Monday, July 5, 2010

Can India afford to ignore Islamic banking?

By Raza Elahi
The recent statement of MS Swaminathan, the father of green revolution in India, that Islamic banking can be a solution for farmers’ suicide in Vidarbha is apt reply to those opposing it tooth and nail by terming this banking system as anti-economic growth.

It is truth, nothing but truth, that exorbitant lending rates charged by moneylenders have created a vicious cycle of debt and suicide not only in Vidarbha, but also in several parts of the country. Islamic banking, which propagates zero-interest lending, can solve not only farmers’ suicide crisis but will also fill the gap between financially-excluded and financially-included classes of the country.

In 2008, Raghuram Rajan Committee recommended interest-free banking in the country to encourage financial inclusion, but nothing much has been done in this direction. The initiative taken by the Kerala government in this regard is sub judice.

The financially-excluded class, which includes small farmers, landless labourers, self-employed, minorities and women, forms around 60% of the country’s population. They do not have access to formal banking. They find it difficult to meet the demand of pre-determined interest rates. If finance is available without the burden caused by pre-determined interest rates, it will be a far-reaching implication for the socio-economic and educational uplift of the masses.

The main objective of Islamic finance is to create a society of investors, unlike the conventional banking system, which has made and created the society of borrowers and lenders from the past 800 years. Islamic banking regards the public interest above all other motives. According to the Islamic banking concept, the banks involve themselves in real time trading or investment activities with their customers based on various contracts like Mudarabah (partnership), Musharaka (joint venture), Murabaha (cost-plus), Ijara (leasing) and some hybrids combining two contracts (Musharaka Mutanaqisa) etc, and therefore earn profit. All the products that these banks offer are Sharia-compliant. A Sharia board decides or monitors what sort of investments the banks can make.

Furthermore, Islamic banking in India will not only be beneficial for the marginalised and the minorities in terms of microfinance, but can also attract major investment from the Gulf countries. The UK and France have made necessary regulatory changes in order to attract these investments.

Islamic banking industry, which is operating for the past 30 years in the Middle Eastern countries, has gained popularity and curiosity around the globe during the financial crisis of 2008. Despite the financial turmoil that crippled so many large Western institutions, Islamic banks continued to grow in prominence and size.

According to a survey conducted by The Asian Banker, a Singapore-based publication last year, the combined assets of world’s 100 top Islamic banks increased 66% in 2008, bucking the trend of slow growth in other markets. Asia’s 300 largest banks, for example, only grew assets 13.4% in the same period. Now, many financial experts are seeing Islamic banking as an alternative to the conventional banking system, which is based on stronger regulatory regimes and a better international understanding of its dynamics.

It is a misconception that Islamic finance is just a Muslim-only affair. For all the Shariah-compliant products sold in countries such as Malaysia, around 40% of clients are non-Muslims. Around 20% customers of Islamic banks in Britain are non-Muslims. Manfred Dirrheimer, chairman of the executive board, FWU AG, a German financial services company, recently told Arab News, “For all the Shariah-compliant products we sell in countries such as Malaysia, some 70% of our clients are non-Muslim."

In India, SEBI has permitted Shariah-compliant financial products such as mutual funds, but still many steps, including necessary banking regulatory changes, are required to establish full-fledge Islamic banking in the country. The delay, it seems, is a bit longer. When London, Tokya Singapore and Hong Kong could become hub and house of Islamic finance, then why not Delhi, Mumbai, Chennai or Cochin?

1 comment:

  1. Excellent article Sir. It's high time that the Indian Banking system made some changes to avail inception of Islamic Banking. The stability of Islamic Banks in the global financial turmoil only stands as a testimonial to the sense that is needed in Banking. According to one article I read in ET, approximately 1.3 trillion worth of funds of middle-east countries are diverged from the Indian shore because of non-existent of Islamic Banking.

    Hoping for a change! :)