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Contemplating Islamic Banking

It explores the possibility of an alternate banking system in India
Muzafar Shah
Srinagar | Posted : Dec 7 2017 1:44AM | Updated: Dec 6 2017 11:40PM
Contemplating Islamic Banking

The book titled “Islamic Banking and Finance- FiqheConomics is the way forward” is edited in a manner to be understood by the masses. It explores the possibility of an alternate banking system in India on the pattern of Malaysia, Turkey and Saudi Arab to involve maximum number of people in risk and profit sharing. The scope for investment in equity shares is therefore broadened and to explore the possibility of implementation of the system much research needs to be done in the subject. The articulation of the book has been done in such a manner that one can start with the benefits of the Riba-Free banking and finish the book with the expert knowledge of fundamentals of alternate banking system. The impact of the measures mentioned in the book could prove of paramount significance to the governments and people of India due to the extensive size and diversity of the market.  

Although the literature presents that researches are done in the field of Banking but for the risk management there is no perfect efficient expert system available. There is expert system for Banking Sector but not for reducing the risk factor for large scale industries. Pertinently all the expert systems which were available in 2008 failed due to global inflation and non-performing assets. Thus, the question of an alternate banking system arose all over the world and the alternate banking system got attention which is known as Islamic Financial Management and alternate banking system in Europe. 

Also, Saudi Arab, Turkey and Malaysia remained unaffected despite global financial crises. International financial agency like the Standard & Poor continuously monitored Greek’s credit worthiness which in turn determined the interest-rate country’s bonds should yield.  By June 2011, Greece’s credit rating had dropped to tipple C, the lowest credit rating in the whole world, and the country’s interest rates shot back to pre-euro rates. Greece earned this triple C rating due to the belief it might actually default on its debt, i.e. Bankruptcy.

The global financial crisis has focused policymaker’s attention on making their banking and financial systems safer and more resilient to shocks and uncertainty. While Interest-free-banks- dominated financial system stood up well during the crisis and did not require the extensive overhaul required in most of the countries including India.  The Islamic banks all over the world continued to develop their prudential policies with the aim of improving the resilience of individual institutions and the financial system as a whole. Ensuring that core banking services could continue if any one of their large banks comes under duress, and that the cost of bank failure falls squarely on the shoulders of shareholders and creditors. Notwithstanding the importance of financial system resilience, a need to understand more about the efficiency of the financial system when assessing its performance and contribution to the economy was felt. 

Responding to the crises all over the world, Mahboob Makhdoomi came up with an advocacy group for implementation of an alternate banking system who conducted an extensive research in all districts of Kashmir valley. The time has come when the international community, facing  financial crises, needs an alternative financial system for equal development of all regions of the world. 

The Economic Development of a nation is highly dependent upon a sound banking system which can facilitate mobilization of financial resources and channel them towards productive purpose which will result to a high degree of capital formation. Bank nationalization was the first step towards financial inclusion in India. Regional rural banks were created to take the banking and financial services to the rural people. But in rural India, Muslim population avoided to open their bank accounts due to interest, which is strictly prohibited in Islam.  Thus the initiatives taken by the Government of India had mixed impact on the economy as the performance was unsatisfactory on some financial parameters. For financial inclusion, people need to have some basic financial literacy, financial skills, product knowledge and understanding. The book addresses investment and profit sharing, but has failed to address the concerns of non-Muslims, as Riba is not prohibited for them and we live in a society which is witnessed by diverse cultures.  Further, the book focusses on the investment in promising markets. However, no market could be determined as ever promising due advancement in the technology which is upgraded on daily basis and collapsing existing markets.  

As an academic discipline Islamic Banking is worth research as a novel subject. But looking at the current situation in India it seems very difficult to get it implemented in any of the banks in India despite the State Bank’s initiative to include more and more people in the Indian Financial System by opening an Islamic banking window at their branches.

Recently, in Malaysia, researchers have found that Islamic Financial System perform very well for the complex and unstructured economies when compared to more traditional statistical approaches. Expert systems with explanation for decision making can achieve a high predictive accuracy rate; the reasoning behind how they reach their decisions is not readily available. This book presents an Expert System for supporting interest free banking in India.   The book provides tools that aids the decision makers to make the right decision with familiar and easy-to-use interface. There are several techniques which could be applied to acquire the knowledge of investment decision systems in banking with effectiveness, efficiency and correctness. 

My overall view on the book is that exhaustive research has been done on the topic by the author and it has been nicely compiled by the editor, Prof. Shabir A. Bhat and his expertise in Business Management is well reflected in the book in such a way that everybody could understand the fundamentals of Islamic Financial System apart from its short-comings and confinement to only one caste of the entire society. It is a tremendous contribution to the existing literature and a base for exploratory research in Islamic banking.  

Reviewer is a Research Scholar at the Business School, University of Kashmir