Prospects of Islamic finance in Kerala

Muhammed Palath
Research Scholar in Economics, Kannur University

Recently Islamic economics and finance is most discussing topic in finance sector and in Medias in the country especially Kerala. The reasons for this are many. Firstly the prospects of Islamic finance was discussed only few proponents of the subject up to last year. But now it is the topic discussing politicians and beaurocrats even Marxists in our country. Islamic banking and finance is fast growing field in the world financial sector. Two years back when economic crisis were hit to the well developed nations and it washed away giant banks from the finance sector the only institutions which cannot affect the crisis was Islamic banks and finance companies. These catch the attention of the financial experts to the Islamic finance. After that the experts and leaders of different nations started study about Islamic finance. Some of them are introduced the Islamic financial products. Now Islamic finance is introduced more than 75 nations including US, UK, China, Canada, Singapore, France etc. When Islamic finance was introduced these nations its success and growth rates are also take the attention of experts and Medias. Thus Islamic finance is now a secular topic in the academic, media and finance fields in Middle East, and western as well as afro Asian regions. But the Indian scenario is somewhat different. Actually the seeds of Islamic banking and finance in modern world are started from our country. The modern history of Islamic economics and finance in India starts with the turn of the 20th century. It came as a response to the challenge of the conventional economic thought and the socio-economic movements of the time. Around half of all the literature on Islamic finance in the world produced in the first half of the twentieth century, was in Urdu, the rest being either in English or in Arabic. Of the works in English most were carried out by Indians. The first book on the subject in English, by a professional economist was published in India is Islam and the Theory of Interest by Professor Anwar Iqbal Qureshi of the Usmania University, Hyderabad, 1946. Maulana Hifzur-Rahman Seoharvi and Syed Manazir Ahsan Gilani also wrote extensively on the subject in 1942 and 1947 respectively. Other writers are include M. Mazharuddin Siddiqui, Mohammad Hamidullah, Haider Zaman Siddiqui, Yusufuddin Mohammad, The renowned Islamic scholar Maulana Abul Aala Mawdud, had published many articles during the 1950s and 60s. Two professors of Aligarh Muslim University, Dr Muhammad Nejatullah Siddiqi and Dr Fazlul Rahman Faridi played the pioneering role in propagation of Islamic economics in post-independence India. Dr M.N. Siddiqi, a world-renowned Islamic economist, won the coveted King Faisal Award, for his contribution to Islamic Studies in 1982. The practicing of Islamic finance also first started in our country. The first modern effort to establish interest free institutions can be traced back to 1890s in the southern India. This was mainly a welfare association collecting donations and hides of animals sacrificed during festivals from the public and providing interest free loans to the needy. One such institution called Anjuman Imdad-e-Bahmi Qardh Bila Sud (Interest Free Credit Society) was established in Hederabad, India in 1923. Patni Co-operative Credit Society, a Surat based institution, which still continues its business was established in 1939. It was during the Indian independence

movement, when Muslim masses were suffering the pangs of poverty, because they were at odds with the British rulers as well as non-Muslims, that Maulana Syed Hussain Ahmed Madni developed the model of Muslim Fund as an economic entity. In 1940 Muslim Fund Tanda Baoli, Rampur (a district in North India) was established. It mobilised the savings of poor farmers and workers on daily/weekly basis as Amanath Deposits and extended interest-free loans against the security of gold ornaments. This basic model of interest-free society has been adopted and implemented by Muslims across the country with minor modifications. For instance the Toor Bait-ul-Maal of Hyderabad has combined interest-free credit function with Zakah and Sadaqah mobilization and distribution through various charity based funds. After independence there was no steps were taken by the govt. to continue the growth of Islamic finance institutions in our country. The people need the service of Islamic finance in the form of loans and investments. But the Muslim society had introduced many region based institutions to help the poor people in the form of interest free loans and to introduce saving schemes and to utilize their funds on productive activities. Some of them are registered in the form of co operative credit societies, nonbanking financial companies and some are as financial and charitable societies. The institution registered in the form of NBFCs and co operative societies has taken important steps. They were mobilized savings and are make available loans for thousands. In Kerala also the movements in these directions were noted since 1960s. To analyze the prospects of Islamic finance in Kerala first we have to list the problems faced by our state. 1) Shortage of funds for infrastructure development. 2) Unemployment especially educated unemployment. 3) Share of foreign direct investment is very small. 4) Abundance of funds with some classes and financial institutions. 5) Increasing public debt. 6) Increasing interest burden. 7) Crisis of agricultural sector. 8) Crisis in industrial sector. 9) Non utilization of NRI savings. 10) Financial exclusion. When we analyze all these problems facing our state it is understand that everything comes from one point and so all these are interconnected. Our state has lot of big projects to implement including South west railway corridor, Coimbatore Cochin railway corridor, development of national highways, air ports and ports, power projects and lot of bridges and roads etc which needs the investment of more than one lakh crores. All these projects in infrastructural sector need funds from various corners. Now govt. is depending on interest based loans from international or national institutions or public deposits which are also on the basis of interest which led to increasing debt and interest burden of our state. This trend is not good in the long run because it led to debt trap. The second way is implementing the project on BOT basis; in it permission given to the private ventures to collect users fee up to 30 years. On the one side all incomes were gone to the private company and on the other and more important side govt. has not get any revenue by implementing these projects. 30 years are the average age of any good

projects. So transfer after that period to the govt. is not beneficial to the government or society. At this gap the introduction of Islamic financial institution to mobilize the resources for the development of infrastructure is useful for the state. The movement of Kerala govt. in this line is appreciable. Here by mobilizing funds on interest free basis for development of infrastructure will expects to reduce the debt and interest burden of the state. Govt has directly implemented the projects and collect user fee and sharing the income in between the financial company and govt. The income received by the company is shared among the share holders according to their contribution after meeting working expenses of the company. This is one model to solve many problems by the state. Lot of money which is keeping idle in the hands of the public because of fear of interest is efficiently allocated. It is a way to utilize NRI savings beneficially to the state as well as they got a reasonable return. Thirdly it will reduce the debt burden and interest burden of the state. And lastly and most importantly it development in infrastructure invites the attention of industrial groups to come to the state which will create a lot of employment opportunities. Like this introduction of Islamic finance companies will promote the investments in other sector also. It will attract the surplus fund with every class of people from the state and outside and utilize these for the growth of the state. Lot of people working in Gulf and other countries wanted a safe and interest free investment opportunities. This fund will flow to the state. If interest free investment opportunity is available funds also available from foreign banks and finance companies also. Finally introduction of Islamic finance institution with the support of the state will convert the state as an investment friendly place and it will boost the economic growth and create employment opportunities. Experts find that the Middle East countries are only the place to have excess fund to invest in other parts of the world. Estimation is that $ 1.5 trillion funds sloshing around the Middle East largely from higher oil prices. By 2020 will have $ 9 trillion to invest (Mc kenzie). About $ 800 billion Arab money has moved from the US and Europe to other regions after 9/11. The experts suggest that India and china are the two countries marked the maximum growth rate and so advising as the good destination for investment. The Investment commission identified 25 key sectors spanning infrastructure, manufacturing, services, natural resources and the knowledge economy. These require an aggregate investment of $ 500 billion. Kerala is the better location for investment in these sectors. So when we ready to receive funds for these sectors lot of foreign investors flow to the state. But the state of Maharashtra identified this first and they already received $12000 Million from gulf finance house Bahrain, and National bank of Dubai for the development of infrastructure. HSBC Amana, Kuwait finance house and Saudi economic development company also invested in different locations of the country, not in Kerala. We are losing millions of petro-dollars which is now eluding a mature market like India and going to smaller places like Malaysia. Another area of concern is financial exclusion in our country. According to a report 60 per cent of the population does not have access to formal banking services in our country and only 5.2 per cent of villages have bank branches. In Kerala the situation have some progress. Even though the central bank announced Kerala achieved full financial inclusion around 30 percent of these accounts are not used. Reducing the numbers facing economic exclusion is critical for inclusive growth. In Kerala 24% are Muslims, in which major percentage are going to the banks on compelling situations only. Lot of them have no accounts in interest based banks. If we

introduced interest free institutions this situation will change. In many emerging economies, Islamic financial institutions are leading the way to provide services to under banked populations previously ignored by conventional banks. Thus introduction of Islamic finance is a way to go forward for financial inclusion. India is the world's second largest Muslim population with 154 million, the lack of Islamic is a barrier to the flow of substantial funds into the market. Some sources are noting that at least Rs5,000 crore of unclaimed interest in banks in Kerala alone. Because of the absence of interest free investment opportunities people prefer to put their money in gold or jewellery, which is the worst kind of investment from an economic point of view. Microfinance The study about the sources of loans in Kerala reveals that 40% of the people in Kerala are depends on co op banks for loans. And 18% depends on commercial banks. A considerable portion of the population depend mainly private sources for meeting their financial needs. Sources of loans in Kerala Name of source Percentage of total loans Co op Banks 40 Public sector banks 18 Money lenders 9 Private banks 5 High interest loans 3 Other interest based 17 Others 8 Source: Kerala Padanam 2004 KSSP Implementation of microfinance is a powerful tool for financial inclusion and poverty alleviation. Raghuram Rajan wrote Microfinance is the fastest growing non institutional channel for financial inclusion in India. A key factor that influenced the success of microfinance was its ability to fill the void left by mainstream banks that found the poor largely uncredit worthy, and were unable (or unwilling) to design products that could meet the needs of this segment in a commercially viable manner. Using group-based lending and local employees, microfinance provides financial services (largely credit) using processes that work, and in close proximity to the client. These qualities facilitated the proliferation of microfinance from a virtually non-existent activity in 1990 to a small, but increasingly important, source of finance for Indias poor. In order to address the issues of financial inclusion, the Government of India constituted a Committee on Financial Inclusion under the Chairmanship of C. Rangarajan. The Committee submitted its final report to Hon'ble Union Finance Minister on 04 January 2008. This report also suggests opening specialized microfinance branches / cells. Microfinance is actually the institutions implemented to provide loans to poor class of people to start self employment and to meet their other consumption needs. But recently we are reading stories of failures of microfinance institutions in fulfilling their objectives. These institutions are becoming the instrument to exploit the poor people. The police department of AP reported within last one year more than 50 suicides due to harassment from microfinance officials. In Kerala also several microfinance institutions are working on the basis of interest. There are no study were published to prove the effectiveness of these institutions. Kudumbasree project working as official microfinance institution with the financial support of govt. also have its own shortcomings. If govt. is ready to introduce a separate registration for interest free microfinance

institutions it is a better way to reduce the poverty among the people. Now different parts of the state are practicing more than 500 such ventures without any support of the govt. legislation. Studies are showing that these interest free micro ventures create employment opportunities, financing for education and like other positive activities. It will help the economy on different ways. Firstly it will help to mobilize the micro savings of the poor. Secondly it will create self employment opportunities and increase the income of the people. Thirdly it will increase the production of the state. Lastly the availability of interest free credit helps to reduce exploitation and helps to increase the vulnerability of the poor. For improving the agricultural production of the state Islamic microfinance is usefull. Govt. should seriously consider developing interest free products to finance agriculture, small trade and small industries through co operative banks by using Islamic microfinance principles. It will promote the economic development of the country. The prospects of Islamic finance in Kerala is to be listed in the following few points. 1) 24% of muslims and major non muslim population from rich are interesting to invest in Islamic financial institutions. 2) Lot of Keralites working in different parts of the world are also needs the investment opportunity on equity basis. 3) Foriegn Islamic financial institutions and individuals also wanted to place their capital in safe investment location with an expectation of more return and no interest. 4) Around 30% of population have no transaction in banks and no savings due to the lack of interest free finance opportunities. 5) Introduction of Islamic finance will attract all these funds to our state, it will helps to include all classes and helps to mobilize savings. 6) Introduction of Islamic finance on a proper way will make the state an investor friendly state. 7) It will support the development in infrastructure, industry, and agricultural sector. 8) It will reduce the debt trap and interest burden of the state. 9) Increase the income of the state that would be utilized for welfare programmes of the state. 10) Overall development and growth will create employment opportunities.