Will India accept Islamic banking?

Experts weigh its pros and cons while critics say it goes against the nation's secular fabric

BY holding the first-ever meeting in India this week of its International Advisory Panel (IAP), the World Islamic Economic Forum (WIEF) Foundation promoted its agenda of "building bridges through business" in a country where it sees big potential.

Foundation chairman Tun Musa Hitam emphasised the need to "solidify the partnerships and work towards concrete initiatives based on changing trends and new opportunities in the global economic scene".

The Malaysian-led initiative sought to establish rapport between political leaders and officials, inviting Indian Planning Commission deputy chairman Dr Montek Singh Ahluwalia, a key aide of Prime Minister Manmohan Singh, to attend the 8th WIEF meet in Johor Baru in December.

Foundation secretary-general Tan Sri Ahmad Fuzi Abdul Razak said he expected a score of Indian businessmen-delegates to be at the forum, which would discuss issues, including the promoting of private sector partnerships among a host of Muslim and non-Muslim nations.

While this is a welcome move, one of the forum's thrust areas -- the introduction of Islamic banking in India -- may have to await a policy decision on a complex issue. It is part of an ongoing debate and a decision is unlikely any time soon.

Ahluwalia raised the issue at the meeting with the delegation. Ahmad Fuzi explained: "India is a non-Muslim country with a huge Muslim population. But we do not want to confine Islamic banking to Muslims. We are optimistic that India will come up with a policy decision to enable Islamic banking in the country."

Indian Law Minister Salman Khurshid, who is also in charge of minority affairs, did not dwell on it during his address. But asked by media on the sidelines, he called it "a good idea" but admitted that it was "difficult" to fit in Islamic banking with the existing regulations, as the very concept of debt and equity was different in Islamic banking.

"Non-banking financial institutions are prevalent now and are accepted, but some ambiguities have to be addressed before they can take up Islamic finance."

He had written to the Planning Commission and the Reserve Bank of India (RBI) on the issue and was "quite hopeful" that they would "look at the issue afresh".

"Sooner or later, the RBI will come up with a final view. Let me say at this point of time that Islamic banking is an interesting idea, compelling idea, if you look at what France, Germany and the United Kingdom are doing. It's an attractive idea if you look at the sovereign wealth funds of the Gulf region and the fact that we need much more money to finance our infrastructure needs." Both Khurshid and Ahluwalia left it to the experts. The crux, however, lies in a political decision.

On March 27, Parliament was informed that Islamic banking was "not legally feasible" under RBI's existing statutory and regulatory framework.

Minister of State for Finance Namo Narain Meena told Rajya Sabha, the upper house, that the RBI had received references from the Indian Centre for Islamic Finance for introducing interest-free banking in the country "in order to ensure inclusive growth with innovation".

The centre cited recommendations of the Raghuram Rajan Committee that scrutinised the working of India's banking sector.

In 2010, the government opposed before the Kerala High Court the setting up of an Islamic banking institution in that state.

The National Minorities Commission has asked the government to allow Islamic banking. Its chairman, Wajahat Habibullah, said in an NDTV debate that such a bank network could cater to many sections in need of funds, like farmers.

A large number of them have committed suicide for lack of funds or inability to repay loans and interest. Like lawyer Zafaryab Jilani, he said India could develop its own model.

But critics say it goes against India's secular fabric. NDTV asked: "Will it open up a Pandora's box?"

Economist and right-wing politician Subramanian Swamy called the concept of loan without interest "a fraud". The 1947 Partition was essentially a Hindu-Muslim division. Hence, religion was best kept out of economic activity. He expressed the fear that if introduced, Islamic banking could be misused for "certain activities". He did not elaborate.

Left-leaning N. Ram of The Hindu newspaper called the introduction of tenets of any particular faith into the economic system "backward".

"Don't fear the word Islamic. See how non-Muslims are being benefited," said a senior Malaysian official at the conference.

This does not seem likely.

Read more: Will India accept Islamic banking? - Columnist - New Straits Times http://www.nst.com.my/opinion/columnist/will-india-accept-islamic-banking-1.103746#ixzz20C2y3toM

Islamic banking is not for Muslims alone

Although the word ‘Islamic’ refers to beliefs specifically related to Muslims, it is a different case altogether with Islamic banking and finance. It is a sophisticated banking and finance structure based on moral and social values, which is compatible with the modern day financing needs, and hence, is receiving overwhelming response from Muslims and non-Muslims alike. Sometime ago, the Pope’s official newsletter, L’Osservatore Romano, published an article praising the ethical concepts of Islamic banking and finance and encouraging western banks to adopt the rules of Islamic banking and finance to restore confidence amongst their clients during the economic crisis.

Not only the Pope, several leading educational institutions have also advocated Islamic banking and finance by introducing courses on the subject. Harvard had set up its Islamic Finance Project way back in 1994-95, followed by several other premier educational institutions worldwide. Apart from this, several governments are taking efforts to benefit from the multifold advantages of the Islamic banking and finance system. Countries like the United Kingdom, Luxembourg, North Ireland, Germany, Bermuda, France, Malaysia, Indonesia, Maldives, Turkey, Singapore, the entire Middle East, Japan and Australia, etc are now well-known names in this regard.

Countries like Luxembourg, Bahrain, and Malaysia, etc have developed a robust infrastructure of Islamic banking and finance system, and it is pertinent to note that Luxembourg last year reported the world’s highest per capita income, whereas Malaysia is fast on its way to becoming a developed nation. It is noteworthy that while Luxembourg has a very small population of Muslims, Malaysia, a Muslim-dominated country, has more than 40% non-Muslim account holders in Islamic banks. It is due to its economic benefits that all these countries, irrespective of the size of their Muslim populations, are trying out different ways to become leading centres of Islamic banking and finance. Likewise, there has been a surge in the number of non-Muslim professionals providing Islamic banking and financial services throughout the world, undoubtedly stressing that the importance and advantages of Islamic banking and finance stretch far beyond its name.The recent past has shown that while the world faced severe economic crisis, Islamic banks continued to grow unabated, making the world take note of this lesser known field. Islamic banking and finance has now become a confident part of the world economy with more than 75 countries joining this industry, which is growing at about 20% to 30% annually.

India, which happens to be home to approximately 150 million Muslims, is seen as the largest untapped market for Islamic banking and finance. There have been growing demands from various sections of the Indian society, especially the economists and businessmen for the introduction of Islamic banking services in India for the past few years, and some efforts have made in this regard. However, there seems to be a lack of awareness among the masses as well as policymakers in terms of its application and benefits. One positive step in this direction came from the Kerala government, which participated in an Islamic finance venture in the state, inviting much needed investment. With the green signal to the project in Kerala, it quickly received investment offers worth Rs100 billion from Oman alone to invest in vital developmental projects including roads, bridges, flyovers, power, water supply and transport, industrial and information technology, tourism, ports, airports, railways and mass transportation and inland waterways across the state, etc. It is a good development towards opening the doors for much-needed investment in India, and promoting an equitable banking structure that will benefit all, irrespective of the religious beliefs of the customers.

India is among the fastest growing economies and shall be a leading economy of the world by 2020; however, to achieve this, it is high time India took some proactive steps in this direction, including policymaking and introducing Islamic banking and finance courses in various institutions to educate the masses besides preparing quality professionals to cater to the growing demand. As per reports, India needs about $500 billion to invest in projects crucial for building its vital infrastructure. The introduction of Islamic banking can easily provide this much-needed money, especially from the oil rich Gulf nations with billions of petro dollars looking for new markets. The importance of Islamic banking and finance is increasing and its integration in the mainstream economy is too big to avoid. It is high time Indian policymakers provided for integration of Islamic banking and finance in the system. If India’s infrastructure develops, every Indian will benefit, irrespective of one’s religious beliefs.

The writer is an advocate and an expert in Islamic banking and finance laws

http://www.dnaindia.com

'Islamic Finance in India can attract investments from Middle East'

Taking advantage of the situation arising out of the economic crisis in Eurozone and countries like United States, India should adopt the Islamic Finance System to pump-in investments from the Middle East. This interest-free and more inclusive system will in turn speed-up the financial inclusion of the Indian Muslims, an expert in Islamic Finance said in Malegaon Sunday.

"The Global Economic Crisis in the West is forcing investors to search for secure places of investment. Creating a situation which is suitable for such investors especially those from the Middle East can pump in huge investment in the country. Introduce the interest-free alternate financial system here and see how the funds start flowing from the oil-rich countries to India", Dr. Shariq Nisar said while speaking to ummid.com.

Dr Shariq Nisar, Director of Research and Operations of India’s premier shariah advisory firm TASIS and one of the senior most professionals of Islamic Finance in India, was in Malegaon on Sunday to address a seminar on "Prospects of Islamic Finance in India".

"China and the Middle East are the two areas in the world where surplus funds more than their requirements are generated. China will never like to invest in India for the obvious reasons. We do not have such problems with the Arab World. We can attract the investors from there by introducing the Islamic Finance in our country", he said while pointing at the requirements in the country of reliable and committed investors in stock market, and banking and insurance sectors. 

"And why not, the system is running successfully in more than 75 countries. It has also earned these countries rich dividends. Then why are we reluctant in taking a decision?", he asked while listing the countries like United States, United Kingdom, France and others besides the Muslim countries where Islamic Banking System is successfully running.

“Almost all the top multinational banks including Standard Chartered Bank, HSBC, DBS, Barclay and others either have their full-fledged Islamic banks or have special windows in their branches - some located in the areas where Muslim population is negligible”, he said adding, "Singapore has in fact taken the lead to introduce the system in the Asian sub continent by opening The Islamic Bank of Asia”.

Linking the Islamic Finance with the empowerment of the Indian Muslims, he said, "The much sought after Muslim empowerment and their financial inclusion can also be achieved by bringing in the system here. For, a vast majority of the community keeps away from the existing banks merely because they are based on interest."

"The Islamic finance will not only provide them an opportunity of getting financial assistance, it will also streamline the amount of funds lying with the Muslims that otherwise don’t flow in the existing system”, he said while giving the example of Kerala where efforts are on to utilize in a suitable way an estimated 14000 crore rupees belonging to the Non Resident Indians (NRIs) mostly of the Gulf.

Interestingly, at the time when Dr Shariq Nisar was discussing with ummid.com in Malegaon about the investment opportunities in India from the Middle East, thousands of kms away Chinese Premier Wen Jiabao on an official visit to Saudi Arabia was signing agreements related to trade and investments with Saudi crown prince Nayef bin Abdulaziz Al Saud.

http://www.ummid.com/news/2012/January/15.01.2012/shariq_nisar_in_malegaon.htm

Islamic Banking: Developed by Indians, flourishing in other countries

A professional researcher on India-centric socio economic and political databases Shafeeq Rahman while stating that the core system of the interest-free banking, widely termed as the Islamic Banking System, is developed by economists of the Indian subcontinent expressed surprise over the fact that the region has gained nothing from it.

"The conceptual framework of Islamic banking is mainly developed by the Islamic economists of the Indian subcontinent; in particular, the complete non-interest banking module was developed for the first time in 1969 by Nejatullah Siddiqi though the business of Islamic banking flourished in West Asian countries, Iran, Malaysia and Indonesia", Shafeeque Rahman wrote in a recent article published in Tehelka.

Mohammad Nejatullah Siddiqui is a leading Indian Islamic scholar, whose specialisation is Islamic Economics. Author of numerous books and a recipient of the King Faisal Award for Islamic Studies, he has taught at the Aligarh Muslim University (AMU) and the King Abdul Aziz University, Jeddah. He was a Fellow at the University of California, Los Angeles and Vesting Scholar at the Islamic Development Bank (IDB) Jeddah.

Stating that Islamic Banking is now fast spreading its wings to other parts of the world, Shafeeque Rahman wrote, "The client network is now expanding beyond the conventional Muslim countries to European and other non-Muslim territories. In UK, it is estimated that $18.4 billion business was done by the end of 2008. According to newest Global Islamic Finance Report 2011, the Islamic finance industry is valued at $1.14 trillion and is growing at a rate of 10 per cent. It was worth a mere $150 billion in the mid-1990s."

"Apart from Islamic banks, mainstream banks and financial institutions are opening Islamic product windows to woo Muslim consumers. For instance, HSBC has HSBC Amanah for its Islamic financial services. The governments of Iran, Pakistan and Indonesia have officially adapted to Islamic policies to run their banking and finance structure. And due to its cosmopolitan society, Malaysia follows the parallel Islamic system alongside conventional banking", he wrote.

Shafeeque Rahman further wrote, "Banking without interest is a long term demand from Indian Muslims that has not been fulfilled so far due to the existing statutory and regulatory framework of Indian banking, which does not allow such an alternate system. Besides interest, a key point of contradiction is that conventional banks in India facilitate only intermediary services while banks have to be involved in trading and business activities in the Islamic banking system. Indian Muslims have seen several unsuccessful experiments in the unorganised sector and through the registration of NBFCS and cooperatives but the lack of government regulatory supervision has led to the failure of major interest-free banking initiatives."

"The non-availability of an interest-free banking option has distanced many Muslims from banking products and services. The Reserve Bank of India (RBI) data report for March 2010 indicates that banking participation in Muslim- concentrated districts is below the national average. They lack in banking access, infrastructure availability and low credit-deposit (CD) ratio", he wrote.

Islamic Banking believed to be an interest-free, participatory and ethical banking system, has been an emerging global paradigm of the banking system since the last quarter of the twentieth century. The essential feature of Islamic banking is the prohibition of taking and giving of interest in all form of banking and financial transaction. In place of an assured return on loan amount by the interest rate in the conventional banking system, the Islamic form of financing advocates the profit-loss sharing module. Taking a risk is the only provision that entitles one to profit, if there is no risk of loss then there is no assurance of profit to the depositor or the financer.

http://www.ummid.com/

ICIF pitches for Islamic banking to fund India's infra

Indian Centre for Islamic Finance(ICIF) today made a strong pitch for Islamic banking in the country to meet India's huge need for funds for infrastructure development.


India needs one trillion dollar to upgrade its infrastructure in order to achieve the target of annual growth of 9 per cent and hence Islamic banking can be an alternative to meet this requirement, said Mr Muddassir Siddiqui, an international expert on Islamic finance.

Speaking at an ICIF conference here, he claimed Islamic financing has emerged as a viable alternative the world over after the financial meltdown in the West in 2008. It is growing at the rate of more than 15 per cent.

Islamic finance, he said, is a business, not a charity but it is an ethical way of financing and investing, he told the media on the margins of the conference.

Mr Siddiqui claimed that Kerala government is open to Islamic funding for infrastructure, while Andhra Pradesh government has decided to launch an interest-free loan scheme to finance self-help groups and microfinance institutions.

He said, "A democratic country like India should think of her citizens first than anything else. Islamic finance can be an alternative as it is an asset-backed system fully based on Sharia(Islamic law)". As a big and emerging economy with the second highest population of Muslims after Indonesia, India can use this alternate mode to help its nationals.

Asked why it is named Islamic banking when its basic objective is business and development, Mr Siddiqui told UNI, " It is not a religious issue. It is a financial alternative for the whole country but yes, the main focus remains on Muslims".


http://www.newkerala.com

Islamic Banking Is the Need of the Hour: Experts

Even as RBI and government aren't keen on allowing Islamic banking, experts from the world of Islamic finances today said it is a question of "how soon and not whether it will be allowed", as this mode of banking can greatly help a fund-starved country get long-term finances.

"It is not when, but how soon, the Reserve Bank and the government will take a positive view on this highly effective financing option," T Balakrishnan, the brain behind the country's first proper Shariah-compliant financial services firm Al Barakah Financial Services, promoted by the Kerala government, told PTI on the sidelines of a meet on Islamic banking organised by the Indo-Arab chamber of Commerce and Industries here today.

Balakrishnan, who just retired as the additional chief secretary of Kerala in-charge of industries and commerce, said the Kerala State Industrial Development Corporation-promoted Al Barakah Financial Services, which was refused permission by the RBI early this year to start NBFC operations, is still hopeful of getting the regulatory nod.

Islamic banking prohibits charging interest from idle deposits, but allows investment in productive projects/ business and the resultant profit-sharing.

Pointing out that 75 per cent of the bank deposits in Kerala is held by the state's Muslim population, which constitute 25 per cent of population, he said, if Al Barakah Financial Services, in which, the state holds 11 per cent equity, or any other organized player is allowed to operate, they can easily channel billions of rupees to build infrastructure in the state. But he added none of these depositors draw interest from their banks, as it is prohibited under their faith.

Currently, Islamic banks across the globe manage an asset base of over USD 1 trillion (as of 2010), which is projected to reach USD 2.8 trillion by the turn of 2015.

Addressing the summit, Rajya Sabha deputy chairman R Rahman Khan blamed the bureaucracy for their myopic approach to developmental issues. 

"The problem is that our bureaucracy is not open to change and look for newer ideas. So is the case with the officials at the central bank. If they open their eyes and look at the Arab world and their finances, they will find that their banking model is many times better and more stable than interest-driven banking system that we have," Khan said.

Shariq Nisar, a director at TASIS that advices Shariah-complaint companies in their investment areas, said, "It is not that there is no Islamic banking being practiced in the country now. There are aplenty, but all in an unorganised manner. What we need is a formal approval from regulators, so that large players can enter and tap this huge untapped money for productive purposes."

Pointing out that already Islamic fund houses like Gulf Finance House, have invested over USD1 billion in the country's infra sector like roads, ports, railways, airports, which are all Shariah-compliant, a partner at law firm Clasis Law Ishtar Ali said the Naiad Toll Bridge was partly funded by Islamic finances.

"But companies cannot come and invest in more such projects because our banking rules don't allow them to do so," he said.

Balakrishnan said, Al Barakah Financial Services will again move the RBI for approval and expressed the hope that it will come by going by the 30 per cent (or USD 300 billion) funding gap envisaged by the Centre for its USD 1 trillion infra push in the next Plan period.

He also drew his optimism from the recent statement by the Prime Minister that it is high time the country looked at the Malaysian model of infra funding.

The Southeast Asian tiger economy heavily depended on Islamic funds for its infra expansion. So are China, the US, Britain, Germany, France and many other non-Arab, non-Muslim nations, Balakrishnan said, adding Islamic banking is thriving in as many as 75 countries today.

http://news.outlookindia.com

Kerala must tap Islamic funds for infrastructure development, say experts

Kerala could become a role model of tapping Islamic finance market to raise badly needed funds for infrastructure development, according to experts.

Mr H. Abdur Raqeeb, Convener, National Committee on Islamic Banking at the New Delhi-based Indian Centre for Islamic Finance (ICIF), made a strong pitch for these funds at the Infrastructure Conference-2011 that began here on Wednesday.

GOVT WELCOMES

Speaking to Business Line, the State Minister for Public Works, Mr V. K. Ibrahim Kunju, and the Secretary, PWD, Mr Manoj Joshi, said the State Government wholeheartedly welcomed Islamic funding agencies in the space of infrastructure development.

Infrastructure development is as Shariah-compliant a cause as they come, Mr Joshi said.

There is nothing that prevents these funds being channelised into the State's developmental scheme of things, he added.

The PWD Minister concurred, but observed that the State's own efforts to set up an Islamic financing institution were still in a ‘fluid stage.”

HIGH COURT ORDER

The Minister for Industries, Urban Development and IT, Mr P. K. Kunhalikkutty, too, underscored the importance of tapping the Islamic finance model at a time when traditional sources of funds are becoming either increasingly inaccessible or cost-prohibitive.

Meanwhile, Mr Raqeeb quoted a Kerala High Court observation that no specific prohibition was contained in any statute that made it impermissible to carry out Islamic banking in the country.

Simple regulatory changes could transform India into a regional hub for Shariah-compliant finance and clear the way for a much-needed wave of investment into its infrastructure, he added quoting international experts and consultants.

SHARED RISK

“When London, Tokyo, Hong Kong, Singapore and Paris have become Islamic banking hubs why can Kerala not become one and lead the country to become a developed economy in the near future?,” he wondered.

Islamic banking focuses on transparency, cooperative ventures, shared risk and ethical investing attracts a wide range of both Muslims and non-Muslims alike.

In Malaysian Islamic banks, more than 40 per cent of investors and 60 per cent of borrowers are non-Muslims, mostly Chinese.

One in five applicants for some of the Islamic products is a non-Muslim in the Islamic Bank of Britain.

ISLAMIC BONDS

Asset-backed Islamic bonds, known as ‘Sukuks,' provide funds for long-term investment.

This tool is used in a number of developing and developed countries. India too should seek to make use of these resources, Mr Raqeeb said.

The fact is, Islamic finance can do wonders. Post 9/11, petro-dollars have been actively eyeing for a safe investment destination.

And this is the opportunity that India should avail of, given that it is not just a safe but vibrant investment destination.

HUGE MONEY

An estimated $1.5 billion in funds is sloshing around West Asia as of now. The region will have $8 trillion to invest by year 2020.

Ms Muliani Indrawati, Managing Director, World Bank, has confirmed that the World Bank Group has ‘formally recognised Islamic finance and has designated it a priority area in their financial sector programme.'

The World Bank has always closely cooperated with the Islamic financial services sector. This demonstrates its commitment to help strengthen the institutional development of the industry.

http://www.thehindubusinessline.com

The $1.5t in Islamic banking - Shafeeq Rahman examines the possibilities of an alternative banking system in India

ISLAMIC BANKING,, believed to be an interest-free, participatory and ethical banking system, has been an emerging global paradigm of the banking system since the last quarter of the twentieth century. The essential feature of Islamic banking is the prohibition of taking and giving of interest in all form of banking and financial transaction. In place of an assured return on loan amount by the interest rate in the conventional banking system, the Islamic form of financing advocates the profit-loss sharing module. Taking a risk is the only provision that entitles one to profit, if there is no risk of loss then there is no assurance of profit to the depositor or the financer. The conceptual framework of Islamic banking is mainly developed by the Islamic economists of the Indian subcontinent; in particular, the complete non-interest banking module was developed for the first time in 1969 by Nejatullah Siddiqi though the business of Islamic banking flourished in West Asian countries, Iran, Malaysia and Indonesia.

The client network is now expanding beyond the conventional Muslim countries to European and other non-Muslim territories; in the UK, it is estimated that $18.4 billion business was done by the end of 2008. According to newest Global Islamic Finance Report 2011, the Islamic finance industry is valued at $1.14 trillion and is growing at a rate of 10 per cent. It was worth a mere $150 billion in the mid-1990s. Apart from Islamic banks, mainstream banks and financial institutions are opening Islamic product windows to woo Muslim consumers. For instance, HSBC has HSBC Amanah for its Islamic financial services. The governments of Iran, Pakistan and Indonesia have officially adapted to Islamic policies to run their banking and finance structure. And due to its cosmopolitan society, Malaysia follows the parallel Islamic system alongside conventional banking.

Banking without interest is a long term demand from Indian Muslims that has not been fulfilled so far due to the existing statutory and regulatory framework of Indian banking, which does not allow such an alternate system. Besides interest, a key point of contradiction is that conventional banks in India facilitate only intermediary services while banks have to be involved in trading and business activities in the Islamic banking system. Indian Muslims have seen several unsuccessful experiments in the unorganised sector and through the registration of NBFCS and cooperatives but the lack of government regulatory supervision has led to the failure of major interest-free banking initiatives.

Banking participation in Muslim-concentrated districts of India District % of Muslim population 2001 Number of Offices Number of accounts (000) Population 2011 (Million) % of population with bank account Bank offices per million population CD Ratio Anantnag (J&K) 98.5 61 455 1.07 42.48 57 41.88 Dhubri (Assam) 74.3 46 430 1.95 22.06 24 45.18 Malappuram (Kerala) 68.5 309 2,226 4.11 54.14 75 54.98 Kishanganj (Bihar) 67.6 57 300 1.69 17.73 34 48.98 Murshidabad (W Bengal) 63.7 248 2,419 7.10 34.05 35 36.74 Rampur (UP) 49.1 125 842 2.34 36.04 54 67.96 India 13.43 86,960 7,34,869 1,210.19 60.72 72 73.34

The non-availability of an interest-free banking option has distanced many Muslims from banking products and services. The Reserve Bank of India (RBI) data report for March 2010 indicates that banking participation in Muslim- concentrated districts is below the national average. They lack in banking access, infrastructure availability and low credit-deposit (CD) ratio. The results were based on an analysis of six districts, which were selected from various states, with fifty per cent or more Muslim share in the population. The detailed analysis is given in the table.

The Sachar Committee report of 2006 highlighted the numerous issues involved in Muslims accessing bank credit and the discrimination by scheduled commercial banks in facilitating credit and other services in Muslim-concentrated areas. Based on the recommendations of this report, the United Progressive Alliance government started the Prime Minister’s New 15 Point Programme for the welfare of minorities, and included the target of enhanced credit support to Muslims for economic activities.

The overall target was to provide 15 per cent priority sector lending to the minority community. But, the lending by public sector banks was 11.42 per cent, 13.14 per cent and 14.16 per cent as on March 31 of 2009, 2010 and 2011 respectively. The reason behind relative exclusion of Muslims from banking services, as pointed out by the Planning Commission-sponsored Raghuram Rajan committee on financial sector reforms in 2007, was that ‘the non-availability of interest-free banking products results in some Indians, including those in the economically disadvantaged strata of society, not being able to access banking products and services due to reasons of faith’.

Other eye-opening facts reported in the RBI study, with reference to a newspaper report, were that in India thousand of crores of rupees earned in interest are kept in suspended accounts, as Muslim believers do not claim it. The assets controlled by Muslims are estimated to be worth $1.5 trillion and growing at 15 per cent a year. In Kerala alone, it is reported that this money could be above Rs 40,000 crore. Research reveals that bulk of the money in India owned by Muslim believers is lying idle, which, if invested in profit-sharing basis and if utilised properly, can have a major impact on the Indian economy.

INDIA CAN also attract foreign investment from Muslim countries by providing an alternative interest-free banking system. A majority of the non-resident Indians (NRIS) working in the Gulf region belong to the Muslim community. Approximately 45 per cent of the total foreign remittance to India, worth $24 billion, came from GCC (Gulf Cooperation Council) countries in the year 2010. Impressed with the potential of nri remittance, the first government-sponsored interest-free NBFC, Al Barakah Financial Services Ltd, began last year in Kerala with the partnership of the state, specifically the Kerala State Industrial Development Corporation (KSIDC). Barakah would be a unique company with an authorised share capital of Rs 1,000 crore and would perform on the principles of an Islamic financial institution. It will not operate as a bank and extend loans but will make direct investments into infrastructure projects not linked with pork, alcohol and other non-Halal products, after which profits would be shared in the form of dividends and not as interest. KSIDC has 11 per cent stake and the rest would be raised by NRIS and the state’s Muslim population. After the introduction of the Shariah index in the Bombay Stock Exchange (BSE), this is the second serious attempt to include the Indian Muslim in a mainstream financial setup.

Shafeeq Rahman is a professional researcher on India-centric socio economic and political databases
rahman.shafeeq@gmail.com

KPMG for Islamic banking

Global consultancy firm KPMG on Tuesday pitched for Islamic banking products in the country and urged the RBI to come out with norms for these interest-free saving instruments along with proposed guidelines on fresh banking licences.

“The scope for launching Islamic finance products is huge here as the savings of Muslim population is untapped. The government should come out with a regulation on the governance of Islamic banking products so that banks can launch such products soon,” KPMG executive director for corporate finance and head financial services, Mr Abizer Diwanji said.

According to KPMG, as the RBI is planning to issue fresh banking licences, it should also consider coming out with a guideline specifically for banks providing Islamic products. “India has the potential of becoming the next big market for Shariah finance in the world,” he said. Accor-ding to the Shariah, payment of interest is barred, besides any kind of speculative activities.

http://www.deccanchronicle.com/business/kpmg-islamic-banking-967

India looks to start Shariah-compliant financial products

India needs to actively consider allowing introduction of Shariah-compliant Islamic finance products to channelise savings of the muslim community, K Reh-man Khan, deputy chairman of Rajya Sabha, said onTuesday.

Speaking at the India Shariah Finance Summit in the capital, Khan said the mutual fund industry is the best vehicle for popularising Shariah-compliant products. He pointed out that mutual funds are largely compliant with Islamic finance principles since they do not pay

interest.

The concept of charging or paying interest is prohibited under Islamic law. “We should start adopting the mutual fund route in a bigger way for Islamic banking. Shariah-compliant mutual fund schemes will help to channelise savings of the huge Islamic population in India,” Khan said.

Khan said Indian Muslims should have the option to invest in Shariah-compliant products. “Muslims have every right to seek an avenue for investment that complies with their religious faith,” he said.

Speaking on the occasion, Abizer Diwanji, executive director and head of financial services, KPMG, said the mutual fund sector could be opened up for Shariah-compliant products. “The present laws are amenable to mutual fund instruments that are compliant with Islamic finance. However, innovation in the industry is lacking and hence such products are not hitting the market,” he said.

Diwanji said bringing out Islamic finance products would be a step towards greater financial inclusion.

“Muslims are an underbanked community in India. Islamic finance could be a very big component for financial inclusion that the government is pushing for,” he said. Muslims account for around 13.4 per cent of the population or around 175 million people in absolute terms. Diwanji said the Reserve Bank of India could also consider offering specialised licences for Islamic banks, while doling out fresh bank licences as promised in the Union budget.

Sashi Krishnan, chief investment officer, Bajaj Allianz Life Insurance, which offers — Pure Stock Pension Fund –a Shariah-certified scheme, said Islamic financial products have seen growing acceptance in India over the past few years.

“The government is already working on a project to analyse the future of interest-free banking in India, while the mutual fund and insurance industry are also developing Shariah-compliant products,” he added.

Krishnan said the challenges to the popularity of Islamic finance in India are distributors who are not equipped to sell Shariah-compliant products, besides a lack of certifying agencies and standardisation of Shariah-based products.

http://www.mydigitalfc.com/mutual-funds/india-looks-start-shariah-compliant-financial-products-737

Delhi to overhaul financial services sector to usher in Islamic banking

 India is planning to overhaul the regulation of its financial system to attract investments from the Gulf and to encourage its largely unbanked Muslim population to save money in a way compliant with their religion, a senior government adviser said on Thursday.

K. Rahman Khan, deputy chairman of India’s upper house of parliament, told the Financial Times that the ruling Congress party had proposed the introduction of Islamic financial products.

The party was seeking regulatory approval from the finance ministry, the Reserve Bank of India and Securities and Exchange Board of India for a move to capture one of the fastest growing sectors in the financial services industry, he said.

“Islamic finance has been growing at a steady pace and it is the most attractive form of alternative [banking] system in the financial sector, it makes no sense for India to exclude itself from this success story,” Khan said.

With more than 150 million Muslims, India has the world’s largest Muslim minority.

Many Muslims are discouraged from banking with commercial banks as Islam has restrictions on interest payments and investing in sectors such as gambling and drinks groups, according to the Institute of Objective Studies, a research group focusing on the Muslim community.

Some Western and emerging economies are taking steps to facilitate Islamic investment.

China, with 80 million Muslims, recently awarded its first licence for Islamic banking to Bank of Ningxia.

The Congress party’s report, which Khan said had been endorsed by Manmohan Singh, India’s prime minister, falls short of backing the creation of a fully-fledged Islamic banking sector at a time when regulators are shy of liberalisation.

Khan said that the “main goal at the moment is to help set up non-banking institutions that will allow Indian citizens to save and invest in a Sharia-compliant manner and to attract foreign direct investment from the Gulf. At a later stage we will be looking into setting up Islamic banking.”

Enthusiasm

India is keen to attract a greater share of Gulf investment. The UAE is already one of India’s largest trading partners. Political and business leaders in the region have expressed their enthusiasm for larger investments in the Indian economy.

Shaikh Nahyan Bin Mubarak Al Nahyan, the UAE’s minister of education and a leading Arab investor, predicts India will become a “world economic power”.

“While countries around the world continue to feel the pinch of the economic downturn, India’s economy is buoyant and in relatively good condition. Investment opportunities abound in this vast, innovation-driven country,” he said.

Link: http://www.ethiopianreview.com/news/19150

Kerala plans 1st Islamic bond issue

Kerala, which relies on Middle East remittances for a quarter of its economy, plans to sell the nation’s first Islamic bonds next year to

help pay for infrastructure projects.

“The way we see it, it’s another form of venture capital,” finance minister Thomas Isaac said in an interview in Thiruvananthapuram, the southern state’s main city. “We need long-gestation funds to build airports, high-speed trains and expressways. Islamic finance

promises unexplored potential in that context.”

Kerala is helping start Al-Barakah Financial Services to sell the rupee-denominated bonds and create investment funds that comply with Shariah law’s ban on interest, Isaac said. The venture will tap Indian Muslims and money sent home by workers living in Gulf countries even as a debt crisis in Dubai threatens to shrink the remittances, he said.

Islamic bonds, also known as sukuk, are asset-based securities that pay a profit rate to investors to comply with Shariah’s prohibition of interest and speculation. Islamic finance may help India raise the $500 billion it needs to spend on infrastructure by 2014.

Islamic bond sales almost doubled to a record $31 billion in 2007 on Arab oil earnings before plunging last year as the collapse of Lehman Brothers Holdings shuttered credit markets, according to data compiled. Crude oil will climb to $82 a barrel in the first quarter of next year from about $71 now as demand from emerging markets increases, Goldman Sachs Group forecasts.

‘Big Prize’

Islamic bonds, also known as sukuk, are asset-based securities that pay a profit rate to investors to comply with Shariah’s prohibition of interest and speculation. “India, if opened up for Islamic banking, is the big prize,” Afaq Khan, Dubai-based chief executive officer of Standard Chartereds’ Islamic banking unit, said in a telephone interview.

“Its large Muslim population and strong growth promise excellent opportunities for releasing a lot of funds into the documented economy.” India’s economy expanded 7.9 per cent in the quarter ended Sept. 30, the second-fastest pace of expansion among major economies after China.

Muslims make up approximately a quarter of Kerala’s population and 13.4 per cent of India’s 1.1 billion people, according to government data. Only Indonesia and Pakistan have more inhabitants who adhere to the religion.

Indonesia Sukuk

Indonesia’s first sale of dollar sukuk in April drew bids for seven times the securities on offer, the head of the country’s debt management office said. Dubai, which said Dec. 14 that it got $10 billion from neighboring Abu Dhabi to help state-owned Dubai World meet its obligations, raised $1.93 billion from its first sovereign Islamic bonds in October.

Kerala will hold an 11 per cent stake in Al-Barakah, which aims to start business next year with 10 billion rupees ($214 million) of capital, according to T. Balakrishnan, principal secretary at the state’s industries department.

More capital will be raised from a group of investors led by Oman-based Indian businessman P. Mohammed Ali, and foreigners may be invited to buy stakes in the venture in the future, he said.



“Current rules don’t permit an Islamic bank yet but they do allow a non-banking firm. We will develop the company into a fully-fledged bank as and when regulations permit.”
Gulf Remittances

India is the world’s largest recipient of migrant worker remittances, and its 4.5 million citizens living in the Gulf send home more than $10 billion each year, according to the Ministry of External Affairs.

Almost 90 per cent of the 1.9 million people who migrated overseas from Kerala lived in the Gulf countries in 2007, sending home as much as $5 billion, according to the Thiruvananthapuram-based research institute Centre for Development Studies.

“It’s quite likely that Dubai will face a severe downturn in the real estate and financial sectors and that will affect jobs and remittances,” Isaac said. A panel headed by Raghuram Rajan, a former chief economist of the International Monetary Fund, recommended last year that India introduce interest-free banking to attract more capital into the mainstream financial services industry.

‘Untapped Potential’

“We are creating an avenue for a lot of people who aren’t comfortable with investment opportunities that don’t comply with Shariah,” Ali, the chairman of Al-Barakah’s investors and vice- chairman of Galfar Engineering & Contracting SAOG., said in a phone interview from Muscat, Oman. “We see a lot of untapped potential to raise capital for development projects.”

Kerala, where in 1957 a communist government was voted into power for the first time, takes a “very pragmatic” approach to free enterprise instead of allowing ideas to be stymied by politics, said Balakrishnan, citing examples of a state- sponsored lottery and a privately-owned airport.

“We have a large and affluent community of Muslims who may prefer banking that’s in accord with their faith,” he said in his government office. “Given that, at a time when the ways of traditional finance are being questioned globally, why not look at alternatives?”

Link: http://economictimes.indiatimes.com/Markets/Stocks/Market-News/Kerala-plans-1st-Islamic-bond-issue/articleshow/5345457.cms?curpg=2