For India, Islamic banking is inevitable

India’s population includes more than 180 million Muslims, so the country can benefit from banking that follows Sharia law, bringing in the many financially excluded to the mainstream.
A vegetable trader in Mumbai. Many Muslims in India reluctantly use the conventional banking system and others avoid using banks altogether. Shailesh Andrade / Reuters
A vegetable trader in Mumbai. Many Muslims in India reluctantly use the conventional banking system and others avoid using banks altogether. Shailesh Andrade / Reuters

Zaheer Chauhan, a public relations consultant in Mumbai, laments the fact that Islamic banking is not available in India.

He uses conventional banking, but he tends to keep his financial activities with the bank to a minimum because as a Muslim, he simply would not be comfortable with certain transactions.

“I’d prefer to use an Islamic bank,” Mr Chauhan says. “One of the major reasons is interest on finance is prohibited [under Islamic law] and Islamic banking would give all the benefits without interest.”

The current situation has a significant effect on his life and how he spends and invests money.

“The entire game of interest is holding me back from investing, be it in mutual funds, taking loans for a car, property, consumer durables,” he says.

But it may not be too long before Islamic banking is available in the country, with strides being made towards introducing the alternative system.

The Reserve Bank of India (RBI), as part of its plan to boost financial inclusion in the country, has proposed to the government that interest-free banking be introduced in India, according to the central bank’s recently released annual report.

This could pave the way for Islamic banking in the country, although strong opposition is coming from some corners.

In Islamic banking, which follows the Sharia, interest is not allowed and should not be paid or collected on deposits and loans. Also, investments should not be made in areas prohibited under Islam, such as alcohol and pork. To earn money, instead of interest, Islamic banks rely on profit-sharing and fees.

“It is observed that some sections of the Indian society have remained financially excluded for religious reasons that preclude them from using banking products with an element of interest,” the RBI report stated. “Towards mainstreaming these excluded sections, it is proposed to explore the modalities of introducing interest-free banking products in India in consultation with the government.”

Previously, the RBI had taken the position that Islamic finance could be offered through non-banking institutions – but should not be offered through banks. This latest move, therefore, marks a significant shift.

India has more than 180 million Muslims, so many believe there is a huge opportunity for Islamic banking to take off in the country.

“The RBI has given its opinion and it’s now up to the government of India to make up its mind,” says H Abdur Raqeeb, the general secretary of the Indian Centre for Islamic Finance.

Middle class and wealthy Muslims in India “reluctantly” use the conventional banking system, because they have no choice, while some Muslims, avoid using banks altogether because the system goes against their religious beliefs, he says.

He says that he expects to see Islamic banking launched in India within the next year following the latest signs that there is a push towards its introduction.

“There is definitely scope and space for Islamic banking in India,” he says. “I don’t think it can be stopped from coming for much longer.”

There have been other recent steps towards Islamic banking in India. Saudi Arabia’s Islamic Development Bank this year announced plans to launch its operations in Ahmedabad in Gujarat, a state in west India. But there are politicians in the ruling Hindu nationalist Bharatiya Janata Party (BJP) that are vehemently opposed to the introduction of Islamic banking in India.

The most vocal of them is Subramanian Swamy. The BJP politician has long argued fiercely against Islamic banking and does not believe that it has a place in the secular society of India. On Twitter, he once said that “Islamic banking is a failure in Dubai” and in India it would “be conduit for religious conversion – no loan to Hindus on technicalities”.

The State Bank of India was planning to launch a Sharia-compliant mutual fund about two years ago but the plan was scrapped at the last minute. The Sunday Guardian reported that this was because Mr Swamy had intervened to halt the launch. In a letter to the Indian newspaper, he was reported as having written that Islamic banking would be “politically and economically disastrous for our country”, and he expressed concerns that it could lead to “dubious funds” being brought into the country via Islamic banks.

But Narendra Modi’s government is eager to advance financial inclusion in the country so that more of the population can come under the formal banking system.

Abhimanyu Sofat at India Infoline, a financial services company with its headquarters in Mumbai, says that Islamic banking does have “big potential” given the number of Muslims in the country, but he thinks that any introduction of Islamic banks could be a lengthy process.

“There could be new legislation that would be required to get this implemented,” he says.

There are a couple of mutual fund schemes in India that are Sharia-compliant, although they are marketed as “ethical” funds.

There would be significant opportunities for UAE banks, including Islamic banks, if Islamic banking does emerge in India.

“There could be opportunities for those with experience of Islamic banking in the Middle East,” says Mr Sofat. “But it’s speculative until we reach the stage where [Islamic banking in India] is going to happen.”

The GCC countries, Malaysia and Iran account for more than 80 per cent of the Islamic finance industry, according to Standard & Poor’s (S&P).

It says that the growth of the industry is slowing amid subdued oil prices and a lack of standardisation within the sector. Nevertheless, Islamic finance is expected to reach US$2.1 trillion this year and will be worth $3tn “some time in the next decade”, according to S&P.

There are a number of Indian expats in the Gulf region that do not put money into banks in India because Islamic banking is not available, Mr Raqeeb says.

He explains that India needs billions of dollars for infrastructure development in the country and Islamic bonds, or sukuk, could be one way of attracting funds.

“Sukuk is one of the important things in the world today for infrastructure development,” he says.

Kerala’s finance minister, T M Thomas Isaac, last month said the state’s government would launch Islamic banks within the next two years, Indian newspaper The Hindu reported. He said that Islamic banking offered an alternative system to the capitalist structure that triggered the global economic crisis of 2008, according to the newspaper.

Mr Raqeeb insists that Islamic banking is not necessarily only for Muslims and it could help to bring more Indians from poorer backgrounds into the banking system. Farmers could be among those to benefit, he says, with farmer suicides in India often linked to crippling high-interest loans that they have taken out.

“The marginalised people and the minorities are excluded from banking, so we think if this alternative system comes, it will be inclusive.”

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Published: September 10, 2016 04:00 AM


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