Naved Mehar for BeyondHeadlines
[highlight]Naved writes: “It is myth that Islamic banking is only for Muslims; it is an alternative and ethical form of banking. It is time when Indian Government should recognise the importance of Islamic banking and grab this significant opportunity.”[/highlight]
Islamic banking system runs on the principles of Islamic law (Fiqh al Mualmalat or Islamic rules on transactions) also called shariah law which is primarily derived from the Holy Quran and saying of Prophet (p.b.u.h) known as hadiths. These principles emphasise on moral and ethical values in all dealings. The shariah law have basically two basic principles: firstly, it prohibits the acceptance and payment of any kind of interest and secondly there must be sharing of profit/loss. Only ethical investing is allowed; investing in alcohol, gambling, pork etc. are prohibited. The first full-fledged Islamic bank was established in 1975 in UAE as Dubai Islamic Bank.
Islamic banking has a impressive growth rate and extended its growth from Middle East to South East Asia (Malaysia, Singapore and Indonesia) to many developed countries of Europe such as the UK, Germany, France and the US. The performance of Islamic banks during the slowdown attracted the attention of many others nations towards it. The major multinational banks such as HSBC, Standard Chartered, City Group etc. have offered many products in accordance with the Islamic banking principles.
The former Prime Minster of UK Gordon Brown who was a Prime Minister when Islamic banking was introduced in the UK was very impressed by its principle and he predicted that London will be the future gateway of Islamic banking. According to the world Islamic banking competitiveness report of 2012-13, the Islamic banking growth story continues to be positive, growing 50% faster than the overall banking sector. Islamic banking assets with commercial banks globally grew to $1.3 trillion in 2011, and are forecast to grow beyond $2 trillion by 2014.
In 2008 when the current governor of India Dr. Raghuram Rajan (former Chief Economic Advisor to Ministry of Finance) was heading the high level Committee on Finance Sector Reform (CSFR) for Planning Commission of India recommended to introduce the interest-free finance and banking in India. This report by Rajan did not get the stamp of approval by D Subbarao the then RBI Governor. With Raghuram Rajan running the RBI now, Islamic banking in India can became a reality if government take a strong will to amend the Regulation Act and RBI Act to introduce this banking system.
Islamic Banking is an alternative to capitalistic financial system. With the introduction of interest free banking system, large number of debt-ridden farmers, labourers, other poor and marginalised groups and minorities can be benefited, and it will create the equilibrium in Indian society. India is having the third largest Muslim population in world approx. 177 Million (by pew research). Indian Muslims mainly invest in noninterest bearing accounts or donate the interest from interest bearing accounts. So there is huge opportunity to attract the investment from this large population which a conventional banking system fails to get. High investible surplus can be attracted from the rich Middle East countries in India with introduction of Islamic banking and finance.
It is myth that Islamic banking is only for Muslims; it is an alternative and ethical form of banking. It is time when Indian Government should recognise the importance of Islamic banking and grab this significant opportunity. By not introducing it we are losing the large amount of capital which can be generated from large section of Muslim population and other Islamic nations. It will help immensely in globalisation of the finance sector, so decide before it gets too late.
(The author is a management student at IMT Hyderabad.)