Islamic Banking and Finance in India

Islamic banking and finance in India

Introduction

Islamic Finance is a newly emerging system in most of the country. So, first of all, let us know what Islamic finance talks about?

Islamic finance is as per Islamic Law and therefore it is Shariah-compliant. It prohibits interest-based transactions but permits profit and loss sharing. It promotes and encourages activities like entrepreneurship, trade, commerce and societal development. On the other hand, it prohibits and discourages earning through interest, speculation and gambling. So, you can see Islamic finance is all about more justice, more ethics and greater accountability.

Despite its impressive growth in other parts of the world such as the Middle East, South East Asia and Europe Islamic banking and finance is yet to favour with Indian authorities.  As per the data, 280 Islamic banks operate in over 50 countries. Its assets are estimated between $ 250 million and $ 300 billion.  Many developed countries of the world including Germany, UK, USA, France and Singapore are welcoming Islamic banking and finance.  Key multinational banks including HSBC, Amanah, standard chartered Saadiq, Lloyds, TSB Bank and Citigroup offer products as per Islamic Banking principles. As you see, that Islamic finance is popular and adopted not only in Muslim countries but also in a non-Muslim country. The absolute reasons are:

  • It is proved that they are much more profitable and growing at a surprising rate in sense of capital, assets and consumers.
  • Islamic finance has succeeded to help in facing the challenges of poverty, high unemployment rates, economic instability, inflation, and many more.

 “Islamic Finance is about ethics, integrity, accountability, and social responsibility, it encourages business and entrepreneurship purely on profit and loss sharing basis and completely prohibits fixed incomes. Sharing of risk and returns by Investors and Entrepreneurs is an integral crux of Islamic finance.

Dr Sheik Ziyaad Muhammad

Benefits of Islamic banking and finance in India

Islamic banking and finance have a strong potential to contribute to the economic growth of India. It is due to the following reasons:

1. Large Muslim Population

According to the Indian census, the population of the country is above 100 crores, out of these the Muslim population is approx 15 crores and majority of them are seeking an interest-free financial system. Although the Sachar Committee report says, a big section of the Muslim population does not have access to banking services (Fasih 2012 ) According to RBI annual report for 2007-08, Indian Muslims annually loose around Rs. 63,700 crores i.e. 27% of their deposits. Zakat potential of Muslims in India still largely remains unused. In this situation, the corporate as well as individual zakah, will help in reducing the widening gap between rich and poor.

Muslim Population

 

2.Potential investment from abroad

India has a great opportunity to receive huge investment from abroad especially from GCC countries. It is estimated that trillions of dollars can flow to India from the Gulf (1) and it is adequate to generate more than 2.7 million jobs in India. The  GCC  countries interest in  Venture  Capitalism and real estate financing can help in infrastructure development in India{2] It is worth mentioning here that Several foreign banks which are working in India also ( Citibank, Standard Chartered Bank, HBSC)  are offering interest-free windows in numerous West Asian countries, Europe and USA.  This window will push the Muslim community to save and invest in various projects and therefore beneficial for mobilization of assets. Moreover, India will be able to magnetize huge investments from those investors who are seeking shariah-compliant investment. it will also attract FDI in India.

Potential investment from abroad

3. Inclusive Economic Growth

Islamic banking and finance promote entrepreneurship especially supporting small and poor entrepreneurs who are rather seeking an interest-free mechanism for their setups. This will lead to inclusive economic growth. According to the Sachar Committee report, approximately 50% of Muslims are financially excluded. A rough estimate shows that introduction of Islamic Banking and development of Islamic Funds would lead to adding of approximately 6mn new DEMAT accounts, thereby giving a boost the share market. In line with Dow Jones’Islamic index, a similar index on BSE and NSE will attract funds from those Muslims who want financially rewarding shariah-compliant investments’ (3)

4. Agricultural Development

We all know that India has an alarming rate of farmer suicides. It is for the obvious reason that the farmers are in able to repay the loan with interest which they have taken for purchasing agricultural equipment, seeds and fertilizers. It usually happens when as farmers are facing crop failure because of extreme weather conditions like drought and flood    In such a situation, Islamic banking may prove to be valuable because Islamic banking is based on the principle of both risk and profit-sharing. It also grants have a Qard-e-Hasan.

“Islamic banking, which propagates zero-interest lending, could hold the key to solving farmer’s suicide crises.

Ms Swaminathan (Indian father of green revolution)

Agricultural development

References

[1] www.ndtv.com

[2] www.researchgate.net

[3] www.researchgate.net