Thursday, December 24, 2009


Let’s embrace Islamic banking and finance

It is reported that the Kerala state government is all set to tap the investments from the Middle-East region through the Islamic finance route. It is also reported that the centre has yet not given a nod for Islamic banking, though it has been under deliberation for long. Though there are challenges in creating an enabling framework for Islamic banking, given the conventional banking regulations, but then some kind of proactive thinking is required for opening doors for Islamic finance, knowing well that it has done wonders in the other parts of the world.

It is a known fact that Islamic finance is governed by Sharia, and is known to be conservative with its philosophy. Under Sharia, interest income is not permitted and along with that the funds cannot be used for speculation, alcohol and a few other sectors. This is still fine, but the biggest diversion of Islamic banking from the conventional Indian banking is that the former does not just lend, but becomes an equity partner in the project, sharing both the profits and losses, whatever might be the case. Another activity which defines Islamic banking is that the banks can engage in trading, purchase and resale of properties and investment and various other activities, which is not permissible under the Indian Banking Regulation Act, 1949. Along with this, there are constraints as the bank rate — maintenance of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) as per the provisions of Banking Regulation Act, 1949, involve the concept of interest, which is not permissible under Sharia Act. All in all, there are challenges but then just like there are separate regulations for Non-Banking Financial Companies (popularly known as NBFCs) in India, similar provisions can be created to cull out Islamic banking and
finance within the country.

But then — as per few experts opinion, if being conservative is an issue then in that case the scheduled commercial banks in India are no less. That is the reason probably that the current NPA or the Nonperforming Assets of most banks on an average is almost negligible and that is also the reason that Indian banks are by far immune to global crises. But then with the growing needs from Indian industry and overall infrastructural development, Indian banks can only do that much. Knowing the fact that how Islamic finance have done wonders to economies like Malaysia and Indonesia. Not just that, Islamic banking is popular in the US too — so much so that as of 2009, it has been home to at least 19 odd providers of Islamic banking products and services including retail banking, investment banking, mortgages services, to name a few.

The fact is, Islamic finance can do wonders, particularly in a country like India. As such culturally, the Sharia philosophy is not much departed from Indian ethos, but more than that if India can go ahead and create provisions for Islamic funds then, the later would find an worthy investment destination, as India has a huge investment appetite for years to come and more than that returns on investment are relatively higher when compared to other parts of the world. Moreover, Indian industrial borrowers’ mindset has been attuned to conservative borrowing which makes the investment/lending option even safer. Not just this, with growing political and financial unrest in the Middle-East region, Islamic finance can find a safe heaven within India.

In addition to all this, provisioning of Islamic banking would also open a window of opportunity for Indian banks, as they can then mobilise funds from regions like Middle-East and invest in India, which is currently nor permitted. It is my own personal experience that there are a lot of investors who are sitting on the fence, across the Middle-East region, eager to invest in India, particularly the Indian real estate, but then they are waiting for an able partner who can effectively mobilise their funds through the Islamic banking route. It is needless to state that Islamic finance pose a huge opportunity and we should be proactively thinking in provisioning the same within the country. Post 9/11, petro-dollars are actively eyeing for a safe investment destination as they have been extremely apprehensive about investing in the US. And this is the opportunity that India should avail, given the fact that as a destination its economic scenario is not just safe but vibrant. It has been reported that France has already amended its laws to issue sukuk (Islamic bond) of one billion euro. Also Indonesia has launched its dollar sukuk earlier this year, which was hugely successful. And lastly if most developed countries like UK, Japan, Singapore and Hong Kong have embraced Islamic finance and banking, then what are we waiting for?



  1. I read ur artical & i would like to extand my conragulation & apreacit u on this,it covers all area of ibf.
    Thank you so much

  2. I think people need to realize and it is the duty of those who promote Islamic Banking to explain to the general public that, Islamic Finance will not benefit muslim alonee, but rather the whole indian population irrespective of religion or caste or creed.

    It is simply a better way of finance, rather a different way of finance which is based of Ethics, equality and Justice

  3. Thank you so much for the much needed clarification regarding the Islamic Banking and Finance.