New Delhi: There are hopes in the Indian small Islamic Finance industry that it would grow and expand across the country by developing products even though there is ban on shariah-compliant banking in the secular state. Nonetheless, political and legal obstacles will slow down the progress.
An estimated 177 million Muslims in India, the largest Muslim minority population in the world, are unable to use Islamic banks because laws covering the sector require banking to be based on interest, which is forbidden in Islam.
This policy has persisted since 2005, when the Reserve Bank of India (RBI) set up a committee to study Islamic finance.
“The Reserve Bank’s position has been that the current Banking Regulation Act does not permit Islamic banking because interest rate is an important component of banking in India,” RBI Governor Duvvuri Subbarao told reporters in October.
Last month, the governor added that some Islamic financial services could be delivered through vehicles other than banks – a comment which is encouraging some firms to look at developing shariah-compliant products outside the banking sector.
“It can be got around not through banking, but other vehicles,” Indian media quoted Subbarao as saying.
Shariq Nisar, Director of research and operations at Mumbai-based Taqwaa Advisory and Shariah Investment Solutions (TASIS), an advisory firm, said of Subbarao’s statement, “This is a good thing – it is the first time the RBI is saying that Islamic banking is possible through other mechanisms.”
“The message is to try out other things,” he added.
Because Islamic banks pay depositors based on the returns earned by pooled investment funds, equity and investment-related products might to some extent mimic the operations of Islamic banks and fill the gap left by the ban on them, the products’ proponents hope.
Saif Ahmed, Managing Partner at Bangalore-based Infinity Consultants, said, “The RBI’s comments will enable a more creative approach to developing Islamic finance in the country, by getting people to critically think through ways they can introduce Islamic finance under the present regulations.”
The 2006 Sachar Committee report, commissioned by the state to examine the social, economic and educational conditions of India’s Muslim communities, recommended steps be taken to improve Muslims’ access to credit, which it called inadequate.
Muslims across all income categories in India are shunning conventional banks because of Islam’s ban on interest, said Ahmed. “Access to shariah-compliant credit is the biggest issue, followed by access to shariah-compliant investment options,” he said.
The issue of investment options looks easiest to resolve. Some capital market products, regulated by the Securities and Exchange Board of India (SEBI), are already based on Islamic equity indexes, such as one launched in 2010 by TASIS and the Bombay Stock Exchange; Islamic indexes exclude firms involved in areas forbidden by the religion, such as alcohol and gambling.
In May, SEBI introduced guidelines for alternative investment funds (AIF) which allow the pooling of capital from local and foreign investors.
“We expect shariah-compliant funds to be registered under the AIF regulations,” and to invest in permissible assets such as real estate, said H. Jayesh, Founding Partner of Mumbai-based law firm Juris Corp.
Both Infinity and the Bangalore-based Amana Group have developed savings schemes known as chit funds which they say comply with Islamic finance principles. In chit funds, subscribers pool their money; members can then obtain temporary use of the funds through a bidding process.
“Our schemes have been approved by major shariah institutions along with prominent scholars. This can promote Islamic banking in the country more wisely,” said Asifullah Khan, Founder and Partner at Amana.