Indian banks should exploit untapped potential in Islamic banking: Experts

Indian and foreign banks should exploit Islamic banking's untapped potential to ensure the financial inclusion of “unbanked” populations excluded by the existing financial system, several experts have said. Islamic banking is a finance system based on the principles of not charging interest, which is prohibited under Islam.

“Research shows that the Islamic finance sector continues to grow and evolve in size and complexity, with Islamic banking offered in more than 60 countries worldwide. It is an excellent opportunity for Indian/foreign banks to expand their footprint in India by venturing into this largely untapped sector,” said Islamic banking expert Hazik Mohamed. He said Shariah instruments like bonds (more accurately, sukuk) and funds that are looking at Shariah-compliant investments will be able to meet the needs of Muslim investors from within India and externally from other parts of the world.

Islamic finance, including its interest-free and equity-based banking system, can complement the existing Indian banking and finance system, said Hazik, who has spent the last decade researching financial systems to understand the various types and causes of financial crises. He is currently developing various solutions to reduce such events by implementing Shariah principles through digital technology.

“As an alternative financial system, Islamic finance will provide Indian consumers (Muslim and non-Muslim alike) an alternative system to meet their banking needs,” Hazik said. For example, an Islamic investment product is typically asset-backed and has additional Shariah rules to curb it from the sub-prime quality and equity-based rather than debt-based, which makes it financially more stable and contractually-vested to limit rogue and speculative behaviors, he explained.

Hazik said Islamic banks show certain advantages over conventional banks. “Islamic banks' greater resilience to crises and shocks compared to conventional banks are based on empirical data from countries such as Egypt, Indonesia, Malaysia, Pakistan, Turkey, UAE (GCC) where both types of banks exist,” he said.

The Reserve Bank of India (RBI) has decided to not pursue a proposal for the introduction of Islamic banking in the country. Replying to an RTI query filed by PTI in 2017, the central bank had said the decision was taken after considering "the wider and equal opportunities" available to all citizens to access banking and financial services.

According to Abdur Raqeeb, general secretary of the Indian Centre for Islamic Finance (ICIF), an organization pushing for Shariah banking in India, Islamic banking has the potential to contribute towards greater financial inclusion besides providing support to small and medium-sized enterprises. If Islamic banking is introduced, he said, the inadequate labor-capital ratio for informal sector workers associated with agriculture and manufacturing industries could be resolved through equity finance, which might be a revolution in the Indian agriculture and unorganized sector.

“With improved labor-capital ratio, our vulnerable workers associated with agriculture and unorganized sector might be able to compete effectively with the formal sector workers. Thus Islamic banking may financially empower the majority of Indian workers,” Raqeeb said. Asked about roadblocks behind not starting Shariah-based banking in India, he said Islamic banking has unfortunately been misunderstood in India as a religious charitable venture restricted to the country’s Muslim community.

“There is a misconception that Islamic banking is beneficial for Muslims only and not for all. In Malaysia, more than 40 percent of the investors and 60 percent of borrowers are non-Muslims. In Kenya, a predominately non-Muslim country, banks such as Gulf African Bank have indicated that as much as 20 percent of the customer base is non-Muslim,” Raqeeb said. According to him, in the Indian stock market, the Jain community more than Muslims has invested in Shariah-compliant stocks like Tata Ethical Fund and Taurus Ethical Fund.

“Even the first halal product - IBA cosmetics -- was produced and sold by two Jain sisters in Ahmedabad,” claimed Raqeeb. “Nomenclature of Islamic banking remains a point of concern for regulators and policy makers. A proper Indian name can be given to the terminology of the Islamic banking system,” he said, adding that “Participatory Banking” has been recommended by the Reserve Bank of India RBI in technical analysis of its interdepartmental report of 2014.

Referring to the recommendations of the Committee on Financial Sector Reforms (CFSR) headed by Raghuram Rajan, Raqeeb said the RBI and government of India have implemented several suggestions of the panel. The panel had also recommended interest-free banking to be introduced into the banking system, citing it to be in consonance with the objectives of inclusion and growth with innovation.

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)