Over the last year, I have watched with a mixture of amazement and despair as thousands of Muslims lost their hard-earned money at the hands of fraudulent companies who promised ridiculously high returns in the name of ‘Halal’ investments. I wonder why people would willingly walk into such traps without checking the background of such companies, their ‘Halal’ label, their books and accounts etc. Over time, I found the answer and it was right there all the time.
Let’s go with an example. A Muslim student is recruited as an employee at a software company. He/she saves Rs 25,000 per month, which means, a year later, he/she would have saved Rs. 3 Lakh per year. At different stages, all his classmates manage to get started with business or secure a decent job and have started investing in some areas through the mainstream banking routes. The Muslim student, on the other hand, remains confused because as a practicing Muslim, he/she does not want to invest in and/or earn interest. When he/she thinks of investment options, depositing with the conventional banks or insurers would not be an option.
Does Shariah Compliant mean Anti profit?
It is also important to point out that over the past few years, the phrase ‘Shariah-Compliant’ has wrongly acquired a negative image due to a misconception that Shariah is anti-profit. This is a myth. A huge number of companies in India are Shariah-compliant and equity is the preferred mode of investment in Shariah. Hence, stocks should have wide acceptance among Muslim investors as long as these stocks follow Shariah rules. In fact, even the National Stock Exchange and the Bombay Stock Exchange have a Shariah index which allows you to keep track of investments and companies that follow Shariah principles. The moot point, however, is this: how do you encourage a population that is economically and socially backward to invest in something as technical as equity investing? Plus, talks of stock investments ring premature when seen in context of the large-scale marginalization of Muslims when it comes to having access to Shariah-compliant banking.
The only option left, then, is to either to start new business with the help of relatives and friends or invest in real estate. And we know that starting a business is neither possible for everyone nor ideal. In the case of real estate, the investment is high and it cannot be liquidated (cannot be converted into cash immediately).
The state of Our community’s savings
Where then, does the money saved by Muslims go? Either it lies unattended in banks (and the banks use it to further interest based loans, an anti Shariah business) or the money lies at home losing value). Who is to be blamed for this? Our savings are not used by our own people and not used for our causes – either business, education, insurance or any needs. And despite several proposals, suggestions and ideas, the Reserve Bank of India and the Government are not in favor to allow full-fledged interest free banks and Takaful (insurance) companies to operate. And when even the ‘pro-Muslim’ Congress/UPA government did not allow it, do we honestly expect this NDA government to do so?
As a result, India finds itself in a rather unenviable position. The world’s third-largest Muslim population has less than 3% representation in financial system. This is even less than their representation in the Indian bureaucracy (4.7%) which itself is hardly a number to feel good about.
No wonder then, that the cases of fraud (which are happening more frequently in Bengaluru and Hyderabad) have become common these days. Companies which claim to do business in terms of Islamic rules of transactions have failed miserably in terms of performance and hence couldn’t sustain over a period of time. They pool investment from small savers, business organization and retired individuals and promise an expected return which they can’t provide for. Some companies are openly indulging in Ponzi schemes, only adding to the image that interest-free financial institutions are not to be trusted.
Do we have viable options?
What we need is a an interest free financial model which is legally sound, financially robust, commercially viable, socially inclusive and shariah compliant. Many companies have tried but failed mainly due to mismanagement of funds, excessive exposure to real estate and dubious financing practices are just few of the problem to mention. The massive rise and the subsequent fall of ponzi companies have once again necessitated the task of reformation of real alternative. In this context, companies like Rehbar, Mount Judi, Secura, Cheraman and TASIS (shariah indexes) are some of the ground breaking efforts furthering the alternative option.
On the level of cooperative societies, there are institutions like Janaseva, Sanghamaum, Al khair, Bait un Nas, Sahulat Microfinance and Islamic Welfare Society which have gained trust in the public in terms of their performance and sustainability. On the stock exchange, there are Tata Ethical Fund and Taurus Ethical Fund which will appeal to the faith-based investor. There are no capital market instruments (stock and bonds, debentures, treasury bills, fixed deposits) available so far that claim to be Shariah-compliant.
How to know if a company is Shariah Compliant? 4 points
Any business/finance or investment in accordance with Islamic Principles is called Shariah-compliant. There are research reports, books and many speeches available on the issue, but essentially there are four principal rules/criteria to check the Shariah permissibility:
- The first and foremost is the business activity screening. Before investing, make sure that the company doesn’t violate any shariah prohibition. Accordingly, any involvement or investment in business of alcohol, pork, gambling, tobacco, and any interest-bearing transaction and all those that are prohibited under Islamic law are to be avoided.
- Second, all the business undertaking or investment commitment needs to be thoroughly written down between the parties and the witnesses are sought to form a contract. While contracting, all terms and condition should be in clear guideline so that no disputes arise in the future. Any uncertainty as to the subject matter, price, delivery date etc shouldn’t jeopardize the true and actual performance of the contract.
- Third, any partnership or co-venture between parties must have equal chances of profit or loss. Any investments that claims to make a fixed sum of money as returns are void under Islamic law. As with any investment, there is a chance of making losses the same applies to Shariah-compliant business/ investments as well. Reporting losses doesn’t mean non compliance with Shariah.
- Fourth, any investment that doesn’t disclose their business in terms of nature and accordingly their accounting fails the test of compliance. This demands the accounting and auditing of the whole business.
These are the prerequisite notes that can be controlled if external body legitimately have supervision both from commercial and legal (including Shariah) point of view. And this is where the fraudulent companies were able to get away. Insurance companies have the Insurance Regulatory and Development Authority of India (IRDAI); the stock market has the Securities and Exchange Board of India (SEBI); banks have the Reserve Bank of India (RBI) and Halal-compliant companies? There is the Ministry of Corporate Affairs and the Registrar of Companies but that is for all registered companies. However, there is no single body or authority that investors who have lost money in these companies can approach. This was most visible when complaints against Heera Gold surfaced; it was between the Crime Branch, the Economic Offences Wing, the Enforcement Directorate and the Serious Frauds Office of India to decide. No wonder then, that the people who have lost money have little hope of ever getting their money back.
The most fundamental yardsticks to consider is the shariah-compliant actual business performance, growth and development and its impact in the economy and its future course of business. It is becoming increasingly clear that in the absence of a regulatory authority and any offering of an alternative from the government regarding investments and banking, Muslims are caught between the devil and the deep sea. And these fraudulent companies are making millions by acting like saviours.
(The author has vast experience in Islamic finance having worked in Malaysia and Middle East and is currently based out of Bhatkal, Karnataka. He can be reached at abudasif@gmail.com)
Disclaimer: The opinions expressed within this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of SahilOnline and SahilOnline does not assume any responsibility or liability for the same.
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