, the issue of bank interest has become a much-debated and polemical one.
Against this murkiness that is Islamic banking, unscrupulous Muslim shylocks, supported by a section of the Muslim clergy, continue to operate in India and are able to hoodwink Muslims in the name of Islamic or non-interest banking. Their propaganda finds adequate support among those whose only agenda is to promulgate everything as non-Islamic to justify and consolidate their positions as self-proclaimed leaders of Muslims. Certainly in doing so they keep harking back to archaic ideals that have no place in the contemporary world and are contrary to the interests of Muslims in India. The modus operandi of these Islamic banking organisations is very simple and one can find these banks in almost every locality where a substantive Muslim population exists.

These shylocks open accounts in a nationalised bank and make huge deposits collected from poor Muslims with small savings on the counters of the so-called Islamic banks. They use their knowledge and skills of the banking system very shrewdly—depositing 80 per cent of the money in nationalised banks in different fixed deposits and leaving hardly 20 per cent of the money in circulation—to profit from the interest earned on the deposit of the collected sum.

The common investor, who has entrusted his/her principal amount to the Muslim usurer, gets back his/her original amount only when needed, little knowing that the interest from his/her money is being used for the moneylender’s business plans. Whenever these poor Muslims need money, the Islamic banks give them loans, with their gold jewellery or land held as security or collateral, and charge interest, calling it ‘service tax’ instead.

Thus, this banking system not only makes money for its unscrupulous operators in the name of Islamic banking but also excludes the Muslim community from actively participating in the modern economy. This ploy systematically denies Muslims the opportunity of availing the benefits of the uniform economic programme. A large section of the community do not take bank loans—believing that giving or taking interest is haram—so their businesses do not flourish and they do not progress while others, who negotiate on their behalf, continue to benefit from their hard-earned money.

Sometimes it gets murkier. Around fifteen years ago, one such dubious operation was introduced calling it a model for Islamic banking. The enterprise offered three to four times higher returns than other investments, proclaiming that investors would be partners in the venture so whatever they will get as additional amount on the principal investment will not be interest. This seemed the apocryphal answer to the prayers of Muslims continually indoctrinated to believe that conventional banking was haram, and they went ahead and invested heavily without realising that in a partnership venture you are liable for loss too if the money is not invested intelligently or the investors do not possess sound business acumen.

Although the venture declared that the deposi-tors were partners, their opinion was not sought while investing their money in the share market, which is at best a high-risk enterprise. Within two or three years the venture collapsed. The mullahs and politicians got their money back, but the common Muslim investors, as is always the case, were left without redress. Although lengthy legal proceedings are on and are likely to carry on for the next 50 years or more, given the way the Indian judicial system operates and given the fact that the money was collected from all over the country. If the government and the RBI do not take stern action against this kind of scandalous banking—that exists in almost every locality where a considerable Muslim population resides, the shylocks of the commu-nity will not allow Muslims to even join in the debate on the issue of modern banking, far less avail of its benefits and participate in the mainstream economy. And big scams of such nature will continue to flourish unabated.16

A very instructive work on this issue is Muhammad Saleem’s Islamic Banking: A $300 Billion Deception.17 In it, he discusses and evaluates the parallels and differences between conventional banking and usury (riba) as defined by the Quran. He explores the various Islamic banking products offered by Islamic banks and tries to understand if they are indeed an improvement on the current conventional banking ones.

According to him, in mudaraba the entrepreneur gets funds from one or more investors and retains the balance from profits but does not share losses;18 Musharaka is similar to Mudaraba but differs in one aspect. In it, the entrepreneur is also a contributor to the venture and shares the risks involved, which also means that his share of the predetermined profits will be higher. From his observations and experiences, the author estimates that not more than five per cent of the Islamic bank assets are used on these two products although $300 billion assets are controlled by Islamic banks in the present date.19

Murabaha, however, involves the bank purchasing specified goods from a third party on behalf of the clients and in turn selling the goods to the clients at the purchase price with an agreed fixed profit margin added to it. But, according to Saleem, “In theory it sounds reasonable and appears to be consistent with the principles of Sharia. Certainly structure of these transactions meets the letter of the law. However, whether they meet the spirit of the Sharia is another matter... Indeed in practice unlike a real trading transaction, the banks purchase the commodity or goods only after the customer has agreed in writing to purchase it from the bank at a profit. The bank does not assume any risk... however gets a predetermined fixed rate. This is clearly interest, concealed in Islamic garb and therefore not conforming to the requirements of the Shariah, certainly not the spirit of the Sharia.”20

In ijara, which he equates with lease financing commonly practiced in the West, the bank purchases equipment such as airplanes or machinery and rents it to clients for a set period at an agreed rate, which takes into account the cost of equipment and the time value of money, which is nothing but interest. So, according to Saleem, although Islamic scholars term this as Shariah compliant by virtue of the risk sharing involved in this product, in practice “the Islamic banks require the equipment to be insured (with the insurance premiums to be paid by the client) and banks, like their counterparts in the West also require that the client put up some of the money—in practice financing no more than about 90 per cent of the cost of the equipment... The bottom line is that Islamic lease financing is the same as practiced by the conventional banks with interest as an integral part of the financing mechanism.”21

He concludes that “proponents of Islamic banking need to make a choice: either they should come up with a more moderate, less rigid and literal, and contemporary interpretation of the Quranic verses concerning riba, or they must make the Islamic banks conduct their business—without semantic gimmicks and tricks—truly on the basis of profit and loss sharing basis (essentially venture capital, mudaraba, and musharaka) and thus demonstrate and prove to the world that Islamic banking is a workable banking system. They can’t have it both ways.”24 His view is, “Muslims should be prepared to debate this issue, not simply accept judgments, fatwas, and views of religious scholars and Mullahs, many of whom are blissfully unencum-bered with any knowledge of Islamic history, economics and banking.”23 In this he has put forth an important argument for the need for an informed debate on the issue, which as of now many proponents of Islamic banking do not encourage. Whether one agrees or disagrees with his view, one cannot deny its value as an important contribution to the study of Islamic banking, more so from a neutral and unbiased point of view.

The tussle of the Muslim world versus others is mainly focused on financial recourses of the former, particularly oil-rich countries, and the debate in India, a secular state, is as vigorous as in many Muslim countries. For recent trends in the debate one can find an inundation of reports and other discussions in Muslim newspapers the world over with India being no exception. A leading daily of Saudi Arabia, Arab News, devoted one full, ‘exclusive’ page to Islamic finance with the leading story entitled “UK promotes city [London] as centre for global Islamic finance” by Mushtak Parker.24 Terry Lacey’s aforementioned report at the Fifth WIEF in Jakarta, Indonesia,25 is a recent example of the continuing debate on the issue in Indian Muslim newspapers.

For the campaign against mainstream banking amongst masses, a good amount of material is regularly disseminated. The propagators of such campaigns have turned a blind eye to the so-called Islamic banking prevailing in almost every locality with substantive Muslim population simply because these banks help Islamists consolidate their constituency with polarisation in the name of Islamic banking.26
Financial institutions in India are commonly categorised as banks and non-banking financial institutions. The definition of banking, as per the Banking Regulation Act of 1949, is: “accepting, for the purpose of landing or investment, of deposits of money from the public repayable on demand or otherwise and withdrawable by cheque, drafts order or otherwise…”27 Banks in India are governed by the Banking Regulation Act 1949, Reserve Bank of India Act 1934, Nego-tiable Instruments Act 1881 and Cooperative Societies Act 1961. The existence of the so-called Islamic banks is not covered under these Acts.

The RBI constituted a Working Group in June 2005 comprising five members representing the Department of Banking Operations and Development, Foreign Exchange Department, State Bank of India, ICICI Bank Ltd. and Oman International Bank headed by Executive Director Anand Sinha. This was an informal group and no formal terms of reference were drawn up. In its five meetings, the Group concluded that “in the current statutory and regulatory framework it would not be feasible for the banks in India to undertake Islamic banking”28, though it made no specific recommendation warranting any action by the RBI. A copy of the report was forwarded to the Ministry of Finance in July 2007, which has not taken an action to the best of public knowledge.

There is an urgent need to revisit the feasibility of Islamic banking in India notwithstanding the pressure of pro-Islamic banking lobbyists who are fast gaining credence here. We should question whether such measures are indeed necessary in a secular country such as India. Surely, introducing conditions favourable to any one community can only be detrimental to the secular fabric of the nation? We should also question whether appeasement is the best way to gain the confidence of a community or a more proactive effort is in order to integrate Muslims into the mainstream economy in order to make them long-term beneficiaries of India’s economic growth. Such questions rather than bowing down to political pressure and appeasement should inform the government’s future decisions on this issue.29

1. I have dwelled at length on this issue of the modern Muslim identity caught in the problematic relationship between the anti-Muslim propaganda of the West and the fundamentalist agenda of the Islamists in my edited volume Muslims and Media Images (New Delhi: OUP, 2010).
2. V. R. Jayaraj, “HC stays LDF Govt’s Islamic bank project”, The Pioneer, January 6, 2010, New Delhi, p. 7.
3. The Times of India and The Economic Times on February 4, 2011 and Deccan Chronicle, February 5, 2011.
4. Dr. Subrahmaniam Swamy v. State of Kerala represented by Chief Secretary and others, W.P. (C) No. 35180 of 2009, High Court of Kerala, Ernakulam.
5. Ibid.
6. W.P. (C) No. 35180 of 2009, Counter Affidavit filed on behalf of the Kerala State Industrial Development Corporation Limited, the 3rd Respondent in the above petition, March 2010.
7. The Times of India, February 4, 2011, p. 1.
8. Ibid., p. 28.
9. Binda Vasu, “Islamic Banking—Banking For A Change”, RBI Legal News and Views­–Journal Section, vol. 10, no. 2, April-June 2005.
10. Purnima S. Tripathi, “Inclusive Banking”, Frontline, vol. 26, no. 21, October 10-23, 2009.
11. Most pro-Islamic banking lobbyists in India, in a bid to further their cause, often draw parallels with the major inroads achieved by other (read secular) nations as far as Islamic banking is concerned. Major among these are the regulations and studies done by the UK, Singapore, Hong Kong, France and Japan. Whether the same can be feasible or applicable in the case of a country as diverse and sensitive as India remains to be seen. For further details see: The Development of Islamic Finance in the UK: The Government’s Perspective, (London: HM Treasury, December 2008); Michael Ainley et al, Islamic Finance in the UK: Regulation and Challenges, [London: Financial Services Authority (FSA), November 2007]; Juan Solé, “Introducing Islamic Banks into Conventional Banking Systems”, IMF Working Paper WP/07/175, (Washington: International Monetary Fund, July 2007); Chia Der Jiun and Wang Yining, “Risks and Regulations of Islamic Banks: A Perspective from a Non-Islamic Jurisdiction”, MAS Staff Paper No. 49, (Singapore: Prudential Policy Department, Monetary Authority of Singapore, December 2008); Islamic Finance Regulations in Non-OIC Jurisdictions, Case Studies of the UK, Singapore, Hong Kong, France, Japan (London: Lovells, November 2009).
12. Salman Khurshid, Congress MP and Minister for Minority Affairs and Law and Justice, explains this in a recent interview, “In India, the discussion on Islamic banking is limited mostly to the issue of interest, which is termed as haraam, though reforms in the banking sector have gone far beyond the issue of the word ‘interest’ in a narrow sense. This debate has been initiated and sustained by those who subscribe to the concept of ‘pan-Islamic mobilisation’. Interestingly, the debate ignores the existence of a number of Muslim dominated banks which are charging interest. Such banks can be found in all cities where Muslim population is substantial. Islamic banking in India would require an amendment to the Banking Regulation Act, which is not possible unless there is consensus on this idea in a secular country like ours. So, unless Islamic banking provides answers to all the questions, people will not buy the argument for Islamic banking in the present context. For Islamic banking to adjust with the prevalent banking system in India is a very difficult task. But for a healthy democracy, we have to debate every public idea and by debating the issue of Islamic banking we are also involving Muslim ideological groups in the democratic process. For me, this is a positive sign as we should welcome any idea that strengthens democracy.” (Salman Khurshid’s interview with Yogi Sikand, July 12, 2011, available at, last accessed on July 29, 2011)
13. In a judgement (PLD 2000 SC 225) of Pakistan’s Supreme Court, it was held that the country’s current interest-based system needs to be replaced with one that is Shariah compliant. However, in a review (PLD 2002 SC 801) this judgement was suspended and was forwarded to the Federal Shariat Court for reconsideration, a matter that is still pending. The main issue seems to be that Pakistan, unlike Saudi Arabia, is not oil-rich and is dependent on international aid like its many other third-world counter-parts. So while seeking to replace an interest-based economy with a Shariah-compliant one may be deemed feasible by the Ulema, it is rendered pragmatically impossible, at least in the foreseeable future, by Pakistan’s current state of indebtedness to international aid, which is of course interest-based. Justice Wajihuddin Ahmed clearly spells this out in PLD 2000 SC 780–1:
“12. That, as is widely known, Pakistan’s obligations to foreign Governments and international agencies run into billions of dollars. These obligations have to be serviced by periodical repayments on a continuing basis. Since the present condition of the national economy is not such that these repayments can be made out of the Government’s own resources, further assistance is sought internationally by the Government for the discharge of its contractual and legal obligations. Thus, every year further loans are taken from foreign Governments and international agencies to enable the Government to repay loans which have been taken in the past. In the event that the Government defaults in the discharge of its obligations, the result will be:
Firstly, that Pakistan will be declared as a defaulter in international markets.
Secondly, Pakistan will not be able to obtain any further foreign loan or credit.
Thirdly, not merely foreign Governments and international lending agencies will refuse to extend credit facilities to the Government but even foreign commercial banks will refuse to advance any money to the Government.
Fourthly, letters of credit which are opened by Pakistani Banks to enable the import of goods will no longer be acceptable abroad. In consequence, the import of goods into the country will be drastically, and perhaps critically, reduced. In particular, this would have a direct impact and bearing on the import of wheat, edible oil, petroleum and oil, as well as other commodities.
Fifthly, quite apart from the adverse impact on the Government, commercial and industrial companies operating in Pakistan would find it almost impossible to import capital goods and machinery for further industralization (sic) of the country. Similarly, the import of raw materials to allow the continued functioning of plants and factories in the country would be adversely affected.”
14. Terry Lacey, “Islamic Finance in a Changing World”, The Milli Gazette, vol. 10, no. 6, March 16-31, 2009.
15. In a letter dated January 17, 1932 to Khwaja Abdur Raheem, Allama Iqbal writes, “Interest in every form is prohibited. But this is so in an ideal society. Fatwa of Shah Abdul Azeez is that to draw bank interest is permissible.” [B.A. Dar (ed.), Anwaare-Iqbal (Karachi: 1967), p. 245 (publication house not known)]
16. This is not a singular case; several other such operations have and continue to function exploiting the Indian Muslim’s willingness to invest money in an Islamic way. See The Milli Gazette, vol. 1, no. 12, July 1-15, 2000, available at, and vol. 5, no. 9, May 1-15, 2004, available at, last accessed on January 18, 2011.
17. Muhammad Saleem, Islamic Banking: A $300 Billion Deception, Observations and Arguments on Riba (interest or usury), Islamic Banking Practices, Venture Capital and Enlightenment (Bloomington, Indiana: Xlibris, 2005)
18. Ibid., p. 21.
19. Ibid., p. 22.
20. Ibid., p. 23.
21. Ibid., p. 25-6.
22. Ibid., p. 69.
23. Ibid., p. 7.
24. “Islamic Finance”, Arab News, April 27, 2009, Jeddah, Riyadh and Dammam.
25. Lacey, “Islamic Finance in a Changing World”.
26. For the extreme orthodox interpretation of the concept of riba, usury and interest, see M. Umer Chapra, Prohibition of Interest: Does it Make Sense?(New Delhi: Markazi Maktaba Islami Publishers, 2005)
27., last accessed on January 18, 2011.
28. Quoted in the Reserve Bank of India’s January 30, 2009 response to H. Abdur Raqeeb, The Right to Information Act, 2005–Query, Ref. No: RIA.1547/2008–2009.
29. I gratefully acknowledge the contribution of Yasmin Rahman in helping me out while revising the final draft of the article.

The author is a pioneer scholar in the field of Urdu language and its education and has for long been arguing that instead of modernising dini madrasas, the government should provide Urdu education as part of the secular curriculum of school education. He has written his M.Phil and Ph.D dissertations from Jawaharlal Nehru University, New Delhi. His recent book, Muslims and Media Images, (OUP 2009) presents a frank and no-holds-barred discussion on an important theme that has become a victim of oversimpli-fication. The paperback edition (2010) of the author’s book, Redefining Urdu Politics in India, with a new Introduction argues how the once-secular Urdu language has now been relegated to only Muslims and confined within the realm of madrasas. It is a timely intervention in the wake of the Right to Education Act, 2010. He can be contacted at e-mail:

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