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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