Financial Exclusion of Indian Muslims

Syed Zahid Ahmad, AICMEU's Baitulmal Co-operative Credit Society Ltd, Mumbai. aicmeus@yahoo.com

Muslims as Minority Community in India:

Though Indian Muslims along with other communities initiated, struggled and sacrificed their lives for freedom of India, perhaps the incident of partition (and origin of Pakistan) shadowed those sacrifices. The awful situation is that, not only those Muslims, who choose India as their own country, became undesirable; but the Muslims born in India after freedom, who had nothing to do with formation of Pakistan, are still paying the price of that partition and are made to feel their fundamental rights as obligations. Today, the community is almost detached from the mainstream and rated as the most under-privileged community after Scheduled Castes (SCs) and Scheduled Tribes (STs) in India. The feeling that Muslims are deprived of sharing development fruits has caused great sense of alienation among the Muslims. With lot of showmanship, it was decided in 2005, by present central government to investigate the plight of Indian Muslim.

Even Justice Sachar Committee did not justice:

This investigation report, popularly known as Sachar Committee Report was published in November 2006, revealed some factual data about the nature and degree of Muslim backwardness; but some section of the report did not justified with the fact findings. As it would not be possible here to discuss all those injustices, with due regard and thanks to Justice Sachar Committee members; I would like to point out the following five points related to deprivation of Indian Muslims religious rights and their financial exclusion in banking and finance sector, where it seems misappropriated.

1. Indian Muslims not prefer to deal with interest based banking or financial services and is seeking policy initiative to operate interest-free banking and finance in India.

2. The prohibition of interest in Islam is a root cause of lower participation of Muslims in employment and business activities in banking sector.

3. Indian Muslims reluctantly use interest based banking services to avail security for their individual deposits and credit for their business requirements.

4. The demand for interest-free banking by Indian Muslims has been deserted for over 60 years and the policies regarding Interest-free financial Institutions in India (IFFIs) are also causing hurdles in growth.

5. In absence of Interest-free banking in India, there is annual financial exclusion of Indian Muslims over Rs. 22,000 crores.

What is unjust in Sachar Committee Report?

It is admirable that through Justice Sachar Committee Report, the Indian Government attempted to divert thinking of Indian Muslim leaders towards general development plans. Since the concerned persons for preparation of the said report used to live in civil society; they miss to include the psychological approach of Muslim majority (living in slums or poor villages with lower tolerance over issues related to religion and community affairs) in preparation of the report. This made the report reflecting the ideology of civil society, and the real observations and feelings of general Muslims were not transmitted in the said report. It is a fact that the demand for interest-free banking by Muslims in unorganized sector is more acute than by Muslims living in civil societies.

Why Muslim's participation is low in banking Sector?

Muslims do not prefer to interact with interest based banking and finance because Islam strictly prohibits interest. The pre-dominant role of interest in our fiscal and monetary system caused exclusion of Indian Muslims from banking and finance sector. The general Muslims are more reluctant to interest based systems as compared to those living in civil society. This is also clear from the observation that majority of Muslims associated to civil society tends to use interest-based banking and the general Muslims who do live in slums and rural areas are more reluctant to interest based banking, and they prefer financial exclusion compared to being part of interest based banking and finance. They like to transact through IFFIs, as they provide interest-free banking and financial services.

Why Interest is prohibited in Islam?

Interest (Riba) is such a forbidding sin in Islam that the Creator of Universe Has Announced War against those who take Riba. Those who devour Riba would be under fire (Hell) forever after death, because Riba is a cruel practice against humanity; which ruins the sublime human feelings like sacrifice, charity and help etc. from civil society and helps promoting such a ruthless society, where instead of 'humanity'; the capitalist forces (with their wealth) rules the society. In fact Riba is just not meant for a value addition as 'interest' over principal sum of deposit or lending, but it could be defined as a practice to take undue advantage from the needy with providing conditional credit. Riba could be observed in different forms while practicing trade and commercial activities. It's important to note that enabling someone to indulge into Riba is indirectly meant for promoting Riba. So those who deposit savings at banks (capitalist forces) are indirectly empowering banks to execute Riba by lending loans on interest (with help of extended finance through savings). The sin of Riba is quite evident after thousands of farmer's suicides cases.

Unjust reporting by Justice Sachar Committee:

In the largest secular democratic country 'India', even after 60 years, the Muslims are not allowed practicing their religious rights in banking sector because while Islam strictly prohibits interest, Indian banking acts does not allow opening an interest free Bank in India. The community being in minority could not fight against it. If someone ever tried to rise voices, that been diplomatically denied by government officials. The latest example could be illustrated from the incidence how the Justice Sachar Committee Report (which is considered as ever best gift to Indian Muslims) denied doing justice with the Community. This demand of interest free banks for Muslims as raised by a few community leaders before delegates of Justice Sachar Committee was not only denied but perverted with just following three sentences.

"Some felt that it was desirable to create separate financial institutions for Muslim entrepreneurs. Others argued that the existing minority financial institutions have been a failure and a decentralized micro-credit schemes through self help groups (SHGs) is the most viable option. Some existing SHGs for Muslim women entrepreneurs that have been successful were cited as examples that could be emulated."

Here in the first sentence; it seems that the committee with intention to avoid discussing over 'Interest-free banking' instead of clarifying the nature of desired 'separate financial institution' for Muslims just said that "Some felt that it was desirable to create separate financial institutions for Muslim entrepreneurs". The very next sentence further sliced the demand by reporting others argument about minority financial institutions that "the existing minority financial institutions have been a failure" (means Muslims are inefficient to manage interest-free financial institutions). Again with intention to avoid any possible uproar over interest-free banking, instead of discussing about causes of these failures (and also about role of government authorities in such failures), in the same sentence, the committee tried to divert the topic towards Micro-Credit Schemes, quoting that "and a decentralized micro-credit schemes through self help groups (SHGs) is the most viable option". The third sentence further strengthens this attempt of diversion by quoting that "Some existing SHGs for Muslim women entrepreneurs that have been successful were cited as examples that could be emulated".

This way without citing the 'taboo' word 'Islamic Banking', the government officials not only denied the demand of interest free bank in India and left the Muslims deprived of their religious right to transact interest free banking; but also tried to divert Muslim's attention from Interest-free Banks to Micro–Credit Schemes, where the rate of interest is relatively higher than SCBs, creating scope for more financial loss to the community.

Muslims have lowest employment share in RBI:

About lower percentage of Muslims in banking sector, the committee writes that –

"The Census, 2001 data (Fig. 6.12) shows that the percentage of households availing banking facilities is much lower in villages where the share of Muslim population is high."

It indicates that generally Muslims avoid interest based banking and wherever the community is higher in concentration, they tend to operate interest-free financial institutions. The committee further mentioned that -

"The representation of Muslims is very low at 2.2% in bank employment overall, just 1.7% at higher levels and 2.5% at lower level positions. "

"Similarly, available estimates suggest that the number of Muslim employees in the Reserve Bank of India (RBI) is 150 out of nearly 19000 employees."

The committee did not like to discuss about reasons of lowest percentage (0.78%) of Muslims in RBI and SCBs (2.2%). The intention could be simply to avoid any discussion over possible reason - 'prohibition of interest in Islam' and thus real need of interest-free banking, which seems unacceptable to RBI and SCBs rather they might in reality seek exclusion of Muslims for monetary and financial system. Unless our policy makers take some policy initiative to recognize the real demand of interest-free banking for Muslims, percentage of Muslims in banking sector is not going to increase.

Manipulated observations and recommendation by Sachar Committee:

The committee did not justify with some of the following sections of recommendations related to banking and finance.

"The chapters on Bank Credit and Government Programmes have highlighted the fact that flow of credit to Muslims is quite limited. While part of this could possibly be due to lower demand for credit due to low income levels of the Community, low access to credit cannot be ignored. Lack of access to credit is a more serious problem for the Community as a significantly larger proportion of workers are engaged in self-employment, especially home-based work."

Here in above observation, it was truly reported that flow of credit to Muslims is quite limited; but wrongly interpreted that it might be due to low income of people, because already in chapter 6, the committee has found and quoted the following facts contradictory to the above statement of low income as a reason for low credit demand.

"Muslims constitute about 12% of all ASCBs account holders. ... It is noteworthy that the share of Muslims in the 'amount outstanding' is only 4.7%".

Unfair Recommendation by Sachar Committee:

So, it is clear from the above statement of the committee that, Muslims share in PSA accounts (12%) is closure to their percentage share in population (13.43%), moreover the demand for Credit by Muslims is much higher as compared to granted loans under PSA by SCBs. Moving ahead with intention to promote interest based banking among Muslims instead of recognizing demand for interest-free banking, the committee further recommends the following -

"The Committee, therefore, recommends promoting and enhancing access to Muslims in Priority Sector Advances. Any shortfall in achievement of targeted amount in minority specific programmes should be parked with NMDFC, NABARD and SIDBI and specific programmes should be funded with this amount. However, the real need is of policy initiatives that improve the participation and share of the Minorities, particularly Muslims in the business of regular commercial banks"

The committee in a way told Indian Muslims that they should either forget prohibition of interest in Islam and start participating in interest based banking as other communities do participate; otherwise remain out of the credit system. This is very clear from the fact that the committee instead of discussing about prohibition of interest in Islam and financial exclusion of Muslims by SCBs, advocated inclusiveness of Muslims in SCBs business.

Sachar Committee supported practice of financial exclusions of Muslims:

About role of specialized financial institutions like SIDBI and NABARD, the Committee submitted the following recommendations.

"The Committee also recommends that the coverage under Public Programmes should be extended to include more schemes and should also include lending by NABARD and SIDBI. SIDBI should set aside a fund for training for minorities under its Entrepreneurial Development Programme. Such programmes should not only aim to improve skills of artisans in traditional occupations but also reequip them with modern skills required to face the adverse effects of globalization in their area of artisanship. Given the substantial presence of Muslims in these occupational groups special attention should be given to them."

"While the available data is inadequate, there is a widespread perception that the participation of Muslims in the Self Help Groups (SHGs) and other micro-credit programmes is very limited. A policy to enhance the participation of minorities in the micro-credit schemes of NABARD should be laid down. This policy should spell out the intervention required by NABARD through a mix of target and incentive schemes based on the population percentage of Muslims in the village in order to enhance the participation of Muslims in micro-credit. In any case, data on the participation of different SRCs in such schemes should be collected and shared with the RBI or the NDB. The implementation of such schemes may need to be tailored to specific situations."

In the above recommendations, the committee not even liked to discuss about reasons and consequences of financial exclusions of Muslims by SIDBI and NABARD. If we see that there is less than 4% share of Muslims in finances extended by NABARD and even less than 0.48% share in loans granted by SIDBI, the above recommendation of the committee bound us to think that, the committee wants to see continued financial exclusion of Indian Muslims by SIDBI and NABARD.

Annual Financial Exclusion of Indian Muslims

Analysis of data available at Sachar Committee Report shows that there is annual financial exclusion of Indian Muslims worth over Rs. 22,000 crores. The following table shows how Indian Muslims are being financially excluded. Due to errors in data of 25 SCBs, the Sachar Committee used data of only 31 SCBs. The analysis of these data shows annual financial exclusion of Indian Muslims worth Rs. 11,170.40 crores.

Loans / Deposits	Rupees in Crores		% to Muslims
	All SRCs	Muslims
1. Outstanding loan amounts under PSA granted by 31 SCBs	328,755.00	15,685.00	4.77%
2. Loans disbursed by SIDBI	26,592.58	124.12	0.47%
3. Production refinance by NABARD	9,167.65	290.83	3.17%
4. Investment refinance by NABARD	8,485.48	333.41	3.93%
5. Total outstanding loans by 31 SCBs, SIDBI and NABARD	373,000.71	16,433.36	4.41%
6. Total individual deposits at 31 SCBs	528,541.00	39,112.03	7.40%
7. Total deposit loan ratio (7=5/6)	70.57%	42.02%	-28.56%
8. Net annual financial exclusion of Indian Muslims	Rs. 11,170.40 Crores

If we assume that the other 25 SCBs whose data been excluded by Sachar Committee would follow the same ratio in deposit and credit amounts, it is supposed that the remaining 25 SCBs will share around 45% of total deposits and loans of 56 SCBs while 31 SCBs will share 55% of total deposits and loan amounts. With this ratio, the annual estimated deposits and outstanding loans at 25 SCBs could be as following:-

Estimated Deposits and Loans at 25 SCBS	Rupees in Crores		% to Muslims
	All SRCs	Muslims
9 Total outstanding loans under PSA accounts by rest of 25 SCBs	146,756.23	7,001.78	4.77%
10. Total individual deposits at rest of 25 SCBs	235,940.70	17,459.61	7.40%

If we sum up the figures of 31 and 25 SCBs deposits and loan amounts, there is estimated annual financial exclusion of Indian Muslims over Rs. 15,025 crores due to deficit in deposit loan ratio for Muslims, based on assumption that all 56 SCBs would maintain the same ratio as 31 SCBs did whose data used by Justice Sachar Committee.

Estimates of all SCBs, SIDBI and NABARD	Rupees in Crores		% to Muslims
	All SRCs	Muslims
11. Estimated total individual deposits at all 56 SCBs	764,481.70	56,571.64	7.40%
12. Estimated total credit issued by 56 SCBs, SIDBI and NABARD	519,756.94	23,435.14	4.53%
13. Estimated total credit deposit ratio (13=12/11)	67.99%	41.43%	-26.56%
14. Net annual financial exclusion of Indian Muslims	Rs. 15,025.43 Crores

If annual interest earned by SCBs over Rs. 7,000 crores (with estimated PLR of 12.5% p.a.) due to deposits by Muslims accumulated to deficit in credit due to deficit in deposit loan ratio, the annual financial exclusion of Indian Muslims amounts to Rs. 22,000 crores.

Analyzing the above table, we may further conclude that Muslims contribute 7.4% of national individual deposits at SCBs and get only 4.7% of outstanding loans; it shows SCBs are more interested in mobilizing deposits from Muslims and neglects them while it comes to granting loans. If this financial exclusion of the community had been checked earlier, the percentage of Muslims living under BPL would have dropped considerably.

Sachar Committee supported Economic Assassination of Indian Muslims:

For Indian Muslims, already suffering from severe economic backwardness, this sort of financial exclusions is proved to be an act of economic assassination by so called secular democratic system. The Justice Sachar Committee Report should have pointed out this financial exclusion of Indian Muslims and suggested measures to check this exclusion. Instead the Committee supported the financial exclusion of Indian Muslims by avoiding to quote anything about this exclusion rather suggested recommendations for inclusiveness of Muslims in the existing banking and financial system. The genuine reason for this might be to avoid any possible uproar among minority community for this exclusion and demand of interest-free banking. The committee is not supposed to let any chance for creating anti incumbency factor for the present government, thus they accordingly prepared the report and tried to avoid any uproar among the Muslim community.

This financial exclusion may spread communalism:

But it is just not possible to hide the fact for a longer time. How long a paper boat could float in the sea? If justice is not given to a community, it will lead to revolution and may disrupt the system as well. It is expected that sooner or later, the Indian Muslims would revolt against this financial exclusion and may also agitate by demanding interest-free system to have due share of credit on their savings. By that time, it would be too late to handle the issue, because if it gets the communal touch, it may communalize our economic and financial structure as well. The community with 67% poverty and over 90% workers associated with unorganized sector, the Indian Muslims need special financial facilities. And in view of the extended credit requirement, if the financial exclusion is not checked, it may really create a sense of communal uproar among Indian Muslims. And by that time, it would be really very difficult to justify the negligence of demand for interest-free banking and measures to control financial exclusion of Indian Muslims.

Immediate Policy Initiatives required:

Some Muslim leaders have already submitted plea to Ministry of finance and office of the Prime Minister of India to consider application for permission of interest-free banking in India. It is high time our government authorities should consider the sensitiveness of this issue and handle it tactfully. With current decline in growth rate it may be the right time to take due policy initiative for allowing interest-free banking business in India to facilitate the entrepreneurs and individuals associated with our unorganized sector. The issue related to feasibility of interest-free banking and its compatibility with RBI, may be discussed in exclusive meetings with advocates of interest-free banking with RBI legal advisors. Any further silence over it may certainly defame our secular democratic governance at international level; if it leads uproar of just following fact that -

"Indian Muslims, being in minority; despite 60 years of secular democracy are deprived of practicing their religious rights in banking and finance sector, and there is annual financial exclusion of Indian Muslims over Rs. 22,000 crores. "

Time is running out for justice!

Indian Muslims seek justice over their financial exclusions and demand for permission to open interest-free banking. If they got permission, it could pacify; otherwise it is not possible for the authorities to compensate losses of Indian Muslims due to this financial exclusion. With passing days, this issue may lead to communal tensions in our country and could also yield anti incumbency factor for UPA government because after all this matter has to be solved by the central government.

Considering proportionate lower share of unorganized sector in GDP growth rate, the UPA government should think about its impact on majority of Indian community. The ministers and policy makers should come out of evaluating growth of organized sector by reading the sensex per day. This sensex reading lead to feel 'Shine India' by NDA government and kept in dark about dissatisfied general Indian associated to unorganized sector. Again our ministers and stakeholders of national economic policies are more interestingly watching stock market and formal sector growth only. There is still to notice any considerable growth sign in unorganized sector. RBIs should also focus to provide financial inclusiveness to 60% potential customers who are still out of credit system.

Majority of people associated with unorganized sector needs comprehensive credit facility with lowest possible interest and not Micro-Finance where rate of interest is even more than PLR of SCBs. With possible dissatisfaction among majority of unorganized sector workers, any uproar by Indian Muslims would be additional burden and may cost the UPA government to loose support of patent voters in next election.

So, before the air of anti UPA blow, the ministers and administrators should come out of projecting over 9% growth rate by screening formal sector indicators like stock exchange and RBI estimates. Its time to listen the people's voice associated to unorganized sector that constitute 90% human capital of Indian economy.

It is expected that if Interest-free Banking is incept operation in India, it may immediately induce Direct Foreign Investments (DFI) around Rs. 1,00,000 crores from Gulf market. Considering present trend of recession in American and international market, it would certainly be preferred to induce DFI from gulf market. For further queries in this regard please feel free to call the undersigned.