The concept of financial inclusion has a special importance for a growing economy like India as bringing the large fragment of the productive zones of the economy under formal monetary network which could unbridle their creative capacities. Financial inclusion efforts do have multiplier effect on the economy as a whole through savings pooled from the vast segment of the bottom of the pyramid (BoP) population by providing access to formal savings arrangement resulting in expansion in credit and investment by banks (Debashis and Parida, 2013). But, the minority communities are not being given privilege rather the situation is quite worse. Therefore, with the aim to understand, promote and highlight the importance of financial inclusion of minorities in India. This paper will attempt to address the issue from Interest free finance perspective that may be seen as a way forward towards the development of financial inclusion. It is indisputably true that economic deprivation of minorities creates the basic condition for all other forms of exclusion. Hence, financial inclusion can play pivotal role in bringing minorities into is the key to social and political inclusion. It is imperative to address the immediate financial needs of minority communities in order for them to focus on other structural changes and to enable changes in the mindset of the dominant community and polity.
An emerging area ‘interest free finance’ that seems to be failed in inviting the attention of people in India but remains adhered to the promises to solve the problems at micro finance level. World Bank Managing Director Mahmoud wrote that Interest free finance “has the potential to meet more people’s banking and investment needs, expand its reach, and contributor to greater financial stability and inclusion in the developing world.” Interest free finance is becoming prevalent in many countries although assets represent less than 1 percent of total financial assets, total funds were valued at $1.3 trillion in 2011, but a 150 percent increase over five (Maan, 2018). It addresses the issue of “financial inclusion” or “access to finance” from two directions: – Promoting risk-sharing contracts which provide a viable alternative to conventional debt-based financing (including Shariah-compliant Microfinance, SME financing, and micro-insurance to enhance access to finance) – Providing specific instruments of redistribution of the wealth that target the poor and offer a comprehensive approach to eradicating poverty and to build a Healthy and vibrant economy (such as Zakah, Sadaqat, Waqf, and Qard-al-Hassan) (Mahmoud, 200). So, in this context, it would be quite relevant to say that RBI and other Apex Institutions seem to be committed to take significant strides to achieve profitability, financial stability and competitiveness to cater to the increasing demand for financial services and interest free finance can be looked upon as another initiative as according to Raghuram Rajan, certain faith people are not into the banking sector because of their faith. Interestingly in one of the articles of Reserve Bank of India, it is said that interest money estimated at 40000 crores is lying idle in the bank accounts of the Muslims particularly in Kerala and Andhra Pradesh and all these places. So, in this scenario we have to look into it what is this Interest free banking and finance, what are its distinctive characteristics that can provide solution to the problem? (Mahmoud, 200).
Contemporary Financial Inclusiveness of the minorities
Financial inclusion can be construed in two ways; first is countering the exclusion from the payment system that is not having an access to a bank account. The second is countering the exclusion from financial services (Harun R Khan, 2012). The Government of India (GoI) and the Reserve Bank of India (RBI) have traditionally played a large role in establishing banks and other financial infrastructure in order to increase the poor’s access to quality financial products. Banks and other apex financial institutions such as National Bank for Agriculture and Rural Development (NABARD) and Small Industries Development Bank of India (SIDBI) have supported and aided the government in a variety of ways towards this end. (Financial Inclusion: Government Promoted Initiatives). What government is doing, spreading the banking network across the country for allowing people to have access that results into the spread of credit, bringing people into the financial system but it is perhaps only one sided as financial inclusion is just not rather it needs financial literacy and also to break down many traditional structures of money lending and entire credit culture is there in the rural areas.
It is of the belief that sustainable financial inclusion is achievable only through mainstream financial institutions i.e. banks, as the penetrative reach of banks is low and have still not been able to reach a large number of villages in the country, other intermediaries, which have the ability to reach the excluded segments of the society are required. Microfinance institutions fill this niche space and to that extent, play a critical role in the financial inclusion. (Chakraborty, 2012). Microfinance programs have a potentially significant contribution to economic, social, political and psychological empowerment of the poor in general, women in particular. Through access to timely credit, savings, insurance and entrepreneurial training, women have become successful entrepreneurs, increased their household income and well-being. Regardless of their scale, outreach, location and the type of clients, all microfinance program interventions target one thing in common – human development that is geared towards both the economic and social uplift of the people that they cater for (Bosco Harelimana, 2016). The unique aspect of micro finance in India is that it is delivered through a variety of channels. These include branches of commercial banks and RRBs directly dispensing micro credit and through their business correspondents (BCs), Self-help groups (SHGs) linked to bank branches, cooperative banks and primary cooperative societies, micro finance institutions (MFIs) as NBFCs and in other forms, obtaining funds from a variety of sources, domestic and external (Harun, 2012). (Union Budget 2011-2012) has proposed to set up a “Women’s SHG’s Development Fund” with a corpus of Rs. 5000 million. The GoI created this fund to empower women and promote their SHGs and it is operated by NABARD through its two major microfinance funds- Financial Inclusion Fund (FIF) and the Financial Inclusion Technology Fund (FITF).
As discussed above that there has been a constant effort of the government of India to focus on the section of the society that is deprived of benefitting from financial services and not able to participate in the financial system even getting a small loan as it involves very high interest. Financially excluded people, consistently, depend, on money lenders even for their day to day needs, borrowing at excessive rates to finally get caught in a debt trap. In addition, people in far off villages are completely unaware of financial products like insurance, which could protect them in adverse situation. Therefore, financial inclusion is a big necessity for our country as a large chunk of the world’s poor resides here. Access to finance by the poor and vulnerable groups is a prerequisite for poverty reduction and social cohesion (Neha, 2013).
One can witness a lot has been done so far, in some recent years, Indian government has extensively focused on financial inclusion through SMEs (Small and Medium Enterprises), Micro Insurance, micro finance, etc. In fact, financial inclusion has emerged as a policy imperative for inclusive growth in several countries across the globe. Welfare of minority has high on the agenda of the government ever since it adopted ‘inclusive growth’ as its guiding principle of the governance in the democratic country like India. It’s the duty of the state and as a corollary, responsibility of the majority community to ensure the welfare of minorities so that all sections of the society feel proud to be part of the democratic setup and thus contribute their best to the development of the nation. In 1983, the prime minister’s 15-point program was launched to provide a sense of security to minorities communities and ensure their rapid socio-economic development. The program was based on a three-pronged approach (1) to tackle the situation arising out of communal riots. (ii) to ensure adequate representation of the minority communities in employment under central and state governments as well public-sector undertakings (iii) other measures, such as ensuring flow of benefits to the minority communities under various development programs, maintenance and development of religious places, Waqf properties and redressal of grievances of the minorities (Naziruddin, 2012). However, as per the 2008 Report on Financial Inclusion by Dr. C. Rangarajan, over 73 percent of farmer households currently do not have access to formal sources of credit. In certain geographies, this ratio is much worse (Indian banking 2020 report, 2010). Therefore, this paper aims to delve into financial services at large and financial inclusion of minorities in particular, which actively contribute to the humane & economic development of the society.
The Interest Free Finance Perspective
The objective of the Interest free financial system, like any other system, is the realization of efficiency and equity in allocation and distribution of resources, for which it recognizes the role of market forces and freedom of individuals. But it also recognizes the possible adverse impact of the totally unregulated market on various sections of society, particularly the poor and the disadvantaged. The pure materialistic “positive” approach never been capable of serving social interests and realizing such goals, In comparison between Interest free and conventional counterparts, both have similarities in terms of focused on eco development and social objective, aim to achieve a better life for whole people, support additional income, promote entrepreneurship activities also both are expected to rely on providing wider access to the poor, be sustainable institution which can achieve “market based for profit approach”, supported by efficient system and transparency reporting, with the focus on capacity building, combine with integration between microfinance and official system (Nur Indah, 2013).
Interest free banking operations could enable inclusive growth in India. Financial inclusion is considered to be critical for achieving inclusive growth; which itself is required for ensuring overall growth in the country. The approach of financial inclusion in developing countries such as is thus somewhat different from the developed countries. In the latter, the focus is on the relatively small share of population not having access to banks or the formal payment systems whereas in India, the focus is on the majority who is excluded. ‘The financial exclusion of minorities has far- reaching implications for their socio economic and educational upliftment. Self-employment is the main source of income of Minorities. To empower minorities economically, it is necessary to support self-employed persons by ensuring a smooth flow of credit to them.’ This amounts to a huge sum of Rs 5,00,000 million that is lying unused in banks. It can, however, also be argued that interest free finance is merely a political issue. To give it undue credence, it ensures that the Muslim community remains financially excluded. In fact, for poor families struggling to make ends meet, it is not an issue at all. The real issue is how to get money: either at 10% interest per day from the moneylender or from the bank (Dhan, 2010). The adoption of Interest free banking can also help the Indian economy in attracting investments from cash rich Middle East countries and Muslims NRIs who would park their savings otherwise in other countries providing Interest free banking at an opportune time when India is becoming an attractive investment destinations driving on its strong fundamentals. Realizing its importance some of the private sector companies are viewing it as a mechanism for attracting capital. Five Indian companies, Reliance Industries, Infosys Technologies, comprising of stocks from the four emerging countries, Brazil, Russia, India and China. The Shariah compliant constituents in the index represent the most liquid stocks trading on the developed market exchange, specifically the Hong Kong stock exchange, the London stock exchange, NASDAQ and NYSE (Shabana & Nishi, 2013).