Compatibility of Venture Capital regulations in India with Shariah law

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United Arab Emirate’s Central Shariah Committee Binds IFIs to Follow AAOIFI

UAE’s higher shariah committee has issued resolution that all the IFIs will be bound to follow AAOIFI’s Shariah Standards effective from 1/9/2018.

Following is the full resolution:

After greetings,
The Higher Sharia Authority (HSA) at the Central Bank, resolved that:
“1. The Sharia Standards issued by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), shall be binding on the Internal Sharia Control Committees (ISCC) of the Financial Institutions that preform all or part of their activities in accordance with Islamic Sharia rules (IFIs) from 1/9/2018 onwards.
These Sharia standards represent the minimum Sharia requirements for IFIs in all their activities and operations without exception. This is applicable for all existing AAOIFI Sharia standards and standards that will be amended or issued by AAOIFI.
The ISCCs must comply with these Sharia standards in all of their Fatwa issuance and adoption, approvals, and recommendations in any form.

2. The products, activities and services adopted and currently used by IFIs prior to this resolution should be revised in accordance with AAOIFI Sharia Standards
based on a time plan that should not exceed by 31/12/2020.

3. IFIs are required to submit their detailed required revision plans to the secretariat of HSA no later than 31/12/2018.

4. The Annual Sharia compliance report submitted to the HSA by the ISCCs should confirm compliance with AAOIFI Sharia Standards as mentioned above.

5. In case the ISCC thinks that there is a need not to comply with the AAOIFI Standards, the IFI’s management should submit the matter to the HSA for their resolution regarding the matter prior to the ISCC’s approval. The submission should be accompanied with clear reasoning for the non-compliance and the Sharia evidence supporting the ISCC’s view on the matter.”

For more information, you may contact the HSA Secretariat via the following email:
shariaauthority@cbuae.gov.ae

 

Click here to download the resolution copy:

Resolution

Nature teaches you

Water is not only an essential element of our life. It is the only reason why hundres of tousands of dollars are spent every year on Mars mission.

Looking beyond, water teaches us a lession that it can be stored only if it doesn’t have space to flow out. This implies that good deeds are to be kept well stored otherwise bad deeds will make them flow out.

Another lesson to be learnt falls on the crystality of water. If the surface is clean and clear, the water flows on it. Likewise, if you are good person, opportunities will come to you. Rough space create hindrances for water to flow. Similarly, if you have problems with yourself of any kind, opportunities will find difficulties to reach you.
Always be a good person and don’t worry about future.

Series on Islamic Banking and finance in GCC countries

Oman

https://www.google.com/search?site=&source=hp&ei=G3BuWJP7EYHtvATO7aeQCw&q=islamic+banking+in+oman&oq=islamic+banking+in+oman&gs_l=mobile-gws-hp.3..0j0i22i30k1l4.2352.7544.0.8044.24.24.0.15.15.0.341.2447.17j6j0j1.24.0..2..0…1.1.64.mobile-gws-hp..0.24.999.3..41j0i131k1j0i131i46k1j46i131k1.19S4QMnPdYQ

Al-Barakah Financial Services Case in High Court of Kerala, India

Abstract

India is the home for around 172 Million Muslims. (Census 2011) According to Sachar Committee Report, approximately 50 % Muslims are financially excluded. Many efforts have been put forward to introduce Islamic Financial system in India with the aim to enhance the overall economic well being of Indian population with special consideration on Muslims to utilize their funds for infrastructure developments. The main purpose of this paper is to review the Kerala High Court judgment on establishment of a non-banking financial company (NBFC) which wishes to follow Islamic Rules in its operations. This paper also shed lights on some aspects of Islamic Law of contract for the applicability of Islamic Finance practices in India. This paper suggests that the judgment by the HC of Kerala need to be brought into consideration for the general public to create more awareness on the possibility of Islamic finance practices and its permissibility in India. Besides, there need to be some special considerations for Islamic Finance activities in India.

Key words: Legal considerations for Islamic finance, Al-Barkat case of Islamic Finance, Islamic Finance in India

 

 

Contents

Abstract 2

Section I. 5

  1. Introduction. 5
  2. Case Background. 7
  3. By an originating motion, the Appellant applied for the following orders: 8
  4. Mr. Swamy in his writ petition made the following arguments: 9
  5. Counter affidavits by the state of Kerala and KSIDC: 10
  6. Argument by The Senior Advocate Dr. Rajeev Dhawan appearing for al-Barakah Financial Services Ltd. Against petitioners: 10

Section II 12

The judgment 12

  1. Judgment on 1st argument: 12
  2. Judgment on 2nd argument: 15
  3. Judgment on 3rd argument: 15
  4. Judgment on 4th argument: 16
  5. Judgment on 5th argument: 17

Indian Constitution on fundamental rights: 18

Specific articles on the state and its duties towards the inhabitants: 19

Section III. 20

Islamic Law Perspectives. 20

  1. Enforcement of Islamic contracts: Issues in the light of contemporary legal frameworks: 20
  2. Issue of the tendency in following different Madhahib: 20

iii.      Legal framework and sharia’h laws: 21

  1. Cross border transactions and related issues: 22
  2. Accounting disclosure issues: 23
  3. Contractual relationship of Islamic Banks with interest-based parent banks or Issues of opening windows in interest-based banks: 23

Section IV.. 25

Need for legal consideration for IFIs: 25

The five resolutions to changes in Indian regulatory system for accommodating Islamic banking and finance in India: 25

Section V.. 27

Conclusion. 27

References. 29

 

 

 

Section I

a.      Introduction

India is the home for 14.2 % or 172 million Muslims and considered to be the second largest Muslim populated country in the world. India has got many cultures, languages, festivals and customs. India is the home for around 172 Million Muslims[1]. According to Sachar Committee Report, approximately 50 % Muslims are financially excluded. Many efforts have been put forward to introduce Islamic Financial system in India with the aim to enhance the overall economic well being of Indian population with special consideration on Muslims to utilize their funds for infrastructure developments.

The Indian constitution gives space for the citizens of India to profess the religion they like, to practice it as well as to preach it[2]. The case of al-Barakah Financial Services Limited (WP C No. 35180-2009) is the first of its kind (to the best of our knowledge) case in the history of India which deals with the establishment of a business which runs its operations based on the Islamic Finance system.

Swamy argued that Indian constitution does not allow such establishment particularly with the involvement of the state by purchasing 11 % of its share in the initial capital. This was a very important point in the history of Muslim society who wants to introduce Islamic Finance in India. The case was such that if court would not give judgment in favor of Swamy, then it would have been difficult for the potentials of Islamic Banking in India.[3]

Eventually, the High Court of Kerala on 3rd day of February 2011, ruled in favor of the Institution under the bench of J Chelameshwar, C.J. and P.R Ramachandran. Hence the court showed the green light for such business which will run according to shariah laws along with obeying all the legal and regulatory requirements by Indian judiciary.[4] This case has shown the opportunity for the introduction of Islamic Financial System and its operations in India beside it reveals the unnecessary hurdles for political and communal reasons in its way out.

This paper evaluates the case of al-barakah financial services limited which is a company running its business with the aim to follow certain principles of sharia’h laws. The paper also shed lights on the various aspects for the Muslims of India from Islamic Law of business transactions such the issue of enforceability, contractual relationship with non-Muslims, and issues in cross border transactions. The paper suggests that this court judgment is in line with the Indian constitution and there should be more awareness with regard to the possibility of accommodating the laws to help to introduce Islamic Finance in India. To do so, the paper has suggested five resolutions that need to be considered to open the door for sharia’h based transactions.

The rest of the paper will be as followings:

In the section below, we present the case background, main ground of attack by the counterparties, and their demands with highlighting some immediate submissions and rejections in the court that are indirectly or directly related to the case. Section II provides the judgment by the state of Kerala and their reply to the arguments raised by the petitioners. Besides, there is a discussion on the Indian constitution and its nature in dealing with the state enactment to the participation in a business which runs in accordance with some principles of a religion. Section III outlines the issues related from Islamic law of contract perspective such as enforceability of Islamic law in a non Muslim country like, India. Section IV provides some recommendations after raising some legal aspects of the Indian constitution to accommodate the permissibility of introduction of Islamic finance in India. Section V concludes the discussion with some policy implications.

 

b.      Case Background

The Islamic financial services industry has grown substantially over the years forming a significant segment within the global financial services and is generating lot of interest as an alternative model of financial intermediation.  With the objective of promoting an interest free financing entity, Government of Kerala had entrusted KSIDC (Kerala State Industrial Development Corporation) with conducting studies and looking into various aspects for the formation of an Islamic investment company in Kerala for attracting investments in aright manner as per the shariah of the Muslim community to the development of the common public at large. The studies concluded that there is a genuine commercial potential for an Islamic Financial institution based in Kerala that has the potential to become the global player.[5]

The minister for industries held a meeting in Thiruvanthapuram on 15.07.2009 to discuss the formation of to discuss the formation of Islamic Financial Institution and decided to incorporate a company with 11% equity contribution from KSIDC and the remaining 89% from private investors. The Board of KSIDC approved a share contribution of Rs.110 Lakhs (11% of the initial paid up Share Capital) to the proposed Company and decided to proceed with further steps for registration of the Company for promoting the Islamic Financial Institution. Govt. examined the matter in detail and found that the decision of the Board of Directors of KSIDC is within the area of their competence and delegation of powers and hence accord sanction for proceeding with further steps for registration of the Company.[6]

Thus, the government of Kerala sets to establish Al Barkah Financial Services Limited (non-banking financial company-NBFC) with the 11 % (110 Lakhs) share of state Government department (Kerala State Industrial Development Corporation-KSIDC) in the initial capital and the rest from NRIs and the public. (ICIF, 2014) The company would be unique in its kind with an authorized share of Rs. 1,000 Crores and will be operated on shariah principles. The company will not operate as a bank but rather invest in infrastructure projects not linked with alcohol, pork and other Non-Halal products after which profits will be shared as dividends and not as interest. (Banu, 2014) However, Dr. Surbahmaniam Swamy filed the petition against this decision in the High Court of Kelrala, Ernakulam. The writ petition was heard on 14/12/2010 in the presence of the Honble the Chief Justice Mr. Chelameshwar and Honble Mr. Justice P.R. Ramachandra Menon. The judgment was given on 3/2/2011.[7]

 

c.      By an originating motion, the Appellant applied for the following orders:

 

  1. Call for the records leading to the case and issue a writ of certiorari or any other appropriate writ, order or direction, quashing Exhibit.P1.
  2. Issue such other appropriate writ, order or direction which this Hon’ble Court may deem fit in the circumstances of the case.
  • Award costs to the Petitioner.

 

d.    Mr. Swamy in his writ petition made the following arguments[8]:

 

  1. Argument 1: The main ground of argument was the decision by the State of Kerala and the KSDIC to contribute in the share capital which deemed as contrary to the article 27 of Indian Constitution which prohibits the use of taxes and its proceeds to pay the expenses or to maintain the promotion of any particular religion.
  2. Argument 2: The petitioners attempted to argue that the business such as the one proposed by al-Baraka is impermissible under the provisions of Chapter III-B of the RBI Act.
  3. Argument 3: According to the memorandum of association registered by al-Barakah Financial Services Ltd, the total subscribers of the memorandum are 8 (of which 6 are Muslims and 2 are Hindus). Four out of 8 subscribers are NRI (Non residential Indians) while the KSDIC (Kerala State Industrial Development Corporation) said they are Indians. If they are not residents of the India, they can’t enjoy the legal rights given by the Indian constitutions.
  4. Argument 4: The petitioners argued that in view of the stand taken by the Government of India, the State of Kerala cannot be a shareholder in a company which proposes to carry on the business in Sharia compliant manner.
  5. Argument 5: One additional ground raised in the second writ petition is that the decision of the State of Kerala and the K.S.I.D.C. to participate in the capital structure of the 6th respondent company is an arbitrary decision as such a decision was taken without following any fair and transparent procedure.

 

e.     Counter affidavits by the state of Kerala and KSIDC:

 

The state of Kerala and KSIDC pleaded in their counter affidavits that the decision to participate in business of al-Barakah Financial Services Ltd. was mainly taken in order to garner huge amounts of unutilized funds from the gulf countries available with the non-resident Indians working in those countries to use such funds for the investment in the state of Kerala for the development of its people by promoting and providing financial assistance to the industries in the state of Kerala. The state of Kerala in its counter affidavit has enumerated the various projects meant for the welfare of the people of Kerala which were planned but could not be implemented due to the shortage of funds. Both (State of Kerala and KSIDC) further argued that the motive and objective of the state of Kerala and KSIDC is purely secular to derive commercial benefit. Furthermore, the al-Barkah Financial Services will run its business in compliance with shariah and the laws of the country. Hence, the impugned decision in any way was not inconsistent with the requirement of the secularism and is within the power or capacity of the state.[9]

f.      Argument by The Senior Advocate Dr. Rajeev Dhawan appearing for al-Barakah Financial Services Ltd. Against petitioners:

 

The petitioners are not bona fide public interest litigants (PIL) and therefore the writ petitions must be dismissed.[10] He further argued that the petitioners have not disclosed any antecedents or their real interest in the case. Hence, Dr. Swamy’s PIL could be taken to be pro-Hindu and Anti Muslim cause including on Babri Masjid, Ram Setu and now on Islamic Banking. R. Babu also belongs to the fundamentalist Hindu Organization. A PIL can’t be a vehicle for baiting or creating communal disharmony.

The High Court rejected the above submission by Dr. Dhavan declaring that the Swamy’s particular stand in case of Babri Masjid or Ram Setu does not make him pro-Hindu or ant-Muslim because everyone has right to have his say in the democratic world. There are three reasons for the rejection of the above submission. Firstly, al-Barakah Financial Services Ltd is not the company exclusively consisting of shareholder of a particular religious dimension. Secondly, a legal objection before a constitutional court to a particular practice of the state on the ground that it is inconsistent with the obligation of the state under the provisions of the constitutions in our opinion does not promote communal disharmony. Thirdly, the arguments may be centered at the shariah but this issue transcends all religion.[11]

 

 

Section II

The judgment

1.      Judgment on 1st argument[12]:

The main ground of argument was the decision by the State of Kerala and the KSDIC to contribute in the share capital which deemed as contrary to the article 27 of Indian Constitution which prohibits the use of taxes and its proceeds to pay the expenses or to maintain the promotion of any particular religion. The respective judges found that the resolution in the preamble to constitute a SECULAR REPUBLIC thus has two affects, i.e., that the State shall not unduly:

  • interfere with the fundamental rights of the subjects to freely profess, practice and propagate any religion;
  • unduly associate itself with any religious activity or favour in any way one religion over the other.

They further argue that the Constitution does not totally prohibit the association of the State with all the religious activity. They rely on the Article 298 Indian constitution, where it is declared that the executive power of the Union and of each State extends to carrying on of any trade or business and also to acquire, hold and dispose of property and making of contracts for any purpose. Moreover, the Indian Constitution guarantees the fundamental right to freely professes, practices and propagates any religion, however every activity undertaken by the followers of a religion or religious denomination is not protected or free from the interference of the State on the ground that it forms part of a fundamental right guaranteed under the Constitution. The Constitution expressly recognizes that there can be secular activities associated with a religious practice, such as economic, financial and political activities associated with a religious practice. Further the Constitution recognizes the authority of the State to regulate such secular activities associated with a religious practice. Even with reference to the non-secular aspects of the religious practices the Constitution declares that the fundamental rights guaranteed under Articles 25 and 26 are subject to the demands of public order, morality and health.

 

State and its association with a business that runs according to the Shariah laws:

The argument is arising mainly since the al-Barakah Company is proposed to be run in a Shariah compliant manner, association of the State with such a Company would have the effect of either promoting or aiding a religion. It is not very clear from the record nor from the company, either the State of Kerala or the al-Barakah Company or its promoters, offer any explanation as to what exactly is meant by them when they proclaimed that al-Barakah Company would carry on its business in a Shariah compliant manner. In the absence of any clear pleading much less the proof of those principles of Shariah which the respondents propose to comply with while carrying on the business, the judges can only proceed on the view that the respondents proposed to carry on the business of a ‘non-banking financial institution’ in accordance with the laws of the land and in addition follow some principles of Shariah in carrying on such business. The judgment clearly states that al-Barakah and its partners will make an emphatic statement that they are bound to follow each and every prescription of law of this country. In addition, they also intend to observe certain principles of Shariah.

Use of tax money for the investments:

The spending of money by the State on an activity which has a basis in some religion does not by itself attract the prohibition contained in Article 27. If that were to be so, all the policies of the State which provide subsidization of the food to poor people would also attract the prohibition contained in Article 27 as such a practice not only coincides but also is rooted in religious belief common to all major religions that feeding the poor is a meritorious activity. In our opinion to attract the prohibition of Article 27 the State action must have the effect of intentionally and directly promoting or maintaining any particular religion. To ascertain the same the purpose behind the expenditure and the primary result of such an activity are required to be examined.

The purpose and intention of the State of Kerala as stated in the affidavit while taking the impugned decision is to secure a commercial benefit from the activity proposed to be carried on by the al-Barakah Company by generating adequate funds for the development of the State, to achieve a commercial benefit, and such payment is to be made to a corporate body which proposes to carry on the business in compliance with certain principles based on the religious text of a particular religion, but not to propagate religion. In judge’s view, such a payment would not have the primary and direct effect of supporting or maintaining the religion. The main and primary purpose of the al-Barakah Company is commerce but not propagation of religion. On the other hand, the denial of the State to participate only on the ground that the al-Barakah Company proposes to carry on the business in compliance with Shariah may amount to discrimination on the basis of religion. The court judgment relies upon some of preceedings one of which is summerized in the following.

 

The above conclusion by the respective judges is further fortified by the order of the Supreme Court in Writ Petition (Civil) No.1 of 2007 dated 28.01.2011 (Prafull Goradia v. Union of India). The Supreme Court was considering the Constitutionality of the Government of India’s granting subsidy in the air fare of the Haj pilgrims, specifically in the context of Article 27 of the Constitution of India. The Supreme Court rejected the challenge.[13]

 

2.      Judgment on 2nd argument[14]:

 

The second argument by Swamy and other was the business such as the one proposed by al-Baraka is impermissible under the provisions of Chapter III-B of the RBI Act. The high court declined to examine the 2nd argument for two reasons Firstly, there is no pleading at all on the said aspect and, therefore, it would be unjust to examine the said issue. Secondly, it is primarily for the RBI to decide the said issue. Any examination of the said issue by this Court would have the effect of pre-empting the examination by the RBI.

 

3.      Judgment on 3rd argument[15]:

The argument was that According to the memorandum of association registered by al-Barakah Financial Services Ltd, the total subscribers of the memorandum are 8 (of which 6 are Muslims and 2 are Hindus). Four out of 8 subscribers are NRI (Non residential Indians) while the KSDIC (Kerala State Industrial Development Corporation) said they are Indians. If they are not residents of the India, they can’t enjoy the legal rights given by the Indian constitutions. The high court judged that all the promoters of al-Barakah company, are asserted to be citizens of this country. They assert that they are entitled to the fundamental rights guaranteed under Article 19(1) (g) of the Constitution of India to carry on any trade, occupation or business. They admit that such a right is subject to the law of the land.

 

4.      Judgment on 4th argument[16]:

Firstly, it was is argued by Dr. Dhavan that the opinion such as the one contained in the affidavit filed by the Union Secretary of the Government of India in the Ministry of Finance is not determinative of the Constitutional interpretation. Secondly, even on the examination of the language of the statement of Mr. M. M. Dawla (Union Secretary), it is his opinion that the activities of the Islamic Banking are not legally feasible “in the current statutory and regulatory frame work”. Dr. Dhavan submitted that the issue before this Court is the Constitutionality of the action of the State of Kerala, but not whether the existing statutory framework permits the carrying on of “Islamic Banking” activity. He further submitted that except making such an omnibus statement no specific prohibition contained in any statute which makes it impermissible to carry on the Islamic Banking is brought to our notice.

The Supreme Court held that while interpreting the Constitution or determining the constitutional validity of the statutes the court cannot be guided by the views expressed by individual officers of the State as the court has to ascertain the true meaning of the statutes made by the legislature. Hence, the principle applies with a greater emphasize in determining the constitutionality of the State action.

 

Court’s stand on the argument:

The high court submitted they reject to deal with the above question any further for the reason that whether al-Barakah company can carry on the business such as the one proposed by the Union of India or whether such a business is prohibited by any statute are questions which in our opinion are primarily to be dealt with by the Reserve Bank of India because, Reserve Bank of India is yet to examine this question. With regard to the second argument by Dr. Dhawan the court held that We are also conscious of the fact, assuming for any reason, that there is some provision in law which either seeks to regulate or prohibit such an activity of the 6th respondent, the right of al-Barakah or its shareholders to question the constitutionality of such a regulation or prohibition cannot be ignored or jeopardized.

 

5.      Judgment on 5th argument[17]:

 

The argument in this case was that the decision of the State of Kerala and the K.S.I.D.C. to participate in the capital structure of the 6th respondent company is an arbitrary decision as such a decision was taken without following any fair and transparent procedure.

In high court opinion, they rejected the submission. When the State is intending to purchase or sell property or goods or seeking to have certain work like construction of a building or a project, etc. to be done by private parties inviting competitive bids from persons interested is generally a rational and transparent process, however even in such cases courts have recognised exceptions to the rule. Furthermore, calling of tenders is not the only procedure which answers the requirement of non-arbitrariness on the part of the State. On the other hand, in a case like the one on hand where the State is proposing to carry on some business by participating in a venture jointly with others, the decision cannot in any way be called distribution of largess. Because, it is not the case of either of the petitioners that they are also interested in carrying on the same business that is to be carried on by al-Barajah, nor some other persons would be interested in such business and if only the State of Kerala advertised its intention to participate in such business venture there would have been more competition enabling the State of Kerala to take a decision which would be economically more beneficial to the State. We are of the opinion that by the very nature of the impugned decision it is incompatible with the process of inviting tenders.

 

Indian Constitution on fundamental rights[18]:

The Indian Constitution declares that the aim of the Constitution is to constitute India into a sovereign socialist secular democratic republic and also to secure all its citizens justice, liberty, equality and fraternity. So, in Part III of the Constitution, various fundamental rights are guaranteed. Some of these fundamental rights are guaranteed only to the citizens of India while some are guaranteed to all persons who are subject to the sovereignty of India.

Specific articles on the state and its duties towards the inhabitants:

Articles 15 and 16 prohibit the State from discriminating against any citizen on the ground only of religion in the matters of access to various public facilities or public employment. Articles 25 to 28 guarantee freedom of religion in its various facets. Clause (1) of Article 25 declares that all persons are equally entitled to freedom of conscience and the right to freely profess, practice and propagate religion. Article 26 guarantees to every religious denomination the rights to acquire and administer property in accordance with law to manage its own affairs in matters of religion and to establish and maintain institutions for religious and charitable purposes. Article 27 prohibits the State not to subject any person to any tax the proceeds of which are to be utilized for the promotion or maintenance of any particular religion. Article 28 on the one hand, prohibits any kind of religious instruction in any educational institution wholly maintained out of the State funds, but recognizes the right of a privately established institution to provide religious instruction, etc. That is why It is sufficient to notice that the Constitution guarantees to all the Subjects the freedom of conscience and the right to freely profess, propagate and practice religion while prohibiting the State in any way subjecting any person to discrimination only on the basis of his/her religion. The Constitution restricts the State’s interaction with the religion. It must be noticed that Articles 25 to 28 deal with the fundamental rights regarding the freedom of religion irrespective of the fact whether the religion is the religion of the minority or majority population of this country. In fact, the rights guaranteed under the above mentioned Articles are extended even to persons other than citizens.

Section III

Islamic Law Perspectives

i.                    Enforcement of Islamic contracts: Issues in the light of contemporary legal frameworks:

In this section, we attempt to examine the issues related to Muslim faced while practicing their religion in a place that is not governed by the rules and principles of sharia’h law. Obviously, all Muslim are bound to follow strictly their religion in all aspects of the life be it related to the rituals of worship or that of related to what is termed as Muamalat, such as marriage and business activities. After examining the sharia’h rules and principles that every Muslim is asked to follow, we tend to opine that there are hurdles in the way of applying all those sharia’h requirements in the absence of the state like India which is based on democratic thoughts and regulations. Below we have summarized some of these hurdles which in our opnion are very important to be considered.

ii.                 Issue of the tendency in following different Madhahib:

 

India is home for almost 20 Million Muslim where majority of the Muslim follow Hanafi school of thought. However, there are considerable amount of Muslim who follow other madhahib like, Shafi’, and La madhhabiyyah.[19] Moreover, this tendency gets worse when we see the disputes arising from the restrictive behavior of Muslims when it comes to clashes of madhahib on certain issues. The situation is such that some fundamental and illiterate people have burnt Masajid of other madhahib. Hence, it is now is a bit difficult to introduce Islamic finance based on any particular mazhab system and that is why scholars of different mazhab are responsible to teach people what is to be tought to people. Furthermore, people are required not to follow every other scholar just because he belongs to their school of thinking.

 

iii.              Legal framework and sharia’h laws[20]:

 

Though the constitution of India is very liberal and gives rights to every individual to practice the religion as stated above, however Muslim in India are somewhat bound to follow the legal requirements enforced by the constitution which in many cases actually contradict with the shari’ah laws. Since India was colonized by the European since 1600s, and tendency of the whole world in following English laws, make possibility of Islamic teachings. The argument that individuals are free to practice the religion as they do not actually necessitate that this practice is confined to masjid or, marriage cermony or death rituals. Rather as discussed earlier, sharia’h actually presents the whole structure for the life with regards to its various aspects. Lead banks are usually a foreign institutions hailing out of Europe, the UK or the United States. The lingua franca of finance remains English. It must be reiterated again that the Common Law is judge made and they remain subject to the prevailing social conditions of the land. Their perception of Islam as a foreign import leaves room for changing stance on Islamic finance. Case in point is the uproar over Archbishop of Canterbury calling for aspects of Islamic Shariah law to be adopted in Britain as reported in 2008.

We can’t deny the fact that India has still got some religious non-governmental bodies like, Muslim Personal Law Board which always try to ensure the sharia’h aspects in dealng with daily issues. However, these religious bodies have their limitations that they are bound to work under the constitutional requirements.

 

iv.              Cross border transactions and related issues:

 

In dealing with cross border transactions that is the integral and essential part of any large banks or even when it comes to transactions that are between the inhabitant of different country’s citizens, there are issues to be considered. One of which is the issue of different mazahib followers. For example, Bai’ I’na which is considered valid from Shafi’ school of thought and therefore provde the followers of the relative school space to practice it while it is prohibited as stated by other scholars.

Another issue is to deal with the internationalization of laws which is seen as the next hurdle. Ever presence in the background of the Common Law is the application of European Union laws such as the European Contract Law, 1995 and whether Britain will in the long run trade in it legal sovereignty in certain areas. How this will feature in affecting Shariah contracts in the European context is uncertain. Similarly the countries within the EU, old, new and non member states have diverse legal systems. Introduction of Islamic finance into one country does not guarantee economies of scale for rolling out in similar fashion in others.[21]

 

v.                 Accounting disclosure issues:

 

It is well established that not all countries are following IFRS[22] and many countries that claim that they follow IFRS eventually has got some difference when it comes to practice. India has its own accounting standard which is basically in line with the IFRS with some differences. This in itself impact on the treatment of Islamic finance transactions especially in matters of taxation e.g. Clifford Chance (2010) commenting on the issue of Islamic Finance and indirect tax treatment in Luxembourg. Disparities only increase the cost of product development and roll-out. The regulatory environment also poses a challenge namely Islamic finance needing to be up to date with regards of regulatory development.

vi.              Contractual relationship of Islamic Banks with interest-based parent banks or Issues of opening windows in interest-based banks[23]:

 

The contractual relationship between muslim and non-muslim is not prohibited unless if there is any shari’ah banned activity. This practice does not fall under the prohibition of musharaka with a Jew or Christian as reported in a hadith compiled by Ibn Abi Shaibah in his book Musannaf because the prohibition made is confined to the partnerships that are in contradict with shari’ah. That is why the four fiqhi school of thought opined that it is a Makrooh transaction. However, the prohibition in hadith is actually confined to the situations were certain principles of sharia’h is violated. If the requirements of shariah are fulfilled there are no restrictions for such contractual relationships. Also, it is not a makrooh partnership as advocated by all four school of thought due to the same reason.[24]

Section IV

Need for legal consideration for IFIs[25]:

 

Many secular countries like Britain have made changes in their laws in favour of Islamic banking. If London, Paris and Hong Kong have chance to become hubs of Islamic finance, why not Mumbai and Cochin? The introduction of Islamic banking in India is for the development of the country. Dr. Muddassir Siddiqi, a renowned financial consultant, opined  the present condition of Islamic finance in the world and added that opening the window of Indian regulatory system for Islamic finance will drive to flow of foreign direct investment to the country. It will promote growth of the nation.

 

The five resolutions to changes in Indian regulatory system for accommodating Islamic banking and finance in India:

 

The five resolutions to change the Indian regulatory system to help introduce Islamic banking and finance in India were adopted in the seminar.

Firstly, the Government of India should accept the recommendations of the Committee on Financial Sector Reforms (CFSR) of Planning Commission of India headed by Dr. Raghuram Rajan to introduce interest‑free banking in the main banking sector for inclusive growth through innovation.

Secondly, the Government should reconsider the suitably to amend Banking Regulation Act 1949 and taxation law to provide a level playing field for Conventional Banking as well as Islamic banking as done in several modern, secular and industrialised countries.

Thirdly, the Government should accommodate Shariah‑compliant mechanism in Microfinance institutions which are mainly operating as NBFC’s along with conventional mechanism based on interest.

Fourthly, the Reserve Bank of India (RBI) should put efforts to open interest‑free windows as a pilot project in few conventional banks which can operate within the framework of Indian Banking Regulation Act 1949.

Lastly, the Insurance Regulatory and Development Authority (IRDA) is to be amended the Insurance Act in order to introduce Takaful (Mutual Insurance).

 

 

Section V

Conclusion

 

This paper evaluate the case of al-barakah financial services limited which is a company running its business with the aim to follow certain principles of sharia’h laws. The issue was very interesting n the sense that it involves the potentials for the introduction of Islamic finance in India and strength of the Indian constitution to accommodate various types of religion, culture and beliefs. The main arguments by the counterparties namely, Dr. Swamy as that such establsishment is inconsistence with the Indian constitution. Particularly, the involvemet of the state of Kerala in the business of al-Barakah financial services limited company by purchasing 11 % shares in the initial capital was opined to be an act violation and questionable for the reason that any secular state should not propogate or participate in the practice of any religion. It was also argued that the Indian constitution with its present structure don’t give space to Islamic finance practices in India.

The high court of Kerala judged and gave permission to the said company to establish the business and also to the state of Kerala to participate in the business. The court further opined that such an activity proposed by the said company is not inconsistent with the legal framework of India.

The paper also shed lights on the various aspects for the Muslims of India from Islamic Law of business transactions such the issue of enforceability, contractual relationship with non-Muslims, and issues in cross border transactions.

The paper suggests that this court judgment is in line with the Indian constitution and there should be more awareness with regard to the possibility of accommodating the laws to help to introduce Islamic Finance in India. To do so, the paper has suggested five resolutions that need to be considered to open the door for sharia’h based transactions.

References

AAOIFI. (2010). Shari’ah standard for Islamic Financial Institutions. Bahrain: Accounting and auditing standard for Islamicc Financial Institutions .

Abdullah, I. B. (Fatwa No. 5855). Trade Partnerships with non-Muslims. Retrieved from Portal of the general prsidency of scholarly research and Ifta: http://www.alifta.net/Fatawa/FatawaDetails.aspx?languagename=en&View=Page&PageID=521&PageNo=1&BookID=7

Ali, A. (2010). ENFORCEMENT OF ISLAMIC CONTRACTS: ISSUES IN THE LIGHT OF CONTEMPORARY LEGAL FRAMEWORKS. Phd term paper , 29-35.

Ayman H. A. Khaleq and Amar N. Meher, V. &. (2012). Islamic Syndicated Financing: An Underdeveloped Method of Sharia Compliant Financing. Practical Law Company , 1-2.

Banu, S. (2014). Islamic Banking in India. Global Journal of Finance and Management , 259-264.

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Farbood, H. (2009, 08 03). Are Islamic syndicated financings different from conventional syndicated loans? Maastricht, Netherlands: University of Maastricht, Faculty of Economics and Business Administration.

Hajar, A. I. (Hadith No. 2068). Fathul Bari. 354/4.

ICIF, I. C. (2014). Letter to Smt. Sonia Gandhi, Honble Chairperson UPA. New Delhi: ICIF .

Kerala High Court Case, WP C No. 35180-2009, p.3

Islam, W. (2002, 7 8). Fatwa Detail. Retrieved from Islam Web English: http://www.islamweb.net/emainpage/index.php?page=showfatwa&Option=FatwaId&Id=84460

Web, I. (2002, 7 8). Fatwa Detail. Retrieved from Web Islam : http://www.islamweb.net/emainpage/index.php?page=showfatwa&Option=FatwaId&Id=84460

[1] Census 2011,

[2] Indian Constitution Articles, 29

[3] Kerala High Court Case, WP C No. 35180-2009, p.3

[4]Kerala High Court Case, WP C No. 35180-2009, p.67

[5] Kerala High Court Case, WP C No. 35180-2009, p.7

[6] This section has been taken from the order-Exibit P1 by the Government of Kerala dated 14.10.2009.

[7] Kerala High Court Case, WP C No. 35180-2009, p.67

[8] This is actually the summary of the arguments raised by the petitioners. Kerala High Court Case, WP C No. 35180-2009,

[9] Kerala High Court Case, WP C No. 35180-2009, p.67

[10] Dr. Dhawan relied upon the judgment by the Supreme Court reported in the state of Uttaranchal v. Balwant {(2010) 3 SCC 402}.

[11] Kerala High Court Case, WP C No. 35180-2009, p.16

[12] Kerala High Court Case, WP C No. 35180-2009, p.24-30

[13] Kerala High Court Case, WP C No. 35180-2009, p.32

[14] Kerala High Court Case, WP C No. 35180-2009, p.35

[15] Kerala High Court Case, WP C No. 35180-2009, p.7

[16] Kerala High Court Case, WP C No. 35180-2009, p.55

[17] Kerala High Court Case, WP C No. 35180-2009, p.60

[18] This section is mainly the summary of the court statement on the matter. Kerala High Court Case, WP C No. 35180-2009, p.24-40

[19] Those who independent themselves claiming that they do not follow any particular madhhab and they are free from it

[20] (Ali, 2010)

[21] (Ali, 2010)

[22] International Financial Reporting Standards.

[23] (AAOIFI, 2010)

[24] (Abdullah, Fatwa No. 5855)

[25] Blog courtesy Dr. Zulkifli Hasan, available at https://zulkiflihasan.wordpress.com/2010/11/25/islamic%ADfinance%ADneeds%ADregulatory%ADreforms/2/6

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