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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.

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Written by Suapi Shaffaii

November 10, 2008 at 10:59 am

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Interest Free Banking Key to Growth in India, Says Rajan

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Points of Essence:

  • Raghuram Rajan, who was responsible for the financial sector reform report which recommended Islamic banking to the Indian Government, is now an economic adviser to the Indian PM, Manmophan Singh. In that famous report, he suggested that Islamic banking be introduced on a larger scale in India being identified as key to  an economic growth in India. It is also a means to reach out to the bankable society in India who have stayed away from the mainstream banking due to their faith restrictions on interest charges.

The International Monetary Fund’s former Chief Economist Raghuram Rajan has just been appointed as 
economic adviser to Indian prime minister Manmohan Singh.

Just before taking up this responsibility, Rajan was given the job to lead a high-profile committee on financial sector reforms, including the one on Islamic banking and finance.

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Written by Suapi Shaffaii

November 10, 2008 at 10:42 am

Why not Islamic banking for India too?

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Points of Essence:

  • Islamic banking almost came to a standstill in India post Rajan Committee Recommendation. Muslims in India have been lamenting about the unavailability of Shariah compliant banking which makes them excluded from the services, while the regulator contributed the vacuum due to the Islamic banking licence in India not being taken up.  India’s Daily News Analysis reported.

G Sampath
Sunday, November 09, 2008  02:57 IST
As governments grapple with the global liquidity crunch, Islamic banking could offer a way to bring fresh funds into the financial mainstream. But while the rest of the world is opening up this avenue, India still has barriers.

“The only reason I have an account in a conventional bank is to encash my salary and file income tax returns. Whatever interest accrues on my deposit, I give away to charity,” says MS Faizy, 54, a mathematics professor at Mumbai’s AP College of Commerce.

“I get many calls from banks offering loans, but I refuse them because Islam prohibits the charging or paying of interest,” says Ayaz Barudgar, 38, a businessman from Santa Cruz. Barudgar takes ‘loans’ by mortgaging gold ornaments with an Islamic co-operative society which extends credit without charging interest.

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Written by Suapi Shaffaii

November 9, 2008 at 8:45 pm

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The economic boom in India is over

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Points of Essence:

  • India acceded to the fact that the impact of the US credit crunch has left the authorities scurrying to deflate the damages that may have battered the country’s previously booming economy. This may delay India’s plan to introduce Islamic financial services as economic revival seems to have taken priority at this stage.

By COOMI KAPOOR

Policy-makers have taken urgent steps to try and stop further haemorrhage of the Indian rupee and equities, but these efforts may not be able to hold off a full-scale recession that may last well through 2009.

DESPITE Finance Minister P. Chidambaram’s best efforts to insulate the Indian economy from catching the Wall Street cold, the contagion finally spread to these shores last week in a rather rude manner.

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Written by Suapi Shaffaii

October 13, 2008 at 2:54 pm

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Raghuram Rajan Committee recommends Interest-free banking

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Points of Essence:

  • The author submitted that the term of ‘interest-free banking’ instead of ‘Islamic banking’ was aptly used in the Raghuram Report put to avoid any communal uproar before coming election.
  • The Raguran report argued that it was within the ambit of financial infrastructure for inclusion to provide for interest-free banking as certain faiths prohibit the use of  financial instruments that pay interest. Hence, no access banking products and services. Also, the delivery of interest-free finance on a larger scale, including through the banking system need to be allowed to be in consonance with the objectives of inclusion and growth through innovation.
  • Being mentioned the first time in any government report, it is a challenge to convince India that interest free banking is genuinely to boost faster and inclusive growth for Indian economy and this goes beyond politics and religious aspects of Islamic banking.

By Syed Zahid Ahmad

Though Raghuram Rajan Committee was silent about Islamic Banking in its draft report released on 7th April 2008, it has suggested Interest-free banking as a part of recommendations made for financial sector reforms. The term of ‘interest-free banking’ instead of ‘Islamic banking’ is needed to avoid any communal uproar before coming election. The next two paragraphs on interest-free banking have been inserted in final report as submitted to the Prime Minister on 12th September 2008.

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Written by Suapi Shaffaii

September 22, 2008 at 3:18 am

Banking on Faith: Islamic (Sharia) Banking and its Prospects in India

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Points of Essence:

  • India is eyeing a stake in the booming Islamic banking industry with its proposed implementation being assessed with great interest by the Indian policymakers. But they have to substantially modify the legal framework which governs the Indian banking system prior to offering Islamic banking financial services in the country.
  • Under the current Indian banking laws, it is almost impossible for Islamic banking to be carried out in India due to the mandatory requirement for interest payments on deposits. The concept of profit-loss sharing or partnership is alien to the conventional banking framework of India and thus not allowed under the law. The tax treatment of Islamic finance products, unless reviewed, would be the biggest hindrance to the implementation of Islamic banking in India.

By Priyanka Lal and Sneha Snehal

In this era where trends flourish around increasing aspirations to identify with social conscious initiatives, it comes as no surprise that Islamic Banking is booming. The concept of interest is fundamental to the business of banking. With this background it is very interesting that sharia[1] banking is working without profits and is still flourishing. They are not only profitable but are also growing at an astonishing rate in sense of capital, assets and consumers. From Jakarta to Jeddah to Jordan, 280 Islamic banks operate in over 50 countries, with assets estimated between $ 250 million and $ 300 billion.[2] Management Consultants Mckinsey and Co. say in their world Islamic Competitiveness Report, 2007 that the value of assets managed by Islamic Banks will grow by 33 % by 2010.[3]

Keeping all this as background this article explores Islamic Banking in totality: origin, principles, growths and future and the possibility of the same in India.

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Written by Suapi Shaffaii

September 10, 2008 at 11:16 am

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Economics of Islamic Banking in India

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Points of Essence:

  • India is ready to make waves in Islamic banking but not without their Government’s permission to the conduct of Islamic banking in the country.
  • With 150 million Muslim population, India stood to gain advantage to pool around one trillion dollars Islamic investment funds from Gulf countries compred with its other non-Muslim counterparts. This will help the national current account and fiscal deficit in check.
  • Regulators are still in doubts about the scope of Islamic banking, having understood that from a mere religious perspective. A committee to analyse the impact of Islamic banking to the Indian communities not withstanding their religious faith was never established. Thus, the potentials of Islamic banking to resolve India’s real economic problems were not realised.
  • The prejudices about Islamic banking still remained as there was not yet report on economic viability of Islamic banking and its impact on inclusive growth.
  • There was also a fear that muslims may dominate the Islamic banking industry in India.  Islamic banking requires a professional expertise beyond one’s religious belief because it deals with commercial projects than mere monetary credit and debit transactions. While Indian Muslims may have an edge in terms of Islamic ethics required for Islamic banking but they lack professional exposures to manage modern commercial banking on Islamic ethics.
  • There would be viable opportunities to energise the Indian economy with the participation of Muslims in Shariah compliant banking who were previously excluded and the availability of funds for developments in India.   It would help the poor and vulnerable as it allows the manufacturing and retail enterprise of unorganized sector and agriculture to obtain equity finance.
  • The equity financing would also help India to fund irrigation, dams, roads, electricity, and communication projects along with other public infrastructure. These are areas where public finance is insufficient and debt finance may be a cause of deficit to the government.

By Syed Zahid Ahmad,

With silent debates on Islamic Banking in India among Indian Muslims, some of our financial sector players and political leaders, time has come that besides considering the religious, social, political and diplomatic dimensions, we should understand the economics of Islamic banking for Indian economy.

Financial Sector Reforms and Islamic Banking:

Though the draft report was silent about Islamic Banking, it is expected that the final report by the Committee on Financial Sector Reforms (CFSR) will add some note about Islamic banking because the issue was raised during the seminar at Mumbai on 12th June 2008 where the committee members assured to consider it in the final report. The recent growth trend of Islamic investment funds worldwide has made some financial sector players feel that it was like a lost wisdom to miss Islamic banking so far which has some post modern financial products / services. Recently Zee news and the Statesman have published projecting high potentials for Islamic banking in India. And latest with statement of Mr. Amar Singh (Samajwadi Party) on 1st September 2008 to pitch for Islamic banking, this issue has got some more attention in India. So, before it become a political agenda, it is better to evaluate its economic value for India.

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Written by Suapi Shaffaii

September 8, 2008 at 12:31 pm

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