Islamic Finance Blog

The recent stay order passed by the Kerala High court against the incorporation of an Islamic finance company needs to be critically reviewed and also the contents of the writ petition filed by Dr. Subramanian Swamy to understand why Islamic finance is generally nipped in the bud in India. In this article I will be mainly analyzing the content of the writ petition and briefly cover the judgment of the Kerala High Court.

An excerpt from the petition of Dr. Subramanian Swamy

5) The Shariah is the canon law of Muslims. A financial services company set up with government participation which would follow the canon law of a particular religion, is clear instance of the state favoring a particular religion.

B) It is clear from Exhibit P1, P2 and P3 that the proposed Islamic financial company is to be set up strictly in accordance with the Shariah, the canon law of Muslims. Exhibit P3 implies the setting up of a Shariah Advisory Board. As it is stated in Exhibit P3 that the CEO of the proposed company is required to report to the Shariah Advisory Board, this makes it clear that the board will have some measure of supervision over the proposed Islamic Financial Services Company.

It needs to clearly emphasized that the company is being set up strictly in accordance with the Indian companies act as a non banking financial company and not in accordance with Shariah. No doubt in the articles of association the shareholders agree to conduct the business of the company in accordance with Shariah. The companies act provides freedom to the share holders to agree upon financial methodologies of the company provided they do not violate any existing regulation. Therefore in this particular case if share holders have agreed to conduct their business in accordance with Shariah then the company has not violated any regulation and further this company is not the first company in India wherein the share holders have decided to conduct their business in accordance with Shariah.

Shariah Advisory Board would be an advisory body advising the CEO of the company on the Shariah compliance matters of the products and the services of the company. The CEO of the company reports to the Shariah Advisory Board on how the products and financial services are being implemented within the advised principles of the Shariah Advisory Board.

As the share holders of the company have agreed to conduct the business of the company in accordance with the principles of Shariah then it becomes pertinent that Shariah experts advice the company on the principles of Shariah. This being an internal matter of the company and being done within the parameters of the over all legal frame work should not raise any legal concern. The company is not a religious organization but a full fledged commercial financial entity which conducts its business based on certain principles. The articles of association of the company does not mention that it would cater to any specific religious community but on the contrary it would as any other registered financial entity would not discriminate its clientele based on their religion.

An excerpt from the petition:

E) In M.P Goplakrishnan Nair v. State of Kerala, (2005) 11 SCC 45, the Hon’ble Supreme Court held that, ‘The state is not only prohibited to establish any religion of its own but is also prohibited to identify with or favoring any particular religion’. Hence Exhibit P1 is liable to be struck down on the ground of violation of Art .14 and 25.

Article 25, Freedom of conscience and free profession, practice and propagation of religion of the Indian constitution clarifies that, ‘Subject to public order, morality and health and to the other provisions, all persons are equally entitled to freedom of conscience and the right freely to profess, practice and propagate religion.

As Islam is a complete way of life, therefore there are also clear principles laid out in the religion on how the financial transactions should be conducted by Muslims. Therefore if the state creates an ambience wherein Muslims have an opportunity to profess and practice their Islamic financial principles that in-fact reiterates the fact that the state is upholding Article 25 of the Indian constitution.

If a state establishes a commercial legal entity and takes a minority stake in it and this entity internally has guidelines on its investment strategy based on Shariah, Islamic law, then it no way should mean that the state has established or embraced any specific religion and neither that it is identifying or favoring any particular religion. The state by its action wants Article 25 to be exercised and create a vibrant economic environment which helps in building infrastructure and job opportunities in the state for people at large without being discriminatory to any particular religious community. It should be understood that the action of the state should not be construed in a parochial manner by any citizen.

In accordance with Article 14 of the Indian Constitution, Equality before law, which states that ‘the State shall not deny to any person equality before the law or the equal protection of the laws within the territory of India.’

The state of Kerala is on the contrary to the charge levied by the petitioner in his petition is upholding Article 14 of the Indian constitution by offering financial services through the company to the citizens at large without discriminating them on the basis of cast, creed and religion.

An excerpt from the petition:

F) The operation of the proposed company in a Shariah-compliant manner would mean that prohibitions of the Shariah will also be complied with. One of the basic principles of financial dealings under Shariah is the prohibition of riba or intetest. The prohibitions contained in the Shariah will also cover articles such as alcohol and pork which are considered haram (meaning prohibited in Arabic) for Muslims. The prohibitions contained in the Shariah may also extend to entertainment, including cinema and music.

It is should be understood that no legislation in India mandates that a financial company should only structure financial products which are based on ‘interest’. There are innumerable financial products which are not based on interest, for e.g. equity funds. Not engaging in the business of alcohol and pork should again be not questionable as both have a clear track record of having negative impact on health. Deaths because of consumption of alcohol and swine flu are clear indications to this. In case of entertainment the prohibition is more so towards obscenity and pornography which in fact is also not permissible under the existing legal structure. We humbly would like to emphasize that the financial policies of the company are indeed in the interest of the general public and not to the contrary as charged by the petitioner.
The law clearly allows the share holders of a financial company to make its decisions internally on how its financial products should be structured and offered to the customers there fore no one has any legal right to question how a legally registered financial company manages its internal policies.

It should be emphasized that the incorporation of the company has in no way violated Article 14, 15, 16, 19(1) g , 19 (6) and 25 of the Indian constitution. On the other hand it has strengthened the practice of Article 14 and 25.

The incorporation of the company also should not be interpreted as though it has favored any particular religion. By incorporating a legally registered financial company which has its own internal policies and which will offer its products and services without discriminating the religion of the recipients, it is clear that it does not violate any rule in the book.

The judgment of the Kerala High Court on the above writ petition should not be viewed in complete negative light as the judge has sought views on the incorporation of Islamic finance company from the Union of India, represented by the Secretary in the Department of Finance and Industry and by the Reserve Bank of India being represented by its governor. It would have been really helpful if the judgment would have been more comprehensive and would have realized the positives attached to Islamic finance. We hope that this judgment will not derail the establishment of financial institutions in India which do not base their products and services based on ‘interest’. Banking which is asset based and not linked to interest should not be considered just as a religious urge of Muslims but it should be also be considered as another type of banking which may surely provide some solutions to the present ailments in the banking sector.

This entry was posted on Monday, January 11th, 2010 at 1:40 pm and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.