A LETTER TO THE CHAIRMAN OF COMMITTEE FOR FINANCIAL SECTOR REFORMS, PLANNING COMMISSION OF INDIA

A LETTER TO THE CHAIRMAN OF COMMITTEE FOR FINANCIAL SECTOR REFORMS, PLANNING COMMISSION OF INDIA

 

 

 

TO:

 

THE CHAIRMAN AND COMMITTEE MEMBERS

 

COMMITTEE FOR FINANCIAL SECTOR REFORMS

 

PLANNING COMMISSION

 

GOVERNMENT OF INDIA

 

NEW DELHI

 

 

RE: FINANCIAL SECTOR REFORMS

 

 

 

PROPOSAL FOR JOINT VENTURES IN ISLAMIC BANKING IN COLLABORATION WITH INTERNATIONAL ISLAMIC BANKS AND/OR INTERNATIONAL BANKS WITH ISLAMIC BANKING OPERATIONAL EXPERTISE

 

 

Financial Sector Reforms are needed, as per Mr. Raghuram G. Rajan’s introductory remarks, to bring into banking fold, all those who are still out of the ambit of Indian banking, either as small and unsecured borrowers that form the bulk of the lower strata of our economy, or to mobilize funds from some sectors, who find current banking service lacking the structural flexibility to meet their special requirements.

 

In this later category, Indian Muslims, whose aggregate population percentage is around 15 percent of the total population of India, form, by far the bigger chunk that have escaped the services provided by Indian banking industry, be that the nationalized banks, cooperative sectors or other para-banking sectors.

 

Many an attempts by social minded people had failed, with huge losses in community funds, in the last sixty years of India’s independent history, mainly because of the rigid and unbending attitude of the bureaucrats and technocrats that unfortunately characterized the pre-liberalisation phase of the economy.

 

Now, over the years, while India was cut off from sweeping developments in the international banking and investment arena in several financial sectors due to its closed economy, new vistas that were opened and honed to form a highly successful and stable Islamic banking system too was out of bounds for Indians at large and Indian Muslims in particular.

 

Credit must therefore be given to the new spirit of liberalization and a strong commitment to redress any anomalies in banking’s structural rigidities, so that the largely neglected sector of Indian economy should be brought in to thrive with the rest.

 

Islamic Banking world over has become a respectable industry that massively and positively contributes to world economy. India should be ready to tap all resources available to expedite measures to cut out the long gestation period that may hamper early and sure-footed introduction of Islamic Banking into India, by opening the doors to established foreign Islamic Banks in the same manner that it has opened the doors to all manner of foreign investment and expertise, be that of technical or financial nature.

 

I propose that a programme should be thrashed out in consultation with a group or consortium of foreign Islamic banks, to see that special products and services that are the hallmark of Islamic banking, should be expeditiously and safely introduced in India, primarily with a view to cater to the specialized needs of Indian Muslims. Since the word ‘Islamic Banking’ is now a generic name, it should not be seen as something non-secular and against the ethos of Indian constitution. Islamic Banking’s pros and cons should be judged on merits. On the other hand the very brand name of ISLAMIC BANKING is enough to get tremendous response from Muslim depositors, investors, traders and prospective borrowers — even without any expensive marketing effort. The market is already there to be readily tapped.

 

In an open economy like the Arabian Gulf countries, newly established nationalized banks invariably hired the services of reputed international banks, to run their back office operations. The management contracts signed by local banks were merely to ensure that their local lack of expertise in banking and investments may not result in banking failures from the very outset.

 

While in the gulf, my two projects, forming two joint-ventures with Habib Bank Zurich (lasting 25 years) and Canara Bank (lasting 8 years), though of limited nature, where management contracts were given to the outside banks to bring in their own expert staff and take over the full management of the organisations, has encouraged me to visualise such joint-ventures between banks in India and other nations, who can offer their full technical and management expertise to Indian banks, or non-banking financial organisations with joint investments of local and foreign percentages. All manner of combination and permutations can be considered with open mind. Only a right frame of mind to experiment and venture into uncharted fields, with full caution and deliberations, of course, would bring in swift changes in Indian banking and investment sectors. We will not waste valuable time, energies and resources, while trying to reinvent the wheel.

 

I wish you all the best wishes and Godspeed in the committee’s robust search for ways and means to care and nourish all sectors of national economy so that future growth of India may not fall prey to unsavory developments; given the ever-present danger of huge pockets of poverty bedeviling the planners of the nations.

 

Regards

 

GHULAM MUHAMMED SIDDIQUI

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One Response to “A LETTER TO THE CHAIRMAN OF COMMITTEE FOR FINANCIAL SECTOR REFORMS, PLANNING COMMISSION OF INDIA”

  1. Syed Zahid Ahamd Says:

    Financial Sector Reforms and Inclusive Growth
    Syed Zahid Ahmad

    The High Level Committee on Financial Sector Reforms as constituted by the Planning Commission has received almost all public comments over their draft report and is now busy in preparation of the final report. Expectedly the CFSR may submit the final report in September 2008. It is possible that CFSR may miss some genuine issues related to economic justice and financial stability of the economy in its final report. The approach of the CFSR was not to reform the financial structure for inclusive growth; rather it was to provide acceleration in the existing financial enterprises. Majority of the commentators over CFSR draft report were basically interested to grab economic advantage in possible reforms and were guided by corporate forces. They were interesting to resolve their constraints compared to resolve the financial constraints restricting inclusive growth of India. During the whole process of suggesting financial reforms, the agenda of foster and inclusive growth was left behind debates over derivates and liberalization process.

    The draft report reveals that big banking players fear liberalization, while upcoming financial and investment companies are finding scope for making money through derivatives and speculation game. Individuals were more concerned with tax advantages compared to socio-economic justice. Government is more concerned about finding means to increase revenues. The major economic problems related to banking inflation, stock market fluctuations, under utilization of savings and capital resources etc. that were left unresolved because the committee members and commentators were preoccupied with their motive to find scope for their business growth after reforms. There had been hardly any voice for foster and inclusive growth with long term stability in the Indian financial sector. It should have been discussed in the report that –

     Why our stock markets behave like a casino? What are the forces and practices making it behave as casino?

     Why prices are increasing with recession in the market?

     Why saving growth rate is increasing with inflation? What should be future saving products for Indian economy to ensure a sustainable growth rate?

     What should be the nature of financial products for our farmers, small retailers and artisans associated to agriculture and allied industries, unorganized sector retail and manufacturing industries to meet their needs?

     If Islamic Banking and Finance are gaining markets at international level why should India not allow its operation?

     Why with highest number of companies listed in Indian stock market, our stock market stand nowhere in comparison to global stock markets?

     Why just 1% of D mat account holders are active in transactions in stock market?

     How agriculture and unorganized sector would raise financial resources in coming years to compete with the global market needs?

    There were many more genuine questions which needed some focused attention by the committee members which could not find place in the draft report. If CFSR is sincerely making the reform proposals, I would like to know some facts related to following issues.

    1. What is the allocation of Indian financial resources between the organized and the unorganized sector in India?

    2. What proposal has been made to ensure stable growth of the stock market?

    3. What is the proposal for providing equity finance to unorganized sector?

    4. What is the scope of opening up of Islamic Banking and Finance in India, which is surpassing conventional banking in many countries and which may invite trillions of dollars investments in India?

    5. What are the real term financial constraints restricting inclusive growth of India?

    6. What specific banking or financial problems of the unorganized sector are taken up under consideration by CFSR?

    7. What is future financial product for farmers and artisans to avoid suicide cases?, and

    8. What are the expected benefits of CFSR recommendations to achieve inclusive growth?

    The financial and economic plight of unorganized sector workers need serious and sincere efforts by our planners and policy makers because despite 60 years of independence, our financial sector and ministries are governed by the capitalists belonging to the corporate sector. We have hardly seen any representation of the unorganized sector in making reforms processes. If we really wish inclusive growth of India, we have to focus our efforts to resolve the problems associated with the unorganized sector where around 94% Indian workers are making their livelihood. Moreover, we have to ensure that our maximum savings should be converted into capital through investments in equities. Moreover we have to adopt some practices to ensure fair trade in stock market and prevent amoral game by traders and agencies.

    Without financial sector reforms for the unorganized sector we may not be able to help majority of Indians. If we wish to see India grow in inclusive manner, we need to have financial reforms suitable for the unorganized sector which constitute over 94% Indian workers. The reforms in formal sector will not help reduce poverty and income disparity. The analyst needs freedom to analyze various possible modules and mechanisms to control the monetary and fiscal system of our economy. We need to adopt such mechanism which is anti inflationary and equitable in nature. Such mechanism is provided by Islamic finance and banking, but we need to study and analyze those provisions and visualize the scope in all segments and sectors of our economy.

    Islamic Finance and Banking that promotes equity finance with risk participation can be geared to meet the requirements of unorganized sector along with corporate sector that will help attain inclusive growth of the economy as a whole. Therefore reforming corporate finance is not enough. Islamic Banking is necessary for inclusive growth of the Indian economy.

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