By Grace Mubashir
Development is the goal of all societies whereas the definition of development is relative. Development is the progress in the social and economic structure. Reduction in poverty, elimination of social isolation, increase in public facilities, and thereby relative change in the standard of living of the people – all these are generally included in the development dream. Economics answers the question of how to measure these by suggesting that per capita income growth indicator. In post-independence India, per capita income is used as an index of development assessment.
However, India’s various economic indicators do not give us a hopeful answer. On the one hand, development is still a dream for the majority of citizens despite the boom of development and growth. The per capita income of 25 crore Indians is still below the world poverty line of two dollars. 80% of the country’s wealth is held by the richest 10%. The 16 richest people hold the equivalent wealth of 600 million people. The bottom line is that economic inequalities are increasing at an alarming rate.
A few months ago, the Oxfam report on economic growth was released. The report, which says that 17 new millionaires have emerged in the country in the past year, shows that the increase in wealth of the country’s 101 billionaires in the past year will account for 85 per cent of the state’s budget estimates. 73 per cent of the wealth produced in the country each year came from the richest one percent. If it goes like this, the super-rich will be able to buy the country in the immediate future. Many of the schemes implemented by the modern capitalist system have backfired. It cannot be a coincidence.
As an exploitative tool of the capitalist system, the interest-based banking system became widespread from the 17th century. The aim was to collect the money needed for capitalist development by accumulating public savings through banks. Through colonization, the modern banking model spread throughout the world. Banks were initially considered as an indicator of development. But the economist and Islamic scholar Prof. Khurshid Ahmad, in a related study, says that one of the reasons for the transformation of colonies into third world countries is the spread of the interest-based banking system. He argues that it is through this capitalist development model that many of the African Latin American-Asian countries we see today have plunged into poverty.
The idea of microfinance
When colonialism ended after World War II, they also took care to germinate the seeds of neo-colonialism. The creation of the IMF and the World Bank was part of an agenda to further exploit the nations of the world. The style adopted by capitalist countries is to give loans and loot them in the name of national reconstruction. Consider that our country spends 20 percentage of its total expenditure on interest payments. We find the interest to repay the IMF by taxing the poor people of the country. In this way, a systematic flow of wealth from poor countries to rich countries is possible.
After independence, countries including India adopted a policy of promoting an interest-based banking system. We saw banks as indicators of development. It is being propagated that the cause of poverty is the lack of inclusion of the poor in the financial sector and therefore everyone should come to the banks for poverty alleviation to be possible. But 40 percentage of the poor in the society were not getting any help from the bank. With the aim of including those who were thus alienated from the banking sector, the next step of capitalism was to make poverty alleviation possible by providing financial services to the poor through microfinance.
Microfinance has become an industry that started in the 1970s and is still growing. The International Monetary Fund and the United Nations have helped the growth of microfinance. Social development along with economic empowerment, Women’s empowerment, employment promotion, self-employment schemes and life training were also recognized as objectives of microfinance. Economists have introduced microfinance as a single tool for poverty alleviation.
Since the nineties, there have been many studies on microfinance. Most of them question the very existence of microfinance as a model for poverty alleviation and development.
Many models of microfinance charge up to 60 percentage interest. Studies suggest that microfinance has adopted the strategy of draining the savings of the poor without their knowledge. After finding that microfinance institutions were one of the reasons for the rise in suicides in India, laws were enacted to control them. The Microfinance Act of Andhra Pradesh prescribes 26 percentage as the maximum interest chargeable. While the rich get loans from banks at 10 percentage interest, the government itself suggests that microfinance institutions aiming at poverty alleviation should charge 26 percentage interest from the poor. How can sustainable development and poverty alleviation be achieved here?
Islamic microfinance to battle inequality
This is where interest-free microfinance systems come into play. Interest-free microfinance is a type of microfinance institution that operates on the model of all other activities except interest. Modern Islamic microfinance started in Bangladesh in the 1970s and has been operating in different countries in different models. They are doing this by realizing interest-free development methods for sustainable development.
There are interest-free microfinance institutions operating in various models. Self-help groups are the most common systems. Self Help Groups are groups of 20 women or men at local levels. Among them, the neighbourhood groups are promoting savings accumulation, providing loans through cooperation, and organizing various programs related to women empowerment and social empowerment. This model depicts that regional development can be achieved by utilizing the economic resources of the respective regions.
Microfinance and Islamic finance are two fields that are both expanding quickly, and Islamic microfinance illustrates their convergence. It has the potential to combine the Islamic social value of helping the less fortunate with microfinance’s ability to give the poor access to financial resources, in addition to meeting unmet demand. Millions of poor Muslims who currently refuse microfinance products that do not adhere to Islamic law may be able to receive financial services if this potential is realised. Business concepts for Islamic microfinance are just starting to take shape.
When creating an Islamic microfinance programme, a financial institution or businessperson should consider the following two structures:
Mudaraba model: The microfinance programme and the microbusiness are ‘partners’ as the programme invests money and the micro business owner provides labour and services. The programme also receives a portion of the proceeds after rewarding the entrepreneur for his efforts. There will always be problems with precise and open accountability, which is necessary to determine the appropriate profit-sharing ratios. For companies with longer profit cycles, this model may be simpler.
Zakat, Awqaf model: Poor people receive credit without any type of security through microfinance. Islamic microfinance has a lot of space to grow as a result of the weaknesses of traditional microfinance, which include high interest rates, credit diversion, credit rationing, and nonconformity with the Islamic faith. Islamic microfinance will be more effective in reaching the extremely poor when combined with the two traditional Islamic methods of reducing poverty, Zakat and Awqaf, in an institutional setting. Long-term financial viability and sustainability of this approach will assure proper utilisation of the non-returning Zakat contributions. In turn, this will result in a win-win situation for all parties involved, which should decrease default rates and hasten the process of lifting people out of poverty.
Some initiatives from Kerala
Interest-Free Funds In India, like in other parts of the world interest-free lending facilities have been prevalent for decades. Islamic movements are leading in this field everywhere. In Kerala, since 1970, interest-free loan funds were started in different parts of the state. Until the 1990s, there were less than a hundred systems. In 1999, with the campaign against usury, their number rose to 400.
Depending on the conditions of the regions, such enterprises differ in terms of capital, working methods and projects. In rural areas, loans ranging from 1000 to 10000 rupees are provided for a fixed period of time for the basic needs of common people. Cities have large enterprises centred on merchants and the like. Several initiatives such as monthly deposits by individuals, hire purchase system, short-term loans to traders and employment schemes are currently being implemented through interest-free funds.
Interest-free schemes are not only involved in providing loans but are also engaged in the activities of increasing people’s money and creating employment by investing in small enterprises. The growth of such enterprises is faster than expected.
A license from the government is required to carry out money transactions, whether savings or loans, as an institution. Self-help groups or neighbourhood groups of up to 20 members are not legally barred from conducting financial transactions between members. Hence it is advisable that microfinance interest-free enterprises also adopt this method.
The microfinance movement, which started in Bangladesh and some Latin American countries in 1970, spread throughout the world by the 1990s with the support of world funding agencies. Even the UN is touting it as a way to eradicate poverty. A large number of initiatives, both government-initiated and in the private sector, have sprung up in the last two decades. Kudumbashree and Janashree are well-known microfinance movements in Kerala with government assistance. These movements have proven to have tremendous political leverage. The interest charged by microfinance enterprises ranged from 25 percentage to 30 percentage. That is why private capitalists stepped into this field with the aim of making huge profits and fattened the sector.
This is where interest-free microfinance becomes increasingly important. Islamic microfinance institutions are restructuring the existing financial cooperation systems in society according to the new era. Countries like Bangladesh made their forays into this field as early as the 1970s.
The Islamic movement in Kerala is striving to strengthen the interest-free and cooperative microfinance system. This system is being realized in a way that benefits all people, irrespective of caste and religion. Within a few years, about 2,000 neighbourhood associations have come into existence. Enthusiastic reports of development and empowerment are being received from these places. The INFACC Sustainable Development Society under the movement aims to create new models of development at the local level by including more people as the links of this new development model.
Many studies are being done on interest-free microfinance systems in Kerala and other regions. Studies have shown that this system, which is free of exploitation and allows wealth to be shared among those in need through mutual cooperation, has been very beneficial in meeting basic needs and increasing employment and income. Estimates show that the repayment capacity of these institutions is 99.7 percentage, while even banks are reeling in the face of bad loans. If the goal of development is to satisfy people, such institutions are able to make it a reality to some extent. These models of sustainable development should be encouraged rather than the model of investing in development by taking loans from the IMF and others and then plunging into financial crisis.
Indian Association for Islamic Economics (IAFIE)
When IAFIE was formed, in 2000 Islamic economics, banking and finance were very new terms for the Muslim community and the people of Kerala. The first public program in Kerala on this subject was the Economic Science Seminar held in Kozhikode Town Hall in November 2000. With that, IAFIE started its work.
Following the opinion of prominent people that creating a young generation with deep knowledge in Islamic economics is very beneficial for the subject knowledge, the universities were approached with a syllabus related to this, but the result was disappointing.
At the same time, efforts to include the subject in the curriculum continued in mainstream universities. There was a favourable decision from Calicut University. Courses like BA Islamic Economics and Finance, B. Com Islamic Finance and MA Islamic Finance have been started at the university. And even at government levels, Islamic banking is being thought of negatively. this organization holds an academic, awareness programme to create a knowledge base for Islamic microfinance in society.
INFACC (INFACC Sustainable Development Society)
‘INFAC’ (Sustainable Development Society) is a scheme formed with the aim of strengthening economic cooperation through interest-free methods of forming neighbourhood groups at regional levels across Kerala and thereby increasing people’s welfare. Local NGO’s are formed at the panchayat level to coordinate the service activities under movement control and guidance, and to provide necessary support for the activities. It would be more appropriate to reorganize the existing interest-free loan initiatives in this manner sooner rather than later. Apart from providing loans through neighbourhood groups, activities such as savings accumulation, starting micro-enterprises and social awareness are also implemented.
Better results can be achieved by forming neighbourhood groups and strengthening interest-free financial activities. More people can be engaged in activities. Public cooperation can be ensured in the organization of such service activities. Interest-free funds are used to collect from a few individuals and give them as loans to the needy. But it is possible to make the interest-free microfinance system effective in a more popular way by using investment from the beneficiaries as per the neighbourhood group method.
Alternative Investments & Credits Limited (AICL) is a non-banking financial institution operating on Islamic principles. It is formed as a large financial institution. A.I.C. L’s work is focused on the objectives of providing capital to talented and capable entrepreneurs on a profit-and-loss partnership basis, fostering entrepreneurial interest in individuals, and educating the community to make investment projects and business ventures fair. While many Non-Banking Financial Institutions (NBFCs) have been formed in accordance with Islamic principles, only this has been able to grow due to transparency and adherence to principles. A.I.C.L has inspired and facilitated the formation of Albaraka (Cheraman Financiers) under the leadership of the Government of Kerala. It is hoped that an Islamic bank will be possible in India soon. AICL will become an Islamic bank after receiving statutory approval from RBI.
The investment is utilized in two ways. Invest money in profitable and relatively low-risk ventures on a profit-loss partnership basis. Another is to carry out financial activities like providing car loans. Enterprises like AICL Builders & Developers Limited can be started on their own. Dividends are distributed among investors by consuming income tax, zakat and reserves. AICL has a relatively low dividend yield compared to other private-sector firms.
Sangamam: A newbie in the Islamic cooperative sector
Studies show that most of the country’s population is outside the Economic Index. The fear of interest is the main reason behind this financial exclusion of people in using banking services. According to the World Bank’s ‘Global Financial Development Report – 2014’ only 53.2% of people in India have accounts with financial institutions. Or, six and a half decades after independence, about 65% of the people are still economically excluded.
The microfinance system is one of the systems that have been introduced for a maximum number of people to use banking services (Financial Inclusion). But these too have created the opposite effect by charging interest rates at par with or higher than the banks.
Sangamam Multistate Co-operative Credit Society (Limited) was formed with the aim of enabling economic stability and holistic development of the community through microfinance initiatives. It is a body registered with the Central Government under the Multi State Co-operative Societies Act, 2002 which applies to Co-operative Societies having limits of operation in more than one State includ Kerala, Tamil Nadu and Pondicherry. The main mission is to provide relief to the common man from economic exploitation. The working method of Sangam is to utilize the potential of cooperative sector and interest free system in the microfinance sector by utilizing the existing legal provisions.
Mode of Operation
Unlike traditional financial institutions, loans are sanctioned by carefully studying the entire project and assessing the feasibility of the loan instead of paying interest and determining the security criteria for the loan. 1/4 of the total capital is kept as cash (Liquidity) and 1/2 of the remaining capital is earmarked as productive loans, 1/4 for purchase of products and 1/4 for emergency loans.
Sangamam strives to achieve growth and self-sufficiency of individuals, families and communities through small-scale employment service projects by providing extensive facilities for financial transactions.
The working capital of the association consists of the share capital and the deposits received from the members. The modus operandi is to utilize this amount in various business and business ventures of the members on a profit and loss partnership basis and share a fixed share of the income with the investors. In this way, entrepreneurship promotion, economic growth of the society and upliftment of the backward classes can be achieved.
Individuals get membership in society through shares. The activities will be supervised by a Board of Directors consisting of 20 members and a Managing Director elected by the General Body comprising all the members. The entrepreneurship plans submitted by the members will be subjected to feasibility study and scrutiny.
All productive projects for which loans are sanctioned will be strictly supervised by the branches. Along with the money, the required security standards are collected and the necessary instructions and supplementary assistance are provided for the loans.
Various investment services such as Savings Deposit, Daily Deposits, Educational Deposit, Special Scheme Deposit etc. are implemented to encourage saving habits among members and provide them with an income stream for their long-term needs. Deposits have security and withdrawal facilities.
Sangam will provide loans to micro and small self-employed enterprises on a profit and loss partnership basis and take necessary steps to periodically evaluate their operations and ensure full utilization of working capital.
The deposit schemes have been designed keeping in mind the members of the three states. Apart from traditional deposits, Sangam also provides innovative deposit services like Special Scheme Deposits, Home Safe Deposit, Group Recurring Deposit, Daily Deposit and Notice Deposit.
Special Scheme Deposits are meant to accumulate savings for expenses like education, marriage, pilgrimage and house construction where heavy expenses are expected. Homesafe Deposit is a scheme where members and their family members can make deposits from the comfort of their homes.
‘Aishwarya Bhawan’ and ‘Homesafe’ investment schemes are being implemented to ensure the direct participation of women in economic sustainability. Along with inculcating saving habits in the households, they are provided with loans (both for employment and non-employment). Sangam is paying special attention to the neighbourhood group systems formed by multiple members and to building new job and income areas by providing financial and other assistance.
Sangamam has created schemes that help the borrower to become self-sufficient and repay the loan in instalments without much difficulty by prioritizing loan
services to productive loans. Sangam provides partnership-lending services such as financing for small self-employment enterprises, short-term business partnership loans, financing for vehicles and household appliances for self-employment, loans for urgent personal needs, and loans secured by fixed deposits. Sangamam’s main partnership service is providing financial assistance to small self-employed – service enterprises on a partnership basis. A maximum of Rs 5 lakh will be given in this scheme.
Sangam has adequate mechanisms to monitor the borrower at every step and give suggestions, unlike traditional financial institutions that end up with the loan amount and interest.
The purpose of Sangam is to find various self-employment initiatives and projects for individuals and families who do not have a regular source of income for their daily life. Registration for Sangham branch was issued in June 2012 and the first branch was opened in Vaniyambadi, Tamil Nadu in September 2013. The first branch in Kerala was opened in February 2014 at the Aluva centre and the second branch at the Kozhikode centre in March. Currently, there are five branches including the branch inaugurated in September 2014 at Eratupetta.
The branches operate under the supervision of a local advisory committee appointed by the governing body of the Sangam from the members of the regions where the branches operate.
Regional Advisory Committees facilitate the efficient functioning of branches and assist in the identification and upliftment of deserving members and the disbursement of loans based on their needs. The loan applications received in the branches are closely monitored and sanctioned under the supervision of the respective committees.
RBI’s policy gives hope!
The Deepak Mohanty Committee in 2015 recommended that interest-free banking should be included in the interim economic action plan prepared for the next five years. The then RBI Governor Raghuram Rajan appointed the Deepak Committee on the demand of Prime Minister Narendra Modi on the 80th anniversary of RBI. In a situation where the report of the Reserve Bank revealed that the vast majority of Muslims in the country are outside mainstream banking, the Reserve Bank pointed out that the proposal to start the interest-free system in the country is to bring this large section into the banking system.
Along with the recommendation of the Deepak Mohanty Committee, the Reserve Bank has published a detailed report on the same. The fifth chapter of this report is devoted entirely to interest-free banking, and the situation in which it is needed in the country has been elaborated. The report mentions that many Muslims have a long history of banking but have very few public transactions with banks. The report continues that this may be because they want financial transactions that are compliant with Shariah.
RBI has submitted nine models for this purpose. These are the models that Islamic finance systems are implementing. They are Musharaka, Mudaraba, Murabaha, Ijarah, Istisna, Sukuk, Waqala, Wadee and Khard Hasan.
Musharaka is a joint venture between the bank and the customer. It is a partnership agreement where both the customer and the bank invest in cash or property. The loss and profit will be shared based on the arrangement made by both parties.
Mudaraba is a transaction based on mutual trust where one partner contributes capital and the other partner deploys skill and effort. Murabaha is when a customer approaches a bank to find money to buy things that one needs. The bank will pay the money and buy the goods and hand them over to the customer. The bank will arrange for repayment in instalments, which will be a little more than the purchase price. Ijara is when the bank buys the property or equipment and leases it to the client. Istisna is the manufacture and supply of a required product for a specified period of time. A part of the price may be paid in advance or in installments and the rest may be paid at the time of delivery of the property. Sukuk is a transaction of Shariah-compliant securities backed by tangible assets. Wakalah is giving money to the bank to invest in Shariah-compliant projects. The bank will play the role of agent to suggest the projects and assets to be invested. Wadee entrusts the money to the bank for safekeeping. The bank can utilize the said funds for any Shariah compliant purpose.
Interest-free partnership-based Islamic finance is the best way for sustainable growth and economic prosperity in society. Many systems exist in our country to spread the theoretical aspects of Islamic finance. There are many courses, institutes and voluntary organizations that teach Islamic finance and economics. But there are only a handful of enterprises in the country that present the practical form of Islamic finance to the masses. Their own services are confined to very limited circles.
The co-operative movement in India with more than 6 lakh co-operatives and more than 25 crore members has been instrumental in the growth of the grassroots of the country. It was through the cooperative movement that the benefits of economic growth reached the hinterland villages and the backward population areas, overcoming the limitations of urban-centric development models. Co-operatives have made a significant impact on the economy of the country by making effective use of our greatest resource, human power. The fact that both the White Revolution and the Green Revolution took place in India through co-operative societies is enough to recognize their impact.
The writer is a PhD student at Jamia Millia Islamia.