As TDP promises setting up of Islamic Banking, a look at why it is so controversial

TDP leader Nara Lokesh promised to set up Islamic Banking if voted to power. The BJP has strongly criticised this. A look at why Sharia-compliant banking is controversial

Islamic Banking is in the news after National General Secretary of the Telugu Desai Party (TDP), Nara Lokesh spoke about the same.

While speaking with Muslim community representatives in Srikalahasti, Tirupati district, Lokesh reminded them about how his grand-father N T Rama Rao had established the minority corporation.

The BJP however reacted to this development and called the setting up of an Islamic bank as ill-conceived. BJP leader Duddakunta Venkateswara Reddy said, 'we want to know if Nara Lokesh actually knows any about Islamic Banking.'

The TDP leader is speaking about an Islamic Bank at a time when the Reserve Bank of India had opposed the proposal to set up one. Moreover the BJP is trying to unite the country that is divided on religion lines. Further the original names changes during the colonial rule are being restored to propagate a feeling of national unity, Reddy also said.

What is Islamic Banking:

Islamic Banking is a form of banking that complies with the Sharia law. It prohibits the charging of Riba or interest. It functions on the principles of the Quran and promises to offer interest-free loans.

One of the main concerns about the Islamic bank is the concept of interest-free loan itself. To provide interest free loans and also make profits, it would need to upsell goods. If a consumer is in need of a loan to by something, the Islamic Bank will buy it and resell it to the customer at a higher price. This loophole allows the Islamic Banks to earn profits from the customers without really charging an interest on loans or other payments, according to reports.

Islamic Banks also offer financing arrangements that involve profit-sharing, where both the bank and the customer share the risks and rewards of the investment.

One more concern about Islamic Banks are that they can grant or deny funds to customers depending upon their interpretation of the Quran.

Although the Reserve Bank of India had disallowed Islamic Banking, there are Sharia Index in India that can be defined as an index of companies that are compliant with the Sharia Law. Before getting listed in indices, these companies are screened by an authorised board. The four main indices in India are-Shariah-compliant companies that are S&P BSE 500 Shariah Index, BSE Tasis Shariah 50 Index, the Nifty 500 Shariah Index, and the Nifty 50 Shariah Index.

There are also mutual funds that adhere to Sharia and the top three in this category are-Nippon India ETF Shariah Bees, Taurus Ethical Fund, and Tata Ethical Fund. The Sharia-compliant funds mostly include those companies that adhere to the principles under 'Halal'. The Sharia-compliant mutual funds do not invest in companies engaged in businesses which are not permissible under Islam. These include alcohol and beverage companies.

What is the controversy:

Islamic Banking or Sharia Banking was recommended by the Reserve Bank of India in 2016. However in 2017, it was scrapped after receiving heavy criticism.

At that time, Union Minister, Mukhtar Abbas Naqvi had said that, "India is a secular and democratic country and will not permit Islamic banking. The current financial system is open to all and there are many government and scheduled banks. Hence the government is not considering the idea of implementing Islamic Banking.

The idea of Islamic Banking was first proposed in a report titled, "A Hundred Small Steps,' prepared by a high-level committee on Financial Sector Reforms heard by Raghuram Rajan in 2008. The report made a reference to Islamic Banking but did not use the term, Sharia-compliant banking or Islamic Banking.

There were controversies around this system of banking after reports of operators of Sharia-compliant Muslim Funds or private banks had duped Muslims.

In January this year, it was found that one Abdul Razzaq had duped Muslims of crores of Rupees that were deposited in a Muslim Fund. Razzaq a resident of Jwalapur, Uttarakhand was running an interest-free transaction office in the name of Muslim Immadi Fund. Thousands of Muslims had opened accounts here and contributed a portion of their daily income.

In April last year, the Bijnor Police in Uttar Pradesh arrested one Mohammed Faizi after it was found that he had duped customers of the Muslim faith of crores of Rupees in the name of a Sharia-compliant Muslim Fund called Al-Faizan Muslim Trust.