The Civilians

What is Islamic banking and how will it impact India’s financial System?

The Reserve Bank of India (RBI) has suggested an idea to open “Islamic window” in traditional banks for gradual initiation of Islamic banking or Sharia Banking or interest-free banking in the country. Both the Centre and the RBI are trying to explore the possibility to introduce Islamic banking system in the country.
It is being processed to ensure the financial inclusion of those sections of the society that remain marginalized due to religious reasons.
This proposal of the central bank is based on the examination of technical, legal, and regulatory issues related to the practicability of introducing Islamic banking in India on the basis of suggestions of the Inter-Departmental Group (IDG). In order to have a comprehensive understanding of this whole issue let us discuss it thoroughly. First of we need to know about Islamic Banking.

What is Islamic Banking?
Islamic banking system is founded upon the principles of Islamic law, also referred as Shariah law. In Islamic banking, the banking system is guided by Islamic economics. Islamic banking has two basic principles- sharing of profit and loss and the prevention of the collection and payment of interest by investors and lenders. The model of Islamic banking follows the Islamic morals and principles. Therefore, the financial transactions within Islamic banking are a culturally different form of ethical investing. For example, investments entailing gambling, alcohol, pork, etc. are prohibited.
The principles of Islamic Banking follow Shariah laws, which are based on the Hadith and the Quran, the recorded actions and sayings of the Prophet Muhammad. Whenever more guidance or information is needed, Islamic bankers turn to learned scholars or apply independent reasoning based on scholarship and customs. While doing this they also ensure that their ideas do not divert from the fundamental principles of the Quran.
It is interesting to know that how Islamic banks earn money without charging any interest. It has developed a mechanism which does not charge interest but still earns the profit. Islamic banks use equity-participation systems. In this method, if a bank gives the loan to a business, the business pays back the loan without interest, but it pays its share of profit to the bank. If the business fails on the loan or does not earn any profits, the bank does not get any profit either.
There is a different method for saving accounts. There are two kinds of deposits for saving accounts. In one, customers deposit their savings in the bank and allow the bank to use their money, with the promise that they would get the full amount back. The bank is not accountable to pay interest to the savers. Some banks do return certain sum to the account holder as profit accumulated from their operations.
In the other kind, the holder allows the bank to invest his money in specific projects and gets returns after a stipulated term based on how the business performs.

The Islamic bank was established in 1963 by Egyptians in Mit Ghmar. This bank was established on profit sharing model. It loaned money to businesses and shared their profits. In order to reduced risks the bank only granted loans to only about 40% of its business loan applications. Its default ratio was zero.

Islamic Banking Terminology:

Riba: It is a concept in Islamic banking that refers to charged interest. It is prohibited under Sharia because it is considered exploitive. There can be the different interpretation of Riba but ultimately it refers to interest that is why it is unlawful in Islamic banking.

Haram/Halal: It is a rigid code of ‘ethical investments’. The operation of this code is meant for interest-free financial activities. It helps in deciding the priority in the investments e.g. investments in essential goods that fulfill the needs of the population, such as food, clothing, health, shelter, and education.

Gharar: It is an Arabic word that is related to uncertainty, deception, and risk. It can also be said that this concept is related to gambling which prohibited in all forms. But Ghrarar is an important concept in Islamic finance and is used to measure the legitimacy of a harmful sale or risky investment related to the selling of goods, short selling, or contracts that are not drawn out in clear terms or assets of uncertain quality or delivery.

Zakat: In Islamic banking, this is the very important instrument for the redistribution of wealth in the form of a compulsory levy.

Takaful: It is a kind of Islamic insurance, where members contribute money into a pooling system in order to guarantee each other against loss or damage. Takaful-branded insurance is based on Sharia. It explains that how it is the responsibility of individuals to cooperate and protect each other.

Shirkah: In the Sharia law, Shrikah is divided into two categories:
1.Shirkat-ul-milk: It is a joint ownership between the parties involved, where each party has given capital in order to buy a particular property.
2. Shirkat-ul-'aqd: It is a partnership formed through a contract. This can also be termed as a type of joint commercial enterprise.

Maisir: Maisir is the prohibition of certain explicit haram activities such as alcohol, prostitution and the like. And Islamic Banks are prohibited to have any connections with such business.

Musharaka: It is a joint investment by the bank and the client, in which both contribute to funding an investment or purchase, and agree to share the profit or loss in agreed-upon proportions.

Ijara: In Ijara the bank buys the asset on behalf of the client and grants its usage for a fixed rental. The ownership of the asset is transferred to the client after a mutually agreed time.

This instrument is made for those clients who want to get credit from a Sharia-compliant bank.

How is it working globally?
World Bank released a report in 2015 which said the estimate of Sharia-compliant financial assets to be in the range of US $2 trillion, including capital markets, bank and non-bank financial institutions, insurance and money markets. The growth rate of Islamic Finance Industry has been of 10%-12% annually. According to this report of World Bank, in many Muslim countries, the growth rate of Islamic banking assets have been faster than conventional banking assets. The Islamic finance has also been increased in non-Muslim countries such as the Luxembourg, UK, Hong Kong and South Africa.
It has been witnessed worldwide that Islamic finance has emerged as an effective instrument for financial development. Major financial markets are exploring solid evidence that Islamic finance has already been mainstreamed within the global financial system.

Concept of Islamic Banking in India
A committee headed by Raghuram Rajan submitted a report to the government in 2008, in which the committee, without naming Sharia banking, suggested the need to have interest-free banking in India. The report said that the non-availability of interest-free banking products in India eventually results in some Indians, including those in the economically disadvantaged strata of society, not being in a position to reach the banking products and services due to reasons of faith. This non-availability also forbids access of many Indians to substantial sources of savings from other countries in the region. As a consequence, the Kerala government had tried to co-promote an Islamic finance institution, but this move was challenged in the High Court.
The concept of Islamic Bank got further push with the recommendation from the committee named as “Medium-Term Path for Financial Inclusion”, headed by Deepak Mohanty. This committee has advocated “interest-free windows” in existing conventional banks. On the other hand, the government also appears to be inclined towards implementing the Islamic banking.
The government has advised the RBI that before taking a decision about Islamic Window, the legal, regulatory, technical, issues need to be clarified by the RBI. After this, an inter-departmental group on Islamic /Alternative Banking was formed within the RBI to evaluate the issues for introducing Islamic banking.
The State Bank of India (SBI) had launched a Shariah-compliant mutual fund in 2014. It was the first time a state-owned bank rolled out an Islamic financial instrument for the country’s estimated 170-million Muslim populations.

Why Islamic Banking in India?
India has a substantial Muslim population, this makes India a huge potential for the growth of Islamic Finance but also an inherent necessity for it. In 2011, there were approximately 180 million Muslims living in India, and this is estimated to rise to 310 million by 2050. This will make India home to the largest Muslim population in the world. In India, at the same time, most Muslims are self-employed and most of their investments are not adequately supported by banks.
Until the present days, there is a need to increase financial inclusion of Muslims in India, which has not been done substantially because the Indian Banking and Financial system has failed to take note of Islamic Financial principles. And as a result, it failed to develop financial products like the Middle East and Europe.
A report released by Sachar Committee back in 2006 points out in the necessity of Islamic Finance in India. The report said Muslim holds 12 per cent of accounts in public sector banks and 11.3 per cent in private sector banks which are less than their share of 13.4 percent of the overall population. So the Muslim population is in need of financial Inclusion and Islamic banking is a prominent idea to satisfy this need.

Problems for Islamic Banking in India
India is a secular country by Constitution. So opening any financial institution with the name of a religion can raise questions among other religious groups. Apart from this, some political parties have said they will oppose the introduction of Islamic banking in India. Here is also another reason that India lacks adequate work force trained in Sharia banking.
And Islamic banking is based on strict Sharia laws of not paying or taking the interest, so the application of Islamic banking will call for a complete change in the banking regulatory system.
The foremost concern for the development of Islamic banking in India is the development of comprehensive legislation, regulations and rules governing the same. Former RBI Governor D. Subbarao objected that present rules and regulations do not allow the operation of Islamic Finance in India, and this creates a major hurdle to achieving complete financial inclusion, given India’s growing and prominent Muslim population.
The banking in India is governed by the laws made in the archaic Negotiable Instruments Act of 1881, Reserve Bank of India Act, 1934, and Banking Regulation Act of 1949.
The core principles of all of these legislations stand in direct conflict with the principles of Islamic Finance. For example, the payment of interest on deposits is mandatory under the Section 21 of the Banking Regulation Act, but it is clearly prohibited under the Riba principle.
Section 8 of Banking Regulation Act, mandates that banking company cannot deal in the selling or buying or bartering of goods. This shows the impossibility to have Shariah-compliant structures such as Murabaha in India.
One of the criticisms of the introduction of Islamic banking in India is Subramanian Swamy’s suspicion about it. He objected the launch of Islamic Banking in India by saying Islamic banking will pave the way for the entry the dubious funds of the Middle East into India through legally baptized channels of Sharia Complaint financial institutions. And he highlighted that these dubious funds hold the volatility to be used for terrorist funding. He also claimed that it can raise the rate of Islamic conversions in India.
So, what’s now?
The criticism that introducing Islamic banking in India will raise Islamic conversions in India is avoidable because in countries Like Singapore and Malaysia there have not been any such incidences. And the skepticism that Islamic banking will enhance funding to the terrorist organizations seems flawed because all the money circulation in the Banking sector in India is under the regulation of the RBI. So it is very unlikely that any RBI affiliated bank can send money to any banned terrorist organization.
Another doubt about Islamic banking which says it will harm the secular fabric of the country can be questioned. Because Islamic banking will serve the need of many people who have been marginalized and it will bring them into mainstream banking. So it is an inclusive step and our secularism is meant to promote inclusive values. Thus it can be said it will not harm the social fabric of the India.
So we have discussed the reasons which are in favor of Islamic Banking in India and also the Reasons which are against it. By viewing both perspectives it seems reasonable to say that a gradual introduction of Islamic Banking should be a welcome step in India. The Indian government also strongly emphasizes and supports the idea of finance inclusion. A noticeable part of Indian population still needs to be a part of Financial Inclusion program of the government. So initiatives about Islamic Banking should be taken in future.

Positive impacts of demonetisation we must know

The demonetisation move, which is now considered as a mother of all reform in India, has started showing its positive impacts in very short time. The demonetisation declaration states that Rs. 500 and 1000 notes is no longer a legal tender. Of course, this reformative move has brought some hard life for common people, but it will pass soon. The people of this country are seem to be very enthusiastic about it and ready to take this pain. This is how democracy works where citizen participate in nation building and policy making.
Here, we’ll see the positive impacts of demonetisation has brought many-fold impacts on country and society:

1. Over Black Money
Black money is considered as a Cancer in any economy. It is a parallel economy, which weakens the foundation of any country. It is estimated that in India, the total amount of black money is Rs. 3 lakh crore. It is huge if we see that the total money in circulation is only Rs.17 lakh crore. With this single master stroke of demonetization, all the black money will either come to account book or will be destroyed.

2. Over Fake Currency
According to the ISI (Indian Statistical Institute), the circulation of total amount of fake currency in India is Rs.400 crore at any given point of time. It is also estimated that around Rs 70 crore fake currencies are being injected into India every year.

3. Over Bank Deposits
It is well-known fact that near about 86 percent currency circulation in India was composed of 500 and 1000 currency notes. And demonetization of these notes made people deposit their money which was in the form of 500 and 1000 Rs notes into the banks. RBI had declared Bank had received Rs 5.12 trillion worth of deposits until 18th November. This deposit of money can boost Indian GDP by 0.5 to 1.5 percent. India’s largest public sector State Bank of India (SBI) said it had received Rs.1.27 trillion worth of cash deposits.

4. Over Lending Rates
This huge cash deposit base will enable banks to cut down the cost of funds because higher deposits will replace the high cost of borrowing and reduce overall costs of funds. It can be expected that banks can reduce deposit rates by ~125 bps over the next six months. The new directives of MCLR (Marginal Cost of Funds based Lending Rate) will instantaneously take into account the lower cost. This will pave the way for a decline in lending rates, which will expedite the economic activity in the medium term.

5. Over Real estate cleansing
It is repeatedly said that real estate industry is built on black money. The extent of black money circulation in the sector is huge. According to report at least 40 percent of real estate transactions in Delhi-NCR are being done in black money. The demonetization move will curb the flow of black money into the real estate sector.

6. Over Hawala transactions
Demonetization has badly affected the the hawala rackets. Hawala is a method of transferring money without any actual money movement. Intelligence reports indicate that Hawala route is mainly used as a means to ease money laundering and terror financing. With black money suddenly being wiped out of the market hawala operations have come to a constant halt.

7. Over Financial inclusion
The inflow of cash into the banks will enable them to offer subsidized loans and other facilities to Jan Dhan account holder. The share of Jan Dhan accounts in total deposit base of the banking system is under 1%. The demonetization drive of higher denominated notes might propel cash deposits in Jan Dhan accounts. And this move will also make Jan Dhan Account holders to be accustomed to Banking system.

8. Over government finances
The unaccounted money will make way into the formal channel. This will raise the income tax collections. This raised amount from income tax will help government to reduce the fiscal deficit in fiscal year 2017. The latest move will shift the economy from the unorganized to organized sector. And the formalization of unaccounted money will also facilitate the implementation of GST scheme.

9. Over Bond Market
The ban on currency notes will enhance the demand of government bond in the market. As we know, it will improve cash deposits in the Banks which will eventually lead to higher SLR (statutory liquidity ratio) demand.

10. Over Kashmir unrest
If anywhere demonetization has shown its impact too soon, it is the Kashmir Valley. The four-month long turbulence in Kashmir has come to rest because of lack of monetary supply. An intelligence report suggests that separatists receive Rs 1,000 crore annually from the Pakistan for causing unrest in the Kashmir. The money is transferred through hawala route. Demonetization completely choked up hawala transactions. As a result, the separatists are now clueless. Demonetisation has dealt a death blow to the counterfeit Indian currency syndicate operating both inside and outside the country.
Demonetization also brought peace to the stone-pelters in the Kashmir valley. Since Demonetization has given a severe blow to the funding of separatist, they are unable to pursue the young people to agitate against the army or the state.

11. Over naxalites and North-East insurgency
They are the group, whose oxygen is black money. They are the worst victim of demonetization. Therefore they term this move as “Financial Emergency”. It is estimated that their yearly turnover is more than Rs.500 crore trough terror funding, NGOs, forgery, extortions and local taxes. This massive amount of money is used for recruitment, arms, foods, medicines and shelters.
With the demonetization move, all these stash of money is no more than a worthless paper. However, it has also come to notice that naxals are using villagers to deposit the money in their accounts. The authority must look into this matter seriously and prevent any further deposition of such money.
It should be also mentioned that after demonetization, crimes like theft, snatching, dacoity etc dipped in many places like Delhi, Pune, and Mumbai according to the recent data.

Smart cane for blind can remotely sense obstacles: Scientists
Scientists in the third week of November 2016 developed a new smart cane that can help transform the lives of the blind and visually impaired by allowing them to sense the obstacles which are beyond the physical length of their walking stick
This smart cane is named as 'mySmartCane'. It was developed by the researchers from The University of Manchester in the UK.
How Smart Cane will be helpful for the visually impaired?
• It works much like a common car parking sensor.
• The ultrasonic ball in the cane wirelessly measures the distance towards the approaching objects and converts this data into an audio signal.
• The visually impaired user can determine the object distance from the frequency of the sound, before the cane reaches an object.
• The user can hear the sounds through single headphone or through a pair of boneconducting headphones. This will enable them to listen to their external environment as well without losing their freedom.
• This modernised white-cane is simple and low-cost as it is fixed with 3D printing and cheap sensors to create an ultrasonic sensory ball, which attaches to the bottom of most existing white-canes.
Background
Vasileios Tsormpatzoudis, from the University’s School of Electrical and Electronic Engineering, upgraded the white cane by adding a low-cost embedded computer. For centuries, it was used only as a mobility tool.
He was inspired to develop mySmartCane after witnessing the struggles of his mother who has retinis pigmentosa, a hereditary eye disorder which affects the retina.

NASA develops Snack Bars for breakfast in Deep Space Missions

NASA food scientists have developed snack bars, a healthier and convenient alternative to the regular breakfast that astronauts carry with them into space.

The bars have been specifically created in order to reduce weight overboard the Orion Space Capsule- the first manned NASA flight- expected to launch post-2021.

Key Details
• The bars have been tested for flavour, texture, and long-term use. They are being looked at as the best possible meal replacement.
• The main reason behind the move is limited space inside the Orion capsule. The bars will help reduce the amount of food supplies astronauts need for longer missions, limit storage space and help cut down on the waste created by them.
• Developed in a variety of flavours such as banana nut, ginger vanilla, orange cranberry and barbecue nut, the snack bars weigh around 700-800 calories. This will also help the astronauts maintain a healthy weight.

Reducing weight aboard the Orion Capsule is significant, as heavier the aircraft, more the consumption of fuel and energy. However, ultimately the usage of these bars will depend on the reaction of the crew members because it is only if they like the taste of these snack bars that they will prefer to consume it for breakfast for weeks at length.

About NASA’s First-Manned Orion Deep Space Mission
The NASA’s first-manned Orion Space capsule is expected to travel beyond the moon, to various distant space destinations.
Unlike crew members on the International Space Station, who get to choose from 200 items for their meals and have a resupply spacecraft to deliver whatever they need or to dispose of their trash, the Orion crew will be on their own. They will have to take everything they need for the whole mission and bring it all back with them.
The lighter the spacecraft, the more distance it will cover.

Union Cabinet approves introduction of Merchant Shipping Bill, 2016

Union Cabinet on 23 November 2016 approved the introduction of Merchant Shipping Bill, 2016 in the Parliament. Simultaneously, the cabinet also approved repealing of the Merchant Shipping Act, 1958 and the Coasting Vessels Act, 1838.

The Merchant Shipping Act, 1958 has been amended 17 times between 1966 and 2014 resulting in an increase in the number of sections to more than 560 sections. However, these provisions have been shortened to 280 sections in the Bill.

Provisions of the Bill
• It allows substantially-owned vessels and vessels on Bare Boat-cum-Demise (BBCD) to be registered as Indian flag vessels.
• It recognises Indian controlled tonnage as a separate category.
• It provides for issuing the licences to Indian flag vessels for coastal operation and for port clearance by the Customs authorities.
• It calls for making separate rules for coastal vessels to develop and promote coastal shipping.
• It introduces welfare measures for seafarers by providing them with the wages till they are released from hostage captivity of pirates and reach back home safely.
• It directs owners of vessels to take insurance of crew engaged on vessels including fishing, sailing, etc. This applies for the vessels whose net tonnage is less than 15 tons.
• It says that the requirement of signing of articles of agreement by the crew will no longer be necessary.
• It calls for registration of few residuary category of vessels not covered under any statute and makes provisions for security-related aspects.
• It adds provisions relating to seven different conventions- Intervention Convention 1969, Search and Rescue Convention 1979, Protocol for Prevention of Pollution from Ships Annex VI to Marine Pollution Convention, Convention for Control and Management of Ships Ballast Water and Sediments 2004, Nairobi Wreck Removal Convention 2007, Salvage Convention 1989 and International Convention for Bunker Oil Pollution Damage, 2001.
• It also provides for survey, inspection and certification of vessels to enable simplified regime for convenience of Indian shipping industry.

RBI relaxes prudential norms on Income Recognition, Asset Classification

The Reserve Bank of India (RBI) on 21 November 2016 relaxed the prudential norms on income recognition, asset classification and provisions pertaining to advances.

The decision came following the withdrawal of the legal tender of 500 and 1000 rupees notes.

Key Highlights
• Taking into consideration the problems being faced by small borrowers in repaying their loan dues, RBI decided to provide an additional 60 days time, provided that the value of the loan or crop loan is less than 1 crore rupees.
• Term loans, housing loans and agriculture loans, whether business or personal, with sanctioned amount of up to 1 crore rupees on the books of any bank or any NBFC, will be eligible for relaxation.
• Loans sanctioned by banks to NBFC (MFI), NBFCs, Housing Finance Companies and PACs and by State Cooperative Banks to DCCBs are also eligible for the same.
• It also applies to dues payable between 1 November 2016 and 31 December 2016.
• Dues payable before 1 November and after 31 December 2016 will be covered by the extant instruction for the respective regulated entity with regard to recognition of NPAs.
• The additional time given shall only apply to defer the classification of an existing standard asset as substandard and not for restructuring of loans.

Islamic Window to be considered in conventional banks

The Reserve Bank of India (RBI) in a letter to the finance ministry has put forward a proposal to open an ‘Islamic window’ in conventional banks. The move is a stepping stone to its consideration of introducing Islamic banking in the country.

The RBI and the Union Government have been exploring the possibility of introducing the Sharia-based foundation since quite long in order to include even those sections of the society that remain outside the banking circuit due to religious reasons.

The information was revealed when a copy of the letter was sent to Press Trust of India, in response to an RTI filed by it.

Response of RBI to the RTI query
• Islamic banking may be introduced in the country in a gradual manner, considering the inexperience of Indian banks in the sphere and complexities of Islamic finance.
• At first, only products similar to those of conventional banking will be considered for introduction through an Islamic window at the conventional banks.
• The full-fledged introduction of Islamic banking will be considered at a later stage, based on the experience gained during the time.

Islamic Banking
• It is a financial institution that is based on the principles of the Islamic law (Sharia). It is also known as Sharia compliant finance.
• All its dealings, transactions, investment focus and business approach are derived from the Sharia law.
• Its governing principles are as follows:
- Absence of interest–based transactions
- Introduction of Islamic tax, zakat
- Avoidance of economic activities involving oppression and speculation
- Discouragement of production of goods and service that go against the Islamic value

In order to introduce Islamic banking, RBI still has to put a lot of things into place. For instance:
• Operationalisation of Sharia boards and committees
• Exploring feasibility of extending deposit insurance to Islamic banking deposits.
• Identifying the financial risks in such a framework
• Formulating appropriate criteria for Islamic products.

The plan, however, of introducing the Sharia-based banking structure has found stiff opposition from certain political and non-political groups.

The Parallel Economy of Old 500 and 1000 Rupee Notes

Prime Minister Narendra Modi’s decision of demonization of 500 and 1000 rupee notes has taken a new turn. It has given birth to a new kind of economy that thrives on the old illegal tender.
The new parallel economy welcomes the old notes, but at a price- at a discounted value- that often amounts to about 30%.

Key Details
• Despite demonetisation, old illegal currency is still being accepted at several local departmental stores, private chemists, small eateries, vegetable vendors and local retailers.
• The acceptance of the notes comes at a price. The consumer will only be able to purchase goods amounting to about 80% of the currency’s total value, that is, if you give a 1000 rupee note, you can only get goods worth around 800 Rupees.
• The places that are not taking any cut from the price, expect the consumer to buy goods worth the entire domination. This holds true for small retailers and privately-owned pharmacies.
• Even those having the new 2000 notes face the same problem. They have to buy goods worth the entire amount as no change is being given in return.

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The Parallel Economy of Old 500 and 1000 Rupee Notes
Nov 21, 2016 13:18 IST
Sangeeta Krishnan

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Prime Minister Narendra Modi’s decision of demonization of 500 and 1000 rupee notes has taken a new turn. It has given birth to a new kind of economy that thrives on the old illegal tender.
The new parallel economy welcomes the old notes, but at a price- at a discounted value- that often amounts to about 30%.

Key Details
• Despite demonetisation, old illegal currency is still being accepted at several local departmental stores, private chemists, small eateries, vegetable vendors and local retailers.
• The acceptance of the notes comes at a price. The consumer will only be able to purchase goods amounting to about 80% of the currency’s total value, that is, if you give a 1000 rupee note, you can only get goods worth around 800 Rupees.
• The places that are not taking any cut from the price, expect the consumer to buy goods worth the entire domination. This holds true for small retailers and privately-owned pharmacies.
• Even those having the new 2000 notes face the same problem. They have to buy goods worth the entire amount as no change is being given in return.

Repercussions of this rise
• With takers still being there for old notes, the black income still continues to flow.
• Savings of the middle class affected, as they have to now pay more in order to purchase daily utility goods.
• The resurrection of Black economy.
What is Parallel Economy?
Parallel Economy, also known as Black economy is an economy that functions on the basis of black money or unaccounted money. The transactions conducted under this system are kept hidden from the government and hence, go unrecorded and untaxed.