Is the cooperative model a good fit for the development of Islamic finance in India?

In a country where the offering of Shariah compliant products and services is almost impossible, the launch in late July of Halal Fayidah, introduced as a cooperative bank, created headlines. The support received by the institution from the Communist Party India — Marxist (CPIM) certainly contributed to the rapid fame of Halal Fayidah as well. However, MARC ROUSSOT finds that the industry is divided on whether or not establishing such a structure is a good idea.

The offering of Shariah compliant products and services is almost impossible in India. Almost, because there is actually one solution: through a cooperative society. Several states are home to such a structure. Sanghamam, a multi-state cooperative society established back in 2012 and offering interest-free microfinancing, is operating in Kerala, Tamilnadu and Pondicherry.

Despite being the only method of offering Shariah compliant products and services to Muslims, Ali Shervani, a marketing consultant in Islamic finance, is very skeptical toward the setup of cooperative societies in general and Halal Fayidah in particular, an initiative that he describes as controversial as it has been politicized since the CPIM had given its support to it.

“I would prefer to wait for the Reserve Bank of India, the banking system’s regulator, to accommodate Islamic banking so that a large bank can open an Islamic window. In my opinion, it would be better to start offering Islamic products later with a proper set of regulations than being sorry,” Ali says.

Ali’s main fear is that the lack of strong and proper regulation may lead to mismanagement or embezzlement cases, seeing that the Reserve Bank of India is not the regulator of cooperative societies. It is either the State Registrar of Cooperatives for state cooperative societies or the Central Registrar of Cooperative Societies for multi-state cooperative societies like Sanghamam.

“Cooperative societies operate on the principle of mutual benefit and their aim is certainly not profit maximization. In the end, this can run into trouble with mismanagement that is bound to happen as it has been seen many times including here in India. There is no doubt that many Islamic cooperative societies will be set up across India and obviously many will be very successful, but even if we have one scandal, it will give a bad name to the whole industry,” Ali shares.

The positive side
Having said that, certainly not everyone is as skeptical as Ali. Abdur Raqeeb, the general secretary of the Indian Center for Islamic Finance, welcomes Halal Fayidah’s establishment and predicts that “support will flourish” among the population of 34.8 million.

“We have received a warm response from the public, especially Muslims,” confirms P Jayarajan, the secretary of the Kannur District Committee of the CPIM, who insists that: “It is not a bank exclusively for Muslims. We welcome people from all religions.”

Halal Fayidah’s primary goal is actually non-religious and purely economic, according to Jayarajan. The idea of establishing the cooperative society did come from cultural organizations working among Muslim communities in Kannur, but this came as a solution to those who lost their savings during the demonetization period, as they failed to produce proper documents showing their source of income.

The CPIM also rejects accusations of politicizing Halal Fayidah. “We are not promoting identity politics nor are we aiming for electoral gains,” claims Jayarajan.

Beyond the polemic
Halal Fayidah will be fully operational in September. It is now in the process of raising capital through the sale of shares worth a total of INR100 million (US$1.56 million).

The 13 members of the board of directors have decided to invest the capital in various Shariah compliant businesses, including construction and meat processing. Profits from the investments will be equally distributed among shareholders and disbursed to people as interest-free loans. “The core idea of the initiative is to bring a larger community into banking,” shares Jayarajan.

The CPIM’s long interest in Islamic financial institutionsBack in the 2000s, the state government of Kerala ran by the CPIM mulled establishing a Shariah compliant financial institution aimed at raising funds that would be utilized for the development of infrastructures.

The goal was to channel funds from Gulf countries, where many Indians are working, to Kerala. The money would have been utilized to finance roads, high schools, hospitals, etc. Similar to Halal Fayidah, depositors would have been the owners of the bank.

This solution had been considered, as the federal government that was usually financing such projects through loans was pressured by the IMF and the World Bank to stop doing so, considering how the country had been going through an economic crisis.

The regulator would not have allowed the setting-up of a conventional bank, according to the CPIM, and this is why it opted for a Shariah compliant financial institution. However, the project did not materialize as the Supreme Court ruled against it before changing its mind. But at that time, the CPIM was not in power anymore.

This article first appeared in IFN Volume 14 Issue 34 on the 23rd of August 2017


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