Hard Knock of Realism
The failure of Islamic financial institutions is an ideological and ethical challenge to the entire community
A number of Islamic investment companies in Delhi, Mumbai, Hyderabad and Bangalore have either crumbled, collapsed, vanished or simply gone bust in the last two years. This is real bad news for all those who looked towards these companies or institutions as a halal (legitimate) avenue for investment of their hard-earned savings. If conventional banks fail, it is merely failure of individual institutions. But in case of Islamic investment companies, the very credibility of the concept has come into question because they had been set up on the premise and promise of interest-free business. Money that vanished into the thin air belonged to earners from the Gulf, pensioners, widows and community owned trusts engaged in welfare activities.
It is estimated that nearly Rs. 1000 crore deposited with these bodies have either been spirited away or gone into such investments that are not likely to return to those who expected them to yield profits. The rise and fall of several of these investment companies has coincided with the boom and bust of speculative businesses such as share market or real estates. It is therefore not difficult to imagine where the investors’ money lies locked. The situation raises two vital issues. First, the Islamic investment lacks a regulatory mechanism in the country without which the system would continue to be vulnerable to the vagaries of market as well as beneficiaries. The depositors’ will remain insecure. Second, one needs to question the wisdom behind hitching - nay staking - the hard-earned money of Muslim investors onto the unstable speculative businesses of share market and real estate. A third but significant aspect is that a good chunk of deposits had been mobilised by appealing to Islamic sentiments rather than any sound business proposition. And sentiments do not govern businesses.
These factors are disheartening to say the least and are likely to affect the confidence of the Muslim depositors. What is more painful is that quite a few fly-by-night operators managed to make forays into the interest-free business and have cheated the gullible Muslims by appealing to their sentiments. A clutch of companies in Hyderabad acted in the true blade companies style through an advertisement blitz in the local Urdu dailies. Depositors were lured by expensive gifts, immediate dividends etc. It was downright fraud. In Mumbai and Bangalore the Islamic investors’ money fell victim to the artificial boom in real estates. A handful of builders gobbled up small investors’ savings and the Islamic investment agencies are clueless about prizing out the funds. But the only non-Muslim mutual fund company, from the House of Tatas that began to attract such funds from 1996 onwards, has been distributing dividends for the last two years. What an irony!
Surprisingly no Muslim organisation has taken notice of the series of closures, failures and frauds by the so-called Islamic financial companies. At stake is not merely the money but the otherwise useful concept of interest free business.
What could be inferred from the episode is that the Islamic investments are totally unsafe. Any smart operator can defraud the gullible Muslims by promising high gains. What he needs to do is to practise the art of giving impressive dividends for the first few months. The depositors have no control within the businesses run by borrowers and can be easily duped because the promise is all about profit-and-loss sharing. The concept has though been turned into institutions, but there is no regulatory body or mechanism to discipline the financial institutions. If these financial institutions decide to wager their fortunes in the wobbly share market, the depositor have no role except to watch helplessly.
We at the Islamic Voice have often counselled pragmatism rather than being guided by sentiments. The failure of Islamic financial institutions has given us the hard knock of realism. It is a classic instance of how our own action could rubbish a valuable Islamic principle. In the world of business, rhetoric, sentiments and fantasy have absolutely no role to play. One has to be hard-headed to bridge the gap between the rhetoric and the action.