the way forward to islamic banking in india by riyazi farook
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8/14/2019 The Way Forward to Islamic Banking in India by Riyazi Farook
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www.islamicfi nancenews.com Vol. 4, Issue 1 5th January 2007
The Way Forward to Islamic Banking in India
By Riyazi Farook
Islamic banking is the fastest growing concept the world
over but has not caught on in India. There are currently a
handful of foreign banks operating in the country which
are offering Islamic banking products. These include
Lloyds TSB, Citibank, Grindlays, Standard Chartered,
HSBC and ABN AMRO, which are already operating
interest free banking in several west Asian countries,Europe and the US. There are a few home-grown banks
like ICICI and Kotak Mahindra which offer Islamic banking
products as Indian banks become increasingly aware of
the Islamic banking concept and confi dent of the huge
potential market in India.
The resilience of the Islamic banking industry already
seen in many parts of the world could progress further with the
distinctive advantages which India can offer. A population of over 1.3
billion is certainly a massive market to tap. India has the capability to
offer huge manpower and natural resources. Opportunities which India
can offer are in the areas of technical and managerial talent, with theadded benefi t of international experience, given the underlying
strength of its economy in which the country has emerged as one of
the fastest growing economies in the world.
At this juncture, Islamic banking in India is limited to the co-operative
sector scattered in various states all over the country. Islamic banks in
operation number less than 15, with deposits of about US$150 million.
In reality, they are just non-banking fi nance companies (NBFCs) which
function on the basis of profi t and loss. These so-called Islamic banks
cater to the needs of their locality except for a few that operate across
districts or states. As their sources of funds are limited and their
existence is small scaled, they miss out on any economies of scale.
Islamic banks in India provide housing loans on the basis of co-
ownership, venture fi nance on Mudarabah or profi t-sharing
and Musharakah or equity participation and consumers ’ loans.
Some banks fi nance transport also on the Murabahah or mark up
basis through hire purchase.
As for investments, the Islamic banks put their funds in government
securities, small savings schemes or mutual funds and to a smaller
extent, investment in shares of companies or the stock market.
Conventional banks are showing preference to undertake this form of
interest-free banking. However, the absence of a legal Islamic banking
framework is making it diffi cult for scheduled commercial banks to
manage this form of banking or even adopt the Islamic banking system ina small way. Islamic banks in India are not under the control of its
banking regulations but are licensed under the Non Banking Finance
Companies Reserve Bank Directives 1997 RBI (Amendment) Act 1997,
operating on profi t and loss (Mudarabah) under Islamic principles. RBI
has also introduced a compulsory registration system.
Even if banks are allowed to set up windows that offer Islamic banking
services, they need to maintain cash reserves and a Statutory Liquidity
Ratio (SLR) which involves interest. Settlement and clearing facilities
are not available from these banks, therefore their inability to issue
cheques.
There is an urgent underlying need to regulate the fi nancial institutions
in India given such an immense market among Muslims. A regulated
Islamic banking industry would offer the masses an avenue to channel
their money into the formal banking system, be it conventional orIslamic.
Muslims in India have undoubtedly regarded religion as the biggest
hurdle for them to deposit their money in the bank or to obtain funding
for developing their businesses or ventures. A huge proportion of
this population even avoids serving in fi nancial institutions. The non-
participation of Muslims in India’s formal banking institutions has not
only weighed down their economic prospects but also prevented a huge
sum of money belonging to the Muslim community to participate in the
national development. Islamic banking can certainly revolutionize the
micro-fi nance sector in the country and become an advantage for the
debt-ridden farmers in areas like Maharashtra.
The Indian fi nance ministry has advised the Reserve Bank of India(RBI) to draw a roadmap for Islamic banking in the country. This is a
step in the right direction to tap both the local market as well as major fi
nancial players from the middle-east.
Subsequent to this advice, RBI has taken the initiative to explore the
feasibility of Islamic banking. A committee comprising senior bankers
from the State Bank of India and other government and foreign banks
and headed by Anand Sinha, chief general manager in charge of
banking operations and development have tabled a feasibility study
along with their recommendations. The fi ndings have yet to be made
public.
Other initiatives towards Islamic banking in the country have beensporadic in the form of press briefi ngs, literature circulation and
seminars. A recent move to get the government ’s involvement in
Islamic banking was the presentation to the fi nance ministry and RBI
by Jamaat-e-Islami Hind (JIH), on the need to amend the RBI Act and
launch Islamic banking in India. (JIH is one of the leading Muslim
organizations based in Delhi).
A Bahrain-based private equity fund, with an amount of US$1 billion
has expressed an interest to start an India-specifi c fund. Also fi rms
like Abu Dhabi Investment, Qatar Investment Authority and Islamic
Bank Finance House are looking at investing in India. This will all lead
to the speeding up of the development process for the country as a
whole.
Regulatory issues need to be put in place before Islamic banking can
be introduced in India and its benefi ts can be enjoyed to the fullest.
Riyazi Farook has received a Professional Diploma from CIM-UK and
Postgraduate Diploma in Islamic Banking & Insurance from The Institute of
Islamic Banking and Insurance in the UK. He can be contacted by email at
ri azif@ ahoo
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