India Keen to Introduce Islamic Banking and Finance

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.

Interest Free Banking Key to Growth in India, Says Rajan

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.

Why not Islamic banking for India too?

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.

The economic boom in India is over

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.

Raghuram Rajan Committee recommends Interest-free banking

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 12^th September 2008.

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

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.

Economics of Islamic Banking in India

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.

Raghuram Rajan report advocates introduction of Islamic banking in India

Points of Essence:

• Raghuram Rajan Report, if accepted by the Indian Government, will mark the entry of Islamic banking in India. Currently, Islamic banking is not allowed in India. Hailed as a blueprint for a reform of the Indian financial sector, the report had identified among others, Islamic banking as a key sector to bring about a change in the Indian financial architecture.
  
• The report referred to Islamic banking as like equity financing in place of charging interest on lending, which is a key principle of Islamic banking.
  
• The report recognised the financial exclusion of Muslim communities and thus recommended that micro-equity financing to be included in mainstream banking products. This is to encourage participation of all communities in India including Muslims in the country’s economic growth.
  
• The report which was based on three principles: inclusion, growth and stability would be presented to the Indian Government soon.

By Kumud Das

The high-profile committee on financial sector reforms, headed by International Monetary Fund former chief economist Raghuram Rajan, is likely to submit its final report to Prime Minister Manmohan Singh, who is also chairman of the Planning Commission, by the middle of the month.

The committee, which was set up by the Planning Commission to recommend various ways to take the country’s financial sector reforms forward, has included a few points pertaining to Islamic banking. The final report has two pages referring to themes like equity financing in place of charging interest on lending-a key principle of Islamic banking-which is yet to be allowed by the government.

Speaking to FE from Hyderabad, Vijay Mahajan, chairman of Hyderabad-based micro finance organisation Basix and one of the members of the committee, said “While interacting with representatives of the Muslim community in Mumbai, we thought it proper to add these issues to ensure that the community also becomes part of financial inclusion in the country.”

High potential for Islamic banking in India

Points of Essence:

• India could be a significant market for Islamic banking institutions due to itslarge Muslim population.
• However it is still subject to a favourable change in regulatory environment and increased awareness among Muslims and India.

NEW DELHI, Aug 3: Given favourable regulatory conditions, India holds a promising growth opportunity for Islamic finance institutions, whose asset base globally is expected to more than triple to $1 trillion by 2016, a study says.

Islamic banking is already fast gaining prominence among the global financial institutions, especially in the backdrop of the banking sector woes impacting the markets like the USA and UK and the concept has a huge potential market in India as well, according to market intelligence and data analysis services provider Grail Research.

India could be a significant market for Islamic banking institutions, provided there is a favourable change in regulatory environment and increased awareness among Muslims and India as a whole, said a report by Grail Research, part of US-based management consultancy Monitor Group.

“You need to look no further than at the profitability of Saudi banks (the world’s highest) for reasons why Islamic finance will have strong interest globally as a growth engine for financial services,” Grail Research Founder and CEO Mr Colin Gounden said.

As per the Indian census, India has one of the largest Muslim population in the world but a large portion of this has not been able to access the banking services because as per Islamic principles, giving or receiving interest is prohibited though money can be lent on profit sharing or fee based model.

“The size of the market will be very large as the Indian population is above 100 crore and Muslim population itself is about 15 crore and majority of them, in the name of religious faith, are looking for interest free banking and finance,” University of Calicut professor AI Rahmatullah said.

Under the current regulations, which do not allow banks to keep deposits without paying interests or enter into profit sharing agreements with clients, it is not possible for commercial banks to offer Islamic banking services in India.

Source: http://www.thestatesman.net

ISLAMIC BANKING: A boon for the country

Points of Essence:

• The India Government was urged to amend the Reserve Bank of India regulations to allow Islamic banking for the interest-free model of financial transactions to reach the lower segments of the society in India. This is to coincide with the global developments vis-á-vis Islamic finance.
• India would enjoy higher foreign direct investment in infrastructure and other vital areas, strong long-term macro investment and growth rate if it embarks on Islamic finance.

By: DR. M. IQBAL SIDDIQUI

“Islamic system of banking can surely be a boon for our country as it is for the whole mankind,” said Mr H. Abdul Raqeeb, Convener of Jamaat-e-Islami Hind’s Islamic Banking Committee and member of the organisation’s Central Advisory Council. He also called upon the Union Government to amend the Reserve Bank of India regulations to allow introduction of Islamic banking in the country, offering an option to consumers to try the interest-free model of financial transactions.

Addressing the media persons in Jaipur, he explained, “Islamic system of banking, contrary to the conventional one, is based on Islam’s interest-free economic system, in which the money flows from higher towards the lower segments of the society.”

He further said that the worldwide trends show that a change is taking place in the policies of prominent banks. A number of banks, including the HSBC and Standard Chartered banks, have opened Islamic outlets at their certain branches.

The Reserve Bank of India (RBI) has formed a special committee in July on direction of the Government of India, for the study of ‘instruments of Islamic Banking and its possibilities in India’, headed by Mr. Anand Sinha, Chief General Manager.

“Islamic Banking offers financial products and services that conform with the Islamic principles, hence it can lead to the unlocking of large financial capital that the Muslims are now unable to invest in the interest-based system,” added Mr. Abdul Raqeeb, who is also former president of the JIH Tamil Nadu Zone. According to him, the Jamaat, which has been campaigning for Islamic Banking for long, is optimistic about the RBI move.

The JIH leader affirmed that introduction of Islamic banking in India would ensure higher foreign direct investment in infrastructure and other vital areas, strengthening long-term macro investment and boosting the country’s growth rate.

“Interest-based banking can create havoc, and can lead to the AP like cases of the farmers committing suicide while Islamic banking is more compassionate as it is based more on sharing of responsibilities. Also Islamic banks will provide micro finance for the poor and the daily basis workers for their small wants,” said Mr. Abdul Raqeeb.

The concept of Islamic banning is moving across the world. The assets controlled by the Muslims in India are estimated up to $1.5 trillion that is growing at a rate of 15% a year. In the year 2004, Islamic Bonds (Sukook) collected $30 billion. The Malaysian headquarters of Islamic Financial Services Board (IFSB), has emerged as a hub of Islamic banking. At least 265 Islamic banks are in function across 40 countries with assets worth $262 billion. Services provided by Islamic banks are popular among non-Muslims also as, more than 50% business of the HSBC’s Islamic banking division is with non-Muslims.

Mr. Abdul Raqeeb also held the nuclear deal with America contrary to the benefit of India and its people. “This treaty is totally one-sided and will prove to be a burden on our economy; in addition our security and sovereignty are also in peril,” he said. He condemned American President George W. Bush on his indication to Israel to attack Iran in case the talks failed. He was sure that if Iran is attacked by the US, oil prices will hike up to double and accordingly all essential commodities will become dearer.

Prior to this deal America barred India from the pipeline treaty with Iran that resulted in a hike in the price of petroleum and also we were compelled to vote against Iran. Now one can easily conclude what happens and how far can US compel us for their benefits if we accept to become a US satellite country. Jamaat-e-Islami Hind has opposed the deal and deemed it to be disastrous for the country. Jamaat has appealed to all political parties and public to unanimously oppose and struggle against the deal.