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Profit and loss-sharing banking in India

Islamic approach to economics is based on equity, justice and fairness, remarked the veteran Islamic banker K. Rahman Khan, M.P. while inaugurating the recent National Seminar on Profit and Loss Sharing (PLS) Banking in India organized by Islamia College, Vaniyambadi. Mr Rahman Khan appealed to Islamic economists to design and create alternative financial instruments based on Mudaraba, Musharaka, Ijara and Murabaha.

Dr FR Faridi asserted that rich nations of today are dealing in ‘usury’ of ancient times. Third world countries pay $1100 billion as interest though their total borrowing is only $400 billion.

Analyzing the performance of PLS Banks in India. Dr Faridi stressed the need for the establishment of PLS banks in the corporate sector. The main hurdle in the establishment of PLS banks in India is the prevailing banking regulating framework. Only when the pressure comes from the community, the Government of India will amend the banking regulations which will allow the establishment of PLS banks in the country. Tracing the growth of PLS Banking Dr Tahir Beg of IIU, Malaysia, pointed out that there are 177 PLS banks with assets worth $148 billion functioning in several countries. India should take pride in being the birth place of Islamic banking academically as well as institutionally.

Dr MY Khan, economic advisor, SEBI, suggested that IFIs should float mutual funds in the present legal frame work. He opined that around 15 Islamic banks with meagre deposits of Rs. 750 million will not be able to cater to the requirements of the country.

Classifying Islamic Financial Institutions in India into (a) Association of persons (b) Islamic Financial Societies (c) Co-operative credit societies (d) Islamic Finance and investment companies in the corporate sector, Dr Bag Siraj, a well known researcher, presented case studies of 5 major interest-free credit societies, viz, Muslim Fund, Deoband, Muslim Fund, Najeebabad, Toor Baitulmal, Hyderabad, Tamil Nadu Baitulmal, Chennai and Islamic Welfare Society, Bhatkal Interest-free credit societies are more successful than Islamic financial companies in terms of their output. They have the potentiality to relieve the distress of the weaker sections of the Muslim society. A notable feature of these institutions is that women constitute more than half of the borrowers and depositors. The main limitation of these societies is that their operating costs are very high. Mergers and consolidations are the only way-out for cost effectiveness and managerial effectiveness of these societies. Formation of a federation of these societies is long over due.

Mr Majeed, GM of Al-Ameen Islamic Finance and Investment Ltd, stressed the need for co-operation among the existing PLS companies in India. Need for conducting a management development programme for the personnel of the PLS companies is underlined.

When financial institutions in countries like England, Russia and Luxemburg are opting for the Islamic system of finance, there should be a concerted effort on the part of the Indian Muslims to pressurize the Government of India in relaxing the relevant rules for starting PLS Banks in India. Dr FR Faridi recalled the times when he and Dr Nejatullah Siddiqui were branded as 'fanatics,' when they propounded the concept of Islamic economics and banking. Gone are those days; there are several universities and institutions offering masters and PhD programmes in Islamic economics and bankings. IMF and Harvard University are studying the growth of Islamic financial system. He exhorted the Muslim community in India to rise to the occasion and venture into Islamic banking.

More than 300 delegates from various parts of the country participated in this seminar which was held as a result of the efforts of Dr Mohammed Ghalib Hussain of the Islamia College, Vaniyambadi. Two working groups have been constituted to work out the modalities of the formation of the federation of interest-free credit societies operating in South India and to prepare a blue print for the establishment of an Islamic bank in India.

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