Explained: How Islamic Banking is Used in Scams Like IMA Jewels

One missing scamster, Rs 2,000 crore at stake, and over 30,000 complaints filed within a week – the scam surrounding I Monetary Advisory (IMA) is one of the biggest financial frauds Bengaluru has witnessed in the recent past.

Using the loopholes in the law, the company’s chairman Mohammed Mansoor Khan had managed to evade scrutiny, including two RBI notices, for several years. But, eventually, Khan’s malpractices resulted in him absconding with the investments raised.

Even though the IMA scam is one of around 20 ponzi scams out of Bengaluru, at the heart of a scam is a clever manipulation of religious feelings and greed, using a banking system based on Islamic beliefs called ‘halal investment’ or ‘Islamic banking.’

What exactly is this religion-accepted banking system? And how does it work?

Also Read: IMA Jewels Scam: How Mansoor Khan Evaded Law Despite 2 RBI Alerts

What is Islamic Banking or Halal Banking?

Halal banking is a model of banking practised in Muslim-dominated countries. The principles of Islamic law Sharia prohibits Riba, which is receiving or paying any interest or usury. In fact, it is considered haraam (sinful and prohibited). Because of this, Islamic banking does not have any interest component.

For example, the equivalent of a savings account in Islamic banking is Wadiah, which means safekeeping. Under this system, the customer gives his or her money to the bank for safekeeping. Unlike the traditional banking, where the customer is paid interest on the deposit, under Islamic banking, the customer has to pay a fee to the bank for keeping the money safe.

Similarly, another form of banking is Mudharabah, which is a profit-sharing model, where the investor funds a bank for business ventures, instead of making deposit, and the investor would get the returns based on the profits made by the venture.

Apart from these, there are several other models of banking within Islamic banking such as Qard (interest-free loan), Ijara (leasing), Salam (cash advance for the purchase of agricultural produce) and Istisna (cash advances for the manufacture of assets) etc.

No interest is paid or taken in any of these banking practices by the banker or investor. 

Is there Islamic Banking in India?

In short, no.

There were a few attempts to incorporate Islamic banking practices in India, including a proposal from former RBI governor Raghuram Rajan, but the plan was dropped by the the apex bank.

Banking in India is regulated by the Banking Regulation Act, 1949. This Act doesn’t have any Islamic banking practices incorporated. However, there were recommendations in the past to include Islamic banking or interest free banking into Indian banking system.

The recommendations were made based on the findings of the 2006 report by the high-level Sachar committee, which examined the socio-economic and educational status of the Muslim community in India. The committee found that Muslim community’s access to bank credit is low and inadequate, and at the same time, a large of number of Muslims in the country did not like the conventional banking system.

Former RBI Governor Raghuram Rajan.

In 2008, a report of the Committee on Financial Sector Reforms chaired by the then RBI governor Rajan recommended the introduction of interest-free banking practices in India.

“Certain faiths prohibit the use of financial instruments that pay interest. The non-availability of interest-free banking products results in some Indians, including those in the economically disadvantaged strata of society, not being able to access banking products and services due to reasons of faith…,” read Raghuram Rajan’s report.

The committee headed by Rajan recommended measures must be taken to permit the delivery of interest-free finance on a larger scale through the banking system.

Similarly, the 2015 Report of the Committee on Medium-Term Path on Financial Inclusion, too, recommended the introduction of interest-free banking.

Even though these proposals made a strong case for incorporating Islamic banking into the Indian banking system, in 2017, the RBI turned down these proposals. 

So, is Practising Islamic Banking Legal in India?


Islamic banking is not part of the Indian banking system, which means banks operating under the Banking Regulations Act can’t undertake any transaction prescribed under the Islamic law. However, financial instruments and non-banking financial companies (NBFCs), which follow the Sharia law, are not illegal in India.

In 2013, the first Islamic NBFC in the country – Cheraman Financial Services Limited – was opened in Kerala. It received the RBI approval the same year. Four years later, the Kerala government started its own interest-free cooperative bank – Halal Fayidah.

Apart from these, there are several mutual funds such as Sharia-compliant Tata Ethical Fund (TEF). The Indian stock exchanges, too, have Sharia indexes that track Sharia-compliant stocks.

In short, while India doesn’t have Islamic banking, financial instruments, institutions and NBFCs following Sharia law are recognised by the RBI.

How is Islamic Banking Used for Ponzi Schemes?

While there are several Sharia-complaint, legal financial institutions are in the country, Islamic banking is often misused. Most often the Mudharabah practice, or the halal investment scheme in Islamic law, is misused to run Ponzi schemes.

On 23 January 2018, a large crowd of investors had gathered outside the revenue department office in Bengaluru. An officer explained to the crowd how they were victims of a fraud and how the government would recover the money they lost. This was the infamous Rs 121-crore worth Ambident scam.

The company, run by Bengaluru-based father-son duo Syed Ahmed Fareed and Syed Afaq Ahmed, had collected money from customers in the name of halal investment. Investors were promised that their money would be invested in a venture. A return of 12 percent per month was offered. The owners of the firm fled with the money after they had duped enough people of their money.

Ponzi schemes using halal investments have two components – religion and a promise of unprecedented return.

As described in the Sachar committee, a large number of Muslims are often the targets of these Ponzi schemes as religion is used as a lure.

According to an officer of the Commercial Street police station who initially investigated the IMA scam, the company’s chairman Khan took the help of religious clergies in Bengaluru to promote his investment scheme.

The second aspect of using the Islamic banking for scams is the promise of higher returns. Since general public is not aware of the Islamic banking system, scamsters claim halal schemes offer higher returns on investment compared to traditional banking.

For example, in the IMA scam, the company offered investors a return of 3-4 percent every month. This meant the annual return from the investment was 36-48 percent.

Similarly, in the Ambident scam, the company offered 12 percentage return per month to the investors, taking the annual return offered to 144 percent. If you compare these returns to normal banks, the annual interest paid on fixed deposits are 7-8 percent and even most successful mutual funds don’t offer such returns.

How Many Ponzi Schemes Have Been Reported?

The state government on 6 February had told the Karnataka High Court that there are 19 criminal cases filed against Ponzi schemes run by companies in Bengaluru. Eleven of them have been referred to the Central Crime Branch of the Bengaluru City Police for investigation.

The IMA scam would be the 20th alleged Ponzi scam running in the city.

The Karnataka High Court on 17 June directed the state’s investigating agencies and the Enforcement Directorate to coordinate with each other on probes on alleged financial and investment scams related to 11 firms and companies, including the IMA Group of Companies.

A Division Bench comprising Chief Justice Abhay Shreeniwas Oka and Justice HT Narendra Prasad also directed the state government to submit a status report about the investigations conducted based on cases registered against such companies by 23 July.

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