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By - Dr. Rahmatullah
Address
1st Floor, Vazir Building, 179, I. R. Road, Mumbai – 400 003, India
Tel. – 091 - 22 - 2347 8329 (O) 26505480 ®
Fax:- 091 - 22 – 2347 8884
Mobile – (+91) 9820255784
E mail – drrahmat5@yahoo.com
Since 1970’s IFFI’s of India started operation similar to that of modern banking and non-banking financial companies. But ten of them operating on large scale collapsed within a span of 20 years. A scrutiny of two collapsed NBFC’s namely Barkat Leasing and Financial Service Ltd., Mumbai and Al Ameen Islamic Financial Investment Corporation, Bangalore reveals various economic and non-economic reasons of failure. Low capital yield, higher cost of operations, unprofessional management, lower capital base, higher NPA’s, market fluctuations and absence of shock observers etc are found major causes. It is however observed that bankers have not succeeded but the Islamic banking principles have not failed. Many people’s desire to invest their funds on PLS basis is silver lining. Hence few remedial steps can strengthen interest free financial movement in India, which is in crisis at present.
Introduction
Interest free financial institutions (IFFI) of India are the forerunners in the history of global Islamic financial movement. Adherence to Godly ordains that “Trade is permitted but interest is forbidden” (1) has been found to be the major factor contributing evolution of institutional form of this ordain. Tracing the history of growth of interest free financial institutions in India, it is reported that such organized credit society had shown its presence as early as 1890. (2) According to the directory of Islamic banks in India (3), such efforts in the organized sector in the style of the Patni Cooperative Credit Society Ltd. was established in1942, almost immediately after the adoption of Indian Cooperative Act 1940. However out of 159, most of the interest free financial institutions were established during the 80’s and 90’s of the 20th century (4). A recent study conducted by Bagsiraj shows that these institutions have grown to a size of 292 with a break up of 85 as financial associations of persons (FAPS) 144 as registered Islamic welfare societies / trusts (IFS), 14 as Islamic Cooperative Credit Societies (ICCS) and 49 as Islamic Investment and Financial Companies (IFIC). (5) It implies that the total institutions catering to Islamic financial need of the people of India FAPS are 29.10 percent, IFS are 49.32 percent, ICCS are 4.80 percent and IFFC’s are 16.78 percent. It may be noted that these institutions primarily fulfill the casual social need of the people at a very small scale. They stand almost nowhere so far as the commercial needs of the people are concerned.
It is however observed that growth as well as performance of these institutions is found erratic and more so incompatible with growth and performance of modern banking and non-banking financial houses. Few of them operating on comparatively larger scale collapsed within a span of less than 30 years giving a big jolt to the on going interest free movement in India. New Amanat Investment Co., Shariah Investment Company, Barkat Leasing and Financial Services Ltd. and Baitun Nasr Cooperative Credit Society Ltd. of Mumbai, Al Fahad Investment, Al Falah Finance and Investment Company of Delhi, Minar Lease Finance Ltd., Al Falah Finance Ltd., and Farzan Capitals Ltd., Hyderanad and Al Ameen Islamic Financial and Investment Company, Bangalore have totally collapsed. Those still operational are classified as marginal unit with highly unimpressive growth performance. Few others are alleged to be sick units prone to extinction.
Paucity of seed capital partial adherence to financial discipline, lack of professionally trained staff, shortsighted entrepreneurial decisions, market recession, absence of call money market, lack of risk management plans, absence of marketable financial products, and lack of broad based support from the depositors are observed to be the important reasons for the crisis and collapse of the major non-banking financial institutions / companies, claiming to be the champions of Islamic banking system in the country.
Being spread over an area of 3214 kms from north to south and 2933 kms from east to west, it is beyond reach of an individual researcher to conduct a thorough probe into the functioning of all these institutions collapsed or in crisis. Hence an effort manageable is made in this paper to probe into the reasons of failure of two important institutions namely Al Ameen Islamic Financial and Investment Corporation – Bangalore and Barkat Leasing and Financial Services Ltd. - Mumbai as case studies, which comprises 25% of the institutions closed. These were non-banking financial companies (NBFC’s) with comparatively larger capital and business base among all IFFI’s of India in the organized sector. It may be noted that interest free financial institutions in the unorganized sector are numerically more but carry little importance so far as financial transactions of Indian money and capital markets are concerned. Therefore they have not been selected three existing operational institutions from three different fields, viz NBFC, and cooperative Sector, namely Al Najib Milli Mutual Benefits Ltd. Najibabad, Seyad Shariah Finance Ltd., Trinavelli, and AICMEU’s Baitulmal cooperative Credit Society Ltd. Mumbai have also been taken for scrutiny to find out their status, strength and challenges. It is expected that the analysis will not only shed lights on the reasons of collapse but also strength and weaknesses of operational units – the remaining future of interest free financial movement of India.
Growth Performance
The study in this paper is organized under four sections. Section I deals with growth performance of (a) Al Ameen Islamic Financial Investment Corporation (AIFIC), (b) Barkat Leasing and Financial Services Ltd. (BLFS), which have closed down at the beginning of the current century. Section II deals with the growth performance of (a) AICMEU’s Baitulmal Cooperative Credit Society Ltd. (ABCCS), (b) Al Najib Milli Mutual Benefits Ltd. (AMMB) and (c) Seyad Shariah Finance Ltd. (SSF) which are functioning and continue to cater the designed services to their stakeholders. Section III Scrutiny report which deals with probable reasons for the collapses and crises of above-mentioned institutions comparison with related conventional financial system in the country is also made wherever possible. And finally section IV deals with conclusions and suggestions that may strengthen and augments the cause of existing interest free institutions and as well as financial movements in India. RBI – The central bank of India uses various parameters (6) to assess and analyze the financial stability and growth of banking and non-banking companies. In view of the significance, two parameters namely Financial Health Status and Important Financial Indicators have been applied for scrutiny and analysis in this study.
Section I
AIFIC, Bangalore
AIFIC, which collapsed and practically closed by the beginning of the present century, was registered as NBFC in 1986 under the Indian Companies Act 1956. (6) It was promoted by a group of socially committed persons enriched with experience of managing a conventional cooperative bank named Amanat Cooperative Bank in Bangalore. AIFIC booklet (7) narrates the basic principles underlying AIFIC as (a) Interest is prohibited but trading is permitted, (b) There can only be participative financing with sharing of profit or loss. No lending can be effected on consideration of interest. (c) Money complied with human resources only can be a source of wealth and money by itself cannot increase.
AIFIC commenced its business immediately after its incorporation in 1986. It mobilized funds as Share Capital, Mudarabah Deposits and Scheme Deposits, which included Advance Link Deposits, Transfer Deposits and Housing Deposits etc. The companies deployed its funds primarily for leasing of automobiles and equipments (Ijarah), Venture financing on profit / loss basis (Mudarabah), Project financing on profit loss sharing basis (Musharakah), interest free loans, Vehicle refinance scheme, Housing Finance schemes and Resale on deferred installments (Murabahah).
It is found that initially AIFIC was well received by the people and well managed by the group of promoters. As a result, the financial base of the company grew with leaps and bounds. It declared dividend @ 10+ percent annually for several years. Encouraged with performance AIFIC opened as many as 24 branches all over the country. However this growing trend could not celebrate its silver jubilee. For practical purposes company ceased its full-fledged operations before the close of the last century. Almost all its branch offices are now closed except its HQRS at Bangalore where few directors and other executives are trying hard to pacify and recover and refund the dues of claimants. It is perhaps one of the reasons why current correct accounts of the company could not be had. However, based on the available printed annual reports / audited financial statements, effort is made for evaluation on the basis of two basic parameters namely financial health status and important financial indicators, as stated earlier.
Financial Health Status: - Financial health status refers to financial soundness of the institution from the point of view of its liability and assets holdings. Accordingly the following table is drawn. It deals with six major items namely total owned funds, total deposits, total borrowings, total outstanding and total liquidity and credit deposit ratios. Based on this information the financial ratios as percentage of the total assets have also been calculated.
The following table shows variations in the compositions of total owned funds, total deposits, and total borrowings as constituents of the total fund year after year. But no definite relationship among them either in terms of growth or decline can be established. Similar is the case of total outstanding, which comprises of loans and advances, investments and other assets. It may be observed that company has been on path of growth although the rate of growth has varied from year to year. In case of deposits, negative growth is observed in few years that had adversely affected the growth of loans and advances and also volume of investments.
Table – 1
Al-Ameen Islamic Financial & Investment Corporation (India) Ltd.
Financial Health Status
Financial Years (Rs. in Lacs)
Items
1990-91
1994-95
1995-96
1996-97
1997-98
1998-99
1. Total Owned Fund
58.06
120.21
136.73
146.06
540.88
1080.51
a) Reserve Fund
5.43
11.99
14.18
14.26
14.26
14.26
b) Share Capital
52.63
108.23
122.55
131.80
526.62
1066.25
2. Total Deposit
267.34
941.43
1045.74
1008.29
1310.48
613.63
a) Fixed Deposit + bonus
267.34
941.43
1045.74
1008.29
1310.48
613.63
accrued & due
3. Total Borrowings
264.60
637.19
915.77
1080.38
1085.29
1369.88
a) Others (Other Liabilities)
264.60
637.19
915.77
1080.38
1085.29
1369.88
4. Total Outstanding
538.98
1433.49
1903.92
2051.93
2742.98
2948.65
a) Loan
332.25
421.85
451.18
529.57
636.92
886.24
b) Investment
0.00
69.38
133.92
167.43
161.48
159.21
c) Other Assets
206.73
942.25
1318.82
1354.93
1944.58
1903.19
5. Liquidity Ratio
8.65%
15.62%
9.26%
8.18%
6.59%
3.77%
6. Credit - Deposit Ratio
124.28%
44.81%
43.14%
52.52%
48.60%
144.43%
Total Assets (1+2+3)
590.00
1698.83
2098.23
2234.73
2936.65
3064.02
Financial Ratio as Percentage of Total Assets
Total Own Fund
9.84%
7.08%
6.52%
6.54%
18.42%
35.26%
Reserve Fund
0.92%
0.71%
0.68%
0.64%
0.49%
0.47%
Share Capital
8.92%
6.37%
5.84%
5.90%
17.93%
34.80%
Total Deposit
45.31%
55.42%
49.84%
45.12%
44.62%
20.03%
Fixed deposit + Bonus Accrued
45.31%
55.42%
49.84%
45.12%
44.62%
20.03%
Total Borrowings
44.85%
37.51%
43.64%
48.34%
36.96%
44.71%
Others
44.85%
37.51%
43.64%
48.34%
36.96%
44.71%
Total Outstanding
91.35%
84.38%
90.74%
91.82%
93.41%
96.23%
Loan
56.31%
24.83%
21.50%
23.70%
21.69%
28.92%
Investment
0.00%
4.08%
6.38%
7.49%
5.50%
5.20%
Other Assets
35.04%
55.46%
62.85%
60.63%
66.22%
62.11%
Source: Audited Financial Statements of the Company for Several Years.
The year after 1995-96, is observed unhealthy rather heavily crisis ridden. In spite of heavy injection of funds in terms of share capital, the company could not overcome the crises of dues to be paid and therefore closed.
ii) Important Financial Indicators: - It contains information mainly about income, expenditure and profits. These indicators not only reveal the profit or loss status but also provisions and contingencies that strengthen company’s financial base.
Table – 2
Al-Ameen Islamic Financial & Investment Corporation (India) Ltd.
Important Financial Indicators
Financial Years (Rs. in Lacs)
Items
1990-91
1994-95
1995-96
1996-97
1997-98
1998-99
1. Total Income
90.08
205.36