A move by the previous Left Democratic Front (LDF) government in Kerala to open an Islamic bank did not take off due to objections from several quarters, especially the Reserve Bank of India (RBI).
The central bank had initially opposed the move stating that it was against the current banking laws. Last month, the RBI passed its final verdict on Islamic banking, saying that it was against the principle of providing wider and equal opportunities to all the citizens to access banking and financial services.
The CPM has bypassed the RBI by launching the Sharia-compliant bank as a society in the primary co-operative sector, which is not governed by the apex bank regulations. The bank called Halal Fayida Co-operative Society was inaugurated by Chief Minister Pinarayi Vijayan in Kannur, the cradle of the Communist movement in the state, on 24 December.
Kerala has a large network of primary co-operative societies spread across the state. A large number of these societies function as banks by receiving deposits from public and lending money. Halal Fadiya will be one such institution.
The primary cooperative banks had come under the scanner of RBI and the Income Tax department during demonetisation. A tussle to make them accountable to the IT department has been going on for years, but the state government staunchly opposed such moves saying that the sector was playing an important role in the development of the state.
B Unnikrishnan, former general manager of State Cooperative Bank, said the primary cooperative banks are not being monitored by the RBI since they are being operated under a state Act. They function in Kerala under the State Co-operative Societies Act, 1969. All powers under the Act are vested with the Registrar of State Cooperatives, who comes under the administrative control of the state government.
The previous LDF government led by VS Achuthanandan had proposed the Islamic bank in 2009 under the aegis of Kerala State Industrial Development Corporation (KSIDC), the industrial and investment promotion agency of the state government, with the objective of attracting investments into the cash-strapped state.
The brain behind the move was Finance Minister Thomas Isaac, a neo-liberalist who found the huge sums of money kept outside the formal interest-based banking system by devout Muslims as an alternative to the private capital that the hardliners in his party, including the then chief minister, opposed.
Isaac had targeted mainly Muslims from Kerala working in the Middle East, who are familiar with Islamic banking. According to Centre for Development Studies (CDS), Thiruvananthapuram, Muslims accounted for over 40 percent of the estimated 2.4 million non-resident Keralites and about 45 percent of over Rs.1 lakh foreign remittances the state receives a year now.
After the Islamic bank project hit a roadblock, Isaac mooted Kerala Infrastructure Investment Fund Board (KIIFB) to mobilise funds for infrastructure development outside the state budget. However, the CPM was not ready to abandon the Islamic banking project.
The party found the concept financially and political rewarding. The party saw huge potential for Islamic bank in the state since 27 percent of the population is Muslim. A major section of this population has been keeping away the formal banking system in the absence of Sharia-compliant banking institutions.
M Shajir, president of Kannur district Democratic Youth Federation of India (DYFI), the youth wing of the party, who is the chief promoter of Halal Fayida, said they had mooted the idea after it was found that a large section of the Muslim community in the district did not have a bank account.
“A large number of the community keep their money at home. Many lost their savings during the demonetisation period since they could not produce proper documents to show the source of their income. Hence, we decided to come up with a solution to address the issue,” Shajir said.
The CPM found the co-operative sector ideal for the foray into Islamic banking since it has high stakes in the sector. More than 90 percent of the cooperative banks in Kerala are controlled by political parties, according to Unnikrishnan.
Of this, 75 per cent are under the control of the CPM. Unnikrishnan told Firstpost that co-operative banks in Kerala were flush with money unlike in other states. The total deposit base of cooperative banks in Kerala crossed Rs 1.40 lakh crore in 2016, according to the state level bankers committee.
Apart from banks, the CPM has also launched several other commercial ventures such as amusement parks, hospitals, schools, colleges and even manufacturing units in the co-operative sector. Most of these ventures were developed with funds ploughed in from its cooperative institutions.
The biggest benefit of the Islamic bank, however, is the Muslim support. The CPM was finding it difficult to make inroads into the community due to its atheist tag. The party, therefore, has been trying to reach out to the minority community through intermediaries.
The party was able to win a few seats in the Muslim heartland of Malappuram in the last Assembly election by fielding independents. The party leadership believe that initiatives such as Islamic banking will take the party close to the community.
The promoters of the society have secured the support of 21 minority organisations. Shajar said these organisations had bought shares and were spreading the word about the initiative. He hopes that others will also join the society as it will function strictly according to Sharia law.
“Like any other Islamic institution, the society will not pay interest on deposits or charge interest on loans. It will also follow ethical financing practices and refrain from lending money for industries like gambling, pornography and liquor, which are considered forbidden in Islam,” he added.
Shajar said that the bank will invest only in Halal business ventures. It will initially invest the funds in meat processing units, construction and contracting businesses, he added.
Shajar has denied any political motive behind the initiative. He said that it was not aimed at making electoral gains. The CPM is against identity politics and it will never promote it. He said that the bank was open to all. Since it is a cooperative society anybody can buy shares and avail its services.
However, the Hindu organisations see red in the initiative. The Hindu Aikyavedi has viewed it as a communal move aimed at wooing the Muslims. State Bharatiya Janaty Party spokesman, J Padmakumar termed the initiative unconstitutional.
He told Firstpost that the Islamic bank will divide the people on religious lines. He said that the RBI had rejected the concept of Islamic bank as it was against the secular traditions of the state. The CPM is trying to introduce it through the backdoor.
“We fear that the Islamic bank may encourage hawala business and help divisive forces to pump money into the state. This is a very dangerous move. Our party would oppose it,” he added.