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India Keen to Introduce Islamic Banking and Finance

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Points of Essence:

  • With all the hypes on the implementation of Islamic banking in India, everyone has been on guessing game as to whether the Indian Government will finally allow Islamic banking to be synchronized into the country’s financial system. Started with the setting up of various committees on Islamic banking and now consultation tours to the Middle East, it still remains to be seen whether Islamic banking will actually see a daylight in India. Khaleej Times is optimistic about it as reported below.

By Ravi S Jha (
India Correspondent)

NEW DELHI – India is seriously considering to introduce Islamic banking and finance to help the marginalised, and minorities in India.

The Islamic banking, which is equity-based, and not on interest with micro finance, and is also known to have contributed significantly for macro financing of major infrastructure projects the world over, is being given a meaningful thought for operation by the government in India.

After various committees appointed by the government recommended putting into practice the Islamic banking, the multiparty coalition government is seemingly keen to give it a final nod. It is said Prime Minister Manmohan Singh is to deliberate over the principles of Islamic banking and finance with the experts during his visit to Qatar and Oman on Saturday, and then accordingly take a decision.

Top officials accompanying prime minister to his Middle East tour told Khaleej Times that the government is willing to make this operational after taking into confidence the coalition partners in the ruling amalgamation. At a time, when global economic crisis has taken a toll on the markets and world’s leading economy, Islamic banking has a ready remedy, and is proving to come to the rescue of many.

One of the key instruments in the Islamic banking called Sukuk is being considered as a solution to the sub-prime crisis that has affected the world economy. According to experts, while sub-prime mortgages has resulted in $400 billion losses to conventional banks the world over, the figures suggest that Islamic banks practising Sukuk have come virtually unscathed from the crisis.

With the sub-prime crisis crippling the economic backbone of many, reports suggest that even United Kingdom Treasury and the Ministry of Finance in Japan have explored the potential use of Sukuk as a debt management tool in the wholesale sterling and yen markets. Islam, as a religion, prohibits earning of interest, which is the fundamental instrument of modern banking sector, but its growing importance is of late being realised.

Such is the significance of this in India, like other developing economy giving prominence to Islamic banking, that a special committee of India’s apex bank, the Reserve Bank of India (RBI), appointed on the directions of the government, has just finished studying various instruments of Islamic banking and finance.

Says India’s deputy chairperson for the upper house of parliament (Rajya Sabha) K Rehman Khan: “Offering financial services and products conforming to Islamic principles can lead to the opening of large financial capital that so far Muslim believers are unable to invest.

In Kerala and Andhra Pradesh, some $10 billions earned in interest is in suspended accounts as believers refuse to claim it owing to religious sanity.”

According to Khan, Indian prime minister has often talked about inclusive growth, and this growth can be achieved by way of Islamic banking. “Islamic banking, no doubt, is driven by ethics of Islam, but it has more economic regularity compared to its religious intransigence. Islamic banking carries more advantageous features to boost real sector economy compared to financial sector,” says Khan.

Experts recommending interest free banking say structural changes in the Indian economy during post-reform period are no barometer for equitable growth. For inclusive growth, India has to ensure increase in income and employment status of workers in all segments. “It is a paradox that India that has registered a decent growth rate in recent years have found its number of poor living below poverty line increasing,” says convener Indian Centre on Islamic Finance and National Committee on Islamic Banking H Abdur Raqeeb.

Raqeeb adds, so far the government had been reluctant to consider introduction of Islamic banking as part of the reforms in the banking sector, but thinks are looking up. The Rajinder Sachar Committee, appointed by the Prime Minister for preparation of a report on the social, economic status of the Muslim community in India have reflected that Muslims are most disadvantaged community in financial sector, and banking is inversely related to concentration of Muslim Population.

Muslims have over 80 per cent financial exclusion due to interest based deposit and credit schemes available with various financial institution apparatus.

The committee report reflects that Indian Muslims have a share of 7.4 per cent in saving deposits, while just get 4.7 per cent in credit.

Indian Muslims annually loose around $15 billion because Muslims would have a credit deposit ratio of 47 per cent against national average of 74 per cent.

It shows that Indian Muslims annually loose around 27 per cent of their deposits by not availing as credits, and after making operational the Islamic banking and finance this deficit may be removed to curb financial loss to Indian Muslims.  With 31 per cent Muslims living below poverty line and 40 per cent Muslim workers as own account workers, this big deficit of credit is apparently a serious economic disadvantage, says report.

Knowing that it is an emergent crisis, few companies have already begun dealing big in Shariah Investments funds.

Many financial sector players are eyeing upon trillion dollars Islamic investment funds.

Parsoli and Eastwind have launched their Islamic Indices; and Reliance Money and Religare have launched Shariah compliant PMS, and Indian stock market too is observing fair business in Shariah Compliant Stocks.

Source: http://www.khaleejtimes.com

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Written by Suapi Shaffaii

November 10, 2008 at 10:59 am

Posted in General Issue

Tagged with ,

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