Bissi, cooperatives, crowdfunding: India’s Muslims find ways to raise funds for business and personal use

Photo: Muslims stand outside a mosque in Old Delhi, India, August 1, 2017. REUTERS/Cathal McNaughton

In the absence of Islamic banking and a shortage of Shariah-compliant investment options in the country, Muslims are exploring various ways to raise funds for business or personal use

Equity and real estate are popular means of managing wealth for Indian Muslim businesses and individuals but those without easy access to the capital and property markets are forced to seek out unconventional means of financing that they consider to be in consonance with their faith.

A large number of financially literate Muslims choose to invest in stocks of Shariah-compliant companies. There are hundreds of such companies listed on the Bombay Stock Exchange, which runs the S&P BSE 500 Shariah Index. The National Stock Exchange also runs three Islamic indices: Nifty 500 Shariah, Nifty 50 Shariah and Nifty 25 Shariah.

India also has two Shariah-compliant mutual funds, Tata Ethical Fund and Taurus Ethical Fund, which provide medium and long-term capital gains by investing in Shariah-compliant equities.

Real estate has long been one of the most sought after investment avenues for wealthy Muslims living in India and abroad, providing income through rental yield and capital appreciation.

However, property is out of reach for those without access to Shariah-compliant property financing channels, of which there aren’t any in India, forcing many Muslims to live in a rental home rather than own it.

Those who are not averse to trying non-traditional avenues of financing asset acquisition in a Shariah-compliant way have very few options available. These options are also available for micro, small and medium sized businesses seeking financing of any kind.

COOPERATIVE CREDIT SOCIETIES

India’s existing banking regulation doesn’t permit banks to run on Islamic principles or provide interest-free banking facilities. However, cooperative credit societies have the freedom to develop their own by-laws and operate in accordance with Shariah principles, using profit-loss sharing and/or an interest-free model.

A large section of the Muslim community chooses to transact with cooperative credit societies, primarily to make savings or avail credit, without earning or paying interest. These Shariah-compliant credit societies take deposits from investors and give interest-free credit to borrowers. Investors make a profit or loss from the overall performance of the credit society that invests their money in various halal businesses and asset-building activities. The borrower pays processing fees on the credit or financing taken. Small traders and businesspersons mostly use cooperative credit societies for short-tenure loans.

There are a number of cooperative credit societies operating from different parts of India such as Janseva Cooperative Credit Society Ltd, Bait-Un-Nas'r Urban Cooperative Credit Society Ltd, Al-Khair Cooperative Credit Society Ltd and Sangamam Cooperative Credit Society. Compared to conventional banking, however, their reach and scale are extremely limited.

NON-BANK FINANCE COMPANIES

The Muslim business community also uses the financing avenue provided by non-bank finance companies, or NBFCs, which are regulated by the Reserve Bank of India under the RBI Act of 1934. They are not allowed to take public deposits like conventional banks or to promote themselves as Islamic or Shariah-compliant financial institutions. They have the flexibility, however, to offer interest-free products that are similar to Islamic finance.

India currently has only one such NBFC, the Cheraman Financial Services Ltd, which provides interest-free lease finance for medical, construction and manufacturing equipment and vehicles. It also provides equity funding to viable ventures, both for start-up entities as well as for expansion finance in various industry verticals.

BISSI OR CHITTI

Another saving scheme practised not only by Muslims but also other communities is bissi or chitti, a kind of complicated “chit fund”.

While there are organised chit funds run by financial institutions, the unorganised bissi is mostly at community level where a group of people come together to deposit an equal amount of cash each month for a fixed period of time. The accumulated sum is given to one of the members every month through a lottery system. (The same practice also prevails among Muslim communities in Southeast Asia where it is called ‘senoman’ in Malaysia and Singapore and ‘arisan’ in Indonesia.)

There is no extra earning through interest, but the depositor stands a chance to get the accumulated sum in advance for business or personal use, without waiting until they pay up all their instalments.

CROWDFUNDING

Since there is growing demand for Shariah-compliant financing in India, Rehbar Financial Consultants has set up operations in Bengaluru to work as an intermediary between Shariah-conscious investors and businesses in need of finance.

The company, which claims to be the first of its kind in India, helps raise crowdfunding for Shariah-compliant companies through halal sources. It performs due diligence and Shariah-compliance checks of the companies and structures a suitable deal based on the profit and loss sharing model, and monitors the performance of the deal post execution.

According to its annual report released during Ramadan this year, Rehbar has raised 19.1 crore Indian rupees (191 million rupees, or $2.98 million) for 54 businesses from about 300 investors.

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