Facebook Twitter Google Plus Vimeo Youtube Feed Feedburner

Business Home LBoard

Tides turning for Islamic banking in India?

April 22, 2013

By Kazi Mahmood

PETALING JAYA: Interest-free banking may attract Malaysian investors in India, if efforts by local financial institutions and non-governmental organisations (NGO) to seek approval for Islamic banking under a new platform are successful.

Earlier this year, the Reserve Bank of India (RBI) made it clear that it could not allow interest-free banking in India, in a blow to attempts by Islamic banking players to get the system recognised in India, but the tide seems to be turning for a solution.

“The RBI, while declining interest-free banking, had suggested to look at another vehicle within the federal law in India,” Mohamed Saeed Shingeri, a member of the well-known Shingeri family said to The Malaysian Reserve.

He added since RBI becomes the platform for interest-bearing banking this meant an interest-free banking system could be sought under the Society Act and not under the Banking Act.

H Abdur Raqeeb, general-secretary of the Indian Centre for Islamic Finance, an NGO campaigning for Islamic banking and finance, said Syariah-compliant finance can be introduced to a limited extent, through alternative investment funds and mutual funds that fall under the Securities and Exchange Board of India.

“However, once the Microfinance Bill is enacted, all the microfinance activities will come under RBI and problems will surface again. Issuing of Islamic bonds – sukuk – may be made possible, though, with minor changes in the rules without making major changes in the laws,” he said.

Allowing Syariah-compliant tools in India would open up the market for foreign investors, including Malaysian buyers, who would be interested in taking up shares in India’s interest free institutions.

Asia’s potential

A former Indian High Commissioner to Malaysia RI Narayan stated last year that Islamic banking may attract more funds to India especially in the infrastructure field where India intends to spend US$1 trillion (RM3.03 trillion) over the next five years in road building, railways, aviation and energy.

Bank Negara Malaysia (BNM) governor Zeti Akhtar Aziz indicated last year that Malaysian Islamic banks needed to expand further, either by taking up stakes in existing partnerships or alliances since that would further unlock Asia’s potential.

On the other hand, Zoe Rai, a BNM media officer told The Malaysian Reserve that though banks investing abroad may seek some form of approval from the local central bank, it was their prerogative to venture abroad, adding that such investments depend largely on the reciprocating nation’s approval.

Abdur Raqeeb urged Malaysian investors to invest heavily in India’s booming infrastructure revamp exercise, saying their massive presence in the country will help Malaysia penetrate the Islamic fnance sector in the future.

He also said there seems to be a change in understanding the need for Islamic banking at the RBI, which stated to the local press in India recently that they are not averse to Islamic banking and finance and could seek changes required for Syariah-compliant banking.

“Islamic bonds [sukuk] is fast growing as a most acceptable product for funding infrastructure  projects. Islamic banking will provide an alternative as it is socially responsible and stands for inclusive growth,” he said to The Malaysian Reserve.

In November last year, RBI governor Duvurri Subbarao told reporters in India that “other options” may be considered to bring Muslims into the banking system.

The Raghuram Rajan Committee Report in 2008 mentioned the need for the introduction of interest-free banking, stating that India would benefit largely since it would tap into billions of dollars from both local and foreign savings markets.

Heavy challenges

Another report, in the same year by the Credit Rating and Information Services India Ltd, stated Islamic banking would not only work for Muslims but would also assist the people in India’s unorganised labour sector.

RBI earlier this year revoked the operating licence of the only interest free banking unit in the country which was operated by the Alternative Investments and Credits Ltd, which was operating since 2010.

“There are heavy challenges faced in these efforts to operate interest-free banking system, but Taqwa Finance will try to seek reforms for Islamic banking with non-banking financial companies,” said Shingeri.

The Taqwa Finance House was running interest-free banking in 2002 but was forced to close down in 2004 under RBI directives. Shingeri is trying to revive the finance house.

“Under Taqwa Finance, I planned to tap Islamic funds under share capital and through sukuk al Ijarah [based on debenture] under the company law in India,” Shingeri said.

Despite the gloom that has gripped the Indian Muslim community over the impediments suffered by the Syariah-compliant banking system, a gleam of hope appeared when India’s first Syariah-compliant Chit Fund was launched by the Zayd Chit Fund Pvt Ltd this year.

This content is provided by FMT content partner The Malaysian Reserve.


Readers are required to have a valid Facebook account to comment on this story. We welcome your opinions to allow a healthy debate. We want our readers to be responsible while commenting and to consider how their views could be received by others. Please be polite and do not use swear words or crude or sexual language or defamatory words. FMT also holds the right to remove comments that violate the letter or spirit of the general commenting rules.

The views expressed in the contents are those of our users and do not necessarily reflect the views of FMT.