The need to make room for interest-free banking

Danger of not doing it is that large financial resources may flow into informal channels, experts say

The country has to learn from the experience of United Kingdom, Malaysia and others and host interest-free banking window in the financial system.

The danger of not doing it is that large financial resources may flow into informal channels, simultaneously denying finances to those who need it most, a webinar ‘The Role of Religious Faith in Financial Exclusion: An Analysis of Financial Deepening in India’ organised at Gulati Institute of Finance and Taxation (GIFT) here on Friday has said.

The speakers argued that financial inclusion has been the coveted policy goal of the Union government and may be thought of at two levels—a bank account reflecting access to banks and financial literacy, and financial deepening as reflected in operating interest-bearing deposit or loan accounts.

As a sizeable proportion of the Muslims in the country subscribes to ‘Riba is Haram’, it is possible that such a religious attitude not to subscribe to interest-bearing banking products may lead to exclusion from financial deepening.

While many countries have tried to overcome this deficiency by hosting Islamic banking in their conventional banking systems, it was pointed out that India has not attempted such a step.

The webinar by D. Narayana and Shagishna K. pointed out that the phenomenal expansion of the branch network of commercial banks over four decades had achieved close to 90% coverage of households. The PM Jan Dhan Yojana took it to 100%. The basic financial inclusion does not, however, lead to the use of banking network for channelising savings, or borrowing if religion forbids certain groups from participating in interest-bearing financial instruments.

The analysis of Reserve Bank of India’s district-level data on deposit accounts, and population census data on urbanisation and religious composition suggests exclusion from financial deepening of Muslims. It is observed that number of deposit accounts per 100 population is significantly lower in districts where the proportion of Muslims in the population is higher.

Faith- based exclusion from financial deepening is significant in Kerala, Maharashtra, Rajasthan, Jharkhand and West Bengal, it has been pointed out.

There have been a few private initiatives to offer interest-free banking services through cooperative societies. Replication of such institutions is constrained more importantly lack of supportive government policy.

As financial inclusion is a moral imperative as well as is based on economic efficiency, it is a blot on Indian society as one seventh of its population is excluded.