Kashmir Reader :Time to Introduce Islamic Banking

The recent floods devastated Kashmir in terms of business, economy and revenues. An estimated rupees 3 trillion (3 lakh crores) loss to property, infrastructure and business was incurred as  Valley experienced the worst ever natural calamity in a century. These are warnings from the Creator aimed at making us realize that whenever the rules of nature are encroached, it leads to destruction and losses.

It was the mercy of Allah the most exalted that even after such a catastrophe, loss to life was minimal. It was heartbreaking to see the visuals of flood furry in our beloved Kashmir — a sign of anger from Allah (SWT) which left this occupied land in shambles and in utter helplessness.

As Srinagar is now in a process of rebuilding (without the international aid or packages), it is  an opportunity to look for other financial options that can help Kashmir restore its past glory.

The state government recently announced the rehabilitation package with main funds coming from the state’s only financial powerhouse, the Jammu and Kashmir bank. There are basic flaws in the pattern of financing of this package as main burden will once again be on the borrowers. In such a scenario, it becomes imperative to look for options other than the one announced by the government.

Such a situation calls for introduction of Islamic financing in our state. Shariah finance is close to a trillion dollar industry today and is emerging as one of the fastest growing areas of international finance. Islamic finance or interest-free finance is one such novel mechanism which has the potential to boost our economic growth.

It will not only help us to rehabilitate and rebuild flood ravaged Kashmir but  will also help us to follow an interest (Riba) free financing system for rebuilding our businesses, homes and even infrastructure.

It is an opportune time for government and JK Bank to introduce financing packages on the pattern of Islamic banking. Financial system, being the backbone, constitutes an integral part of the process of the economic development of a nation and inclusion of Islamic finance by any state will be step towards that growth.

During the recession in 2011-12, the stability shown by Islamic banking system was appreciated by regulators all over the world. Islamic finance has its roots in the Islam and concerns for equity and justice, lawful (Halal) and prohibited (Haram) with a sense of responsibility towards the weaker sections of society.

Presently, Islamic finance industry is rapidly evolving with growth of its assets estimated at more than USD 750 billion and growing at a rate of 15 to 20 percent a year. The spectacular acceptance and demand for Islamic finance means that within the next decade, the industry is likely to capture half the savings of the 1.6 billion-strong Muslim world. At present more than 250 Islamic banks operate in more than 75 countries worldwide, these include many countries of Europe, North America and South East Asia.

Islamic law prohibits all types of economic activities which include receipt and payment of interest, excessive ambiguity (gharar) and all non-productive speculative activities like gambling, wagering, etc. (Maysir). Keeping in view the Shariah considerations, financial Institutions around the world use financial structures such as: Mudarabah (capital financing); Musharakah (partnership) Murabahah (cost plus financing); Ijarah (leasing); Bay al-Salam (forward purchase) and Istisna (manufacturing contract).

Considered most relevant and best suitable Shariah-based financing structures, Murabahah and Istisna can be introduced in Kashmir as well. Murabahah is a sale contract mostly used for financing activities. Since interest is prohibited in Shariah and trading is not, the financing agency first buys the assets needed by the customer on its own account and then sells it to the customer with a certain profit margin with a repayment option of instalments.

Similarly, Istisna is a contract of acquisition of goods by specification or order, where the price is paid progressively in accordance with the progress of the work. This is practiced for purchasing an item that is yet to be completed or produced, for example, a house. The repayment is done in instalments and monthly rentals. Introduction of such systems will help the people of Kashmir to a large extent.

RBI Governor Prof. Raghuram Rajan has already advocated inclusion of interest-free financial system. He recommends that measures be taken to permit the delivery of interest-free finance on a larger scale, including through the banking system and to create a framework for such products without any adverse systemic risk impact.

 The apex trade bodies like KCCI, KEA and other associations must press for introduction of Islamic financing, while the JK Bank must lead and initiate the process to get the Shariah compliant financing approved by RBI for the flood rehabilitation packages initially  so that the next phase of full-fledged Islamic banking is made a reality in future, thereby fulfilling both religious as well as the social responsibility.

“Whoever sincerely seeks forgiveness from Allah is bestowed with His great Mercy and Blessings, as HE is the most Gracious, the most Merciful”. (Sura Al Furqan – Al Quran)

 —Author is founder member Pace Financial Services and can be reached at pacekashmir@yahoo.com

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