Global boom of Islamic banking but India still confined

To create Islamic finance system in India remained misunderstood as Reserve Bank of India (RBI) an autonomous body has been unresponsive toward Islamic banking in India. Last year, the idea of Islamic banking in India was forwarded by the former governor of RBI Raghuram Rajan but the RBI management has dropped the proposal instead the idea would have brought in billions of dollars worth investment and remittance into the ailing India economy. The ground reality of dropping of fully introducing the Islamic banking system into the country, is not clear either it is political or secular thinking. Moreover, the objection is the fear that Islamic finance will be used to fund terror, or channel terror money. The simple way of looking at this is that Islamic banking is misunderstood.

Islamic banking is basically a form of finance that rules out receipt and payment of interest and fees. The rules forbid profiting from money lending. Islamic banks buy properties for clients, and then sell them back at a profit, allowing clients to pay back installments. There is structuring profit-sharing agreements between the borrower and the bank. Leases and hire purchase are allowed.

Guided by the Holy Quran, Islamic banking also does not allow money to be invested in speculative, ‘non-productive’ investments, like gambling, liquor, tobacco and weapons. Islam does not allow Muslims to invest in interest-bearing products.

There is no doubt an Islamic-friendly product found in India’s non-banking finance companies, cooperative societies and chit funds. These are not regulated by the central bank. Recently, cooperative banks with Islamic banking products were set up in Kerala (Cherman Financial Services Ltd) and Maharashtra (Lokmangal Cooperative Bank). There are just a handful of ethical mutual funds in this space and a Shariah-compliant stock index, the BSE TASIS Shariah 50. These products a very small number, no doubt exist to meet the market need in India.

There are reasons cited by government to disallow Islamic banking. The argument is that enabling Islamic banking would require changing laws. That requires legislative support, which brings back to the Bharatiya Janata Party (BJP) – a current ruling Indian party. For some time representatives of Indian Muslim community some 180 million strong have been pushing for such banking products.

In India, there is need for such products. At 7.4 percent the Muslim community’s share of bank deposits and loans is lower than the national average. Money coming in as remittances from West Asia is also not making it into the banking system. Current accounts are not interest bearing. There is no harm in experimenting with a window within the existing financial system, as most of the Western world has done. In India the government will is missing.

No Islamic thinker ever treated the honest pursuit of profit as itself inherently immoral or injurious to faith.

Neither did the prohibitions against usury lessen against any sense of commerce, or even the development of complex credit instruments.

In India, there is an unfulfilled market need for such products. Fewer Muslims in India operate a bank account compared to other religions. Earlier RBI governors and the UPA government had seriously considered the idea of introducing such products in India in a phased manner. Former Governor of Reserve Bank of India Raghuram Rajan had proposed working with the Government to introduce Islamic Banking (interest-free banking) to tackle financial exclusion of a vast Muslim population, who for religious reasons do not go for traditional banking.


Interestingly, RBI in its 2016 annual report had given its clearance for opening Islamic banking windows across India. The proposal in this regard was seen as a major shift in the stance of Reserve Bank which earlier had said that Islamic finance could be offered through non-banking channels like cooperative societies and other investment models.

Before the RBI recommendations could be discussed by Government of India, Union Finance Ministry said that Islamic banking was not relevant any more in achieving the objectives of financial inclusion as the government has already introduced several programmes for all citizens towards financial inclusion. RBI had set up an inter-departmental group on Islamic Banking. Entire exercise was aimed at promoting financial inclusion, accessing huge market potential to attract finance from Gulf countries for infrastructure development.

Among all hurdles caused after demonetization and fear of declined income and employment opportunities in near future, Muslims feel that December 9th, 2016 is a black day for them when BJP led Government ruined their hopes to avail required finance in future through interest-free windows. Besides other factors, main reason for this loss is that Muslims are not able to get interest-free finance from banks.

This huge financial loss is putting Indian Muslims economically far behind other communities. If India really wants to achieve inclusive growth, then the government will have to safeguard financial inclusion among Muslim community.

Islamic banking growth worldwide

Islamic bank globally, is a $2-trillion industry growing at a double-digit rate. In recent years, banking and related Shariah-compliant services have been among the fastest-growing segments of finance in the West. London is a big hub of Islamic banking. Germany and US have limited offerings, but they can be found.

According to the BBC, in recent years, banks in Hong Kong, Luxembourg, South Africa and the UK have issued Islamic bonds.

Following recent reports and figures, Islamic banking is outgrowing conventional banking and its total participant banking market is worth around $920 billion which is projected to grow to more than $1.6 trillion by 2020.

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