India is all set to embrace Islamic Banking and Finance as reforming the current banking law to allow sharia compliant banking, is on top of Finance Minister Pranav Mukherjee’s to-do list. Banking Laws Amendment Bill, 2010 proposes to bring about the necessary changes in Indian Banking Law to open doors for Islamic Banking and Finance in India – which has done extremely well even in non-Islamic countries like UK and Sri Lanka. Apart from providing finance of their preference to one of the largest Muslim population in the world, it will enable Indian projects to receive finance from Middle East and other countries where lenders prefer Islamic finance to other conventional methods of financial transactions. However, is India ready to take on the opportunity?
One of the key factors that will determine India’s success at Islamic finance is availability of trained personnel. For the youth in India, this brings fresh opportunity. Those who learn the intricacies of Islamic finance can look forward to meteoric growth as demand for experts will exceed supply right at the beginning. On the other hand, it will be a challenge before banks and financial institutions to find experts for various roles. One of the most difficult tasks may prove to be creation of a Sharia board which is required to govern and audit compliance of all the products and services with Islamic principles.
What is a Sharia Board?
The fundamental reason for existence of Islamic Banking and Financial products is that it caters to a market that prefers Sharia compliant means of finance. Islamic finance products therefore are required to be Sharia compliant by definition. It therefore becomes necessary that apart from designing a financial or banking product in accordance with principles of Sharia, it must also be certified by experts who understand religious principles as well as banking and finance business. This is where a Sharia-board becomes indispensible in the course of developing Islamic Banking and Finance products.
A Sharia board in this context is an advisory board, which is constituted of Muslim religious scholars who are trained in Islamic Finance. The Board pre-approves various products and services offered by an Islamic Bank or Financial Institution. Their primary job is to consider whether the proposed product or service before them is compliant to Sharia law. If it is not, it may suggest changes so as to Islamic values are maintained.
The Challenge before Sharia Boards
The biggest challenge before any Sharia board is identifying the correct interpretation of the Sharia law – as Sharia is not codified law. Even precedents are not binding. Therefore, Islamic scholars often hold varying views on important issues. Uniform practices with respect to what is Sharia compliant banking and what is not, is yet to emerge. Lot of difference often exists between rulings of Sharia boards of different banks, especially in different countries as scholars tend to follow different schools of Sharia interpretation.
What will happen in India?
In light of the fact that India is a vast country and with many sects of Islamic people (predominantly Hanafi, Shafi’i in Kerala and others), it is important to ensure that universally agreeable interpretations and principles emerge so that all kind of products and services offered by Indian Islamic banks and financial institutions receive equal treatment. Confusion with respect to this can seriously hamper a nascent market of Islamic products. Lack of uniform principles are also likely to lead to much litigation, and in the Indian context, given the time required to resolve legal disputes, this can surface as a major problem.
Training of Scholars for Effective Participation is Sharia Boards
It is essential therefore that from the outset there should be no lack of trained personnel to man the Sharia boards, who should understand principles of Sharia as well as banking and finance, and do not adopt materially different interpretations of Sharia. The initial training for this purpose is crucial. It is desirable that Reserve Bank of India, bearing the ultimate responsibility to protect banking interests in India, will ensure that the training issue of Sharia boards does not happen in an unplanned and haphazard manner, as that is sure to cause much distress to banks and financial institutions when they start rolling out products and services in accordance with Sharia.
Ramanuj Mukherjee is a young corporate lawyer at a leading Indian law firm in Mumbai and an alumni of National University of Juridical Sciences. He co-founded iPleaders, an LLP which seeks to make law easily accessible to everyone. He presently works at a leading law firm in Mumbai, and writes on Marketing and Advertising Law on www.MAdLaw.in. He generally blogs at 1sttaste.blogspot.com