INDIA KEEN ON TAPPING INTO ISLAMIC BANKING

MOHAMMED ARIFEEN
(feedback@pgeconomist.com)

Apr 9 - 15, 20
12

Two fundamental principles behind Islamic banking are the sharing of profit and loss and importantly the prohibition of the collection and payment of interest. Islamic banks operate on the principles of Shariah, which prevents people from investing in businesses that are haraam (prohibited).

Islamic banking has been common in the Gulf states for years. According to a report in 2008, Islamic banks had more than US$400 billion in assets, and have been started with better results in the West with many non-Muslims using its facilities.

Islamic banking has been adopted in India after the Kerala High Court has dismissed the petitions filed against it. After 9/11 and successive terrorist strikes, the Arabs were not so much interested to invest in Europe and USA. They are planning to invest in China and India, as these are the fastest growing economies in the world.

With sound economy, stable political condition and a favorable business climate, India offers a better alternative for Arab and Gulf states. These rich states having enough resources and money in their hands like to invest in an interest free banking system in India.

India has the third largest Muslim population in the world after Indonesia. There are approximately 156 million Muslims living in India today, 13 to 14 percent of the population. In the absence of an alternative to the conventional interest- based system, in the state of Kerala where Muslims make up around 25 percent of the population of Kerala. It is reported that millions of interest earned in interest is kept in suspended accounts, as Muslims do not claim it.

Muslims both rich as well as those employed in the Gulf invest their money on gold and real estate, which are not so much profitable investments. They also entertain extravagant spending in marriages and many of them fall into the trap of fake financial institutions.

India is considered as the largest unexploited market for Islamic banking and finance. There have been increasing demands from various sections of the Indian society, especially by the economists and businesspersons for the introduction of Islamic banking services in India for the past few years, and some efforts have been made in this context.

There appears to be a lack of consciousness among the Indian masses as well as their policymakers in terms of its application and benefits. The only positive step in this direction came from the Kerala government, which participated in an Islamic finance conference in the state, inviting much needed investment.

The projects in Kerala quickly received investment offers worth Rs100 billion from Oman alone to invest in critical developmental projects including roads, bridges, flyovers, power, water supply and transport, industrial and information technology, tourism, ports, airports, railways and mass transportation and inland waterways across the state, etc.

After the successful introduction of Islamic banking system in Kerala, India being among the fastest growing economies took some initiatives in this direction. It introduced Islamic banking and finance courses in various institutions to educate the masses besides preparing quality professionals to cater to the growing demand.

According to the reports, India needs about $500 billion to invest in projects in its life- sustaining infrastructure. The full-fledged introduction of Islamic banking can easily provide this large-needed money, especially from the oil rich Gulf countries with billions of petro dollars looking for new markets. India feels that with proper infrastructure development, every Indian will benefit, whether Muslims or non-Muslims.

The Kerala government has taken positive step in launching the first ever interest-free Islamic banking institution in India. The Al-Baraka came into force once the Kerala High Court dismissed a couple of writ petitions, which challenged the setting up of Islamic financial institution in a secular country like India.

The Islamic bank is promoted by Kerala State Industrial Development Corporation (KSIDC), which has 11 percent stake in Al-Baraka Financial Services. The company will invest the money only in Shariah compliant projects such as development and infrastructure projects, according to the promoters. The government plans to use the Al-Baraka resources for major projects like Southwest rail corridor and Coimbatore-Kochi corridor.

Islamic banks in India do not function under banking regulations. They are licensed under Non Banking Finance Companies Reserve Bank Directives 1997 RBI (Amendment) Act 1997, and operate on profit and loss based on Islamic principles.

India needs Islamic banks for major investment in its infrastructure. It will act itself as professional banking and not religion-based banking. India offers great promise for the development of Islamic financial services because the Indian capital market is the most liberalized in the world and there is a good financial infrastructure.

Indian experts feel that there is a shortage of Islamic banking expertise in the country. In response to the problem of lack of expertise, in July 2009 the Aligarh Muslim University (AMU) launched a course in Islamic banking and finance.

In India, there is general level of ignorance about Islamic finance. There is no barrier to non-Muslims, who wish to use Islamic financial services. Islamic finance is meant for all mankind irrespective of religion.

The lack of Shariah-compliant investment opportunities has discouraged Indian Muslims from investing funds, not only through the banks, but also through the stock market.

There is no doubt that a huge potential for Islamic banking in India exists, but it will need some strong policy decisions to make it a reality.

There is also a fear that Muslims may come to dominate the Islamic banking industry in India. Islamic banking, however, requires a professional expertise beyond religious belief, because it deals with commercial projects not just monetary credit and debit transactions.

It must be borne in mind that Islamic banking can provide immense opportunities to develop the Indian economy with the participation of Muslims in Shariah-compliant banking and at the same time could lead to substantial inward investment to boost India's further development.

It would also help the poor and helpless, allowing small manufacturing, retail and agricultural enterprises to access finance as well as providing equity funding for infrastructure projects such as irrigation, dams, roads, electricity and communications projects, which are key to the development of the Indian economy.

Economic backwardness of Muslim community in India can be dealt with through the promotion of interest free banking and finance, which may be welcomed by the Muslim community to a large extent. At present, access to bank credit to Muslims is only 4.3 per cent, which is very low as compared to their share of population.

There are many benefits to the development of interest free banking finance in India which include improving of the condition of India's largest minority, more savings across the country, and increase in the national GDP growth rate.

Islamic banking is at an embryonic stage. Appropriate models need to be adopted and implemented to suit society's diverse financial needs. Islamic Bank of Britain, Islamic banks of Thailand, Singapore, and USA may be shining models for Indian bankers.