Islamic Banking capable of protecting economy from unprecedented meltdown

Aligarh:

Faculty of Management Studies and Research, Aligarh Muslim University today organized an International Conference on ‘Islamic Finance: An Alternative Financial System’.

The main thrust behind organizing this conference was to bring together students and professionals from different field to interact on one platform and contribute towards sharing, designing, propagating and implementing Islamic Finance.

Modern Islamic Finance is a young but vibrant industry that is becoming an alternative form of Finance as well as an integral from mainstream finance. Its growth rate of 15 to 20 percent over the last few years and suggested future rate of 30 percent is encouraging.

In his welcome address, Prof. Khalid Azam, Chairman, Department of Management Studies and Research at AMU has pointed out that in the present economic scenario, Islamic banking and finance has been recognized by economists and bankers as an alternative way of managing the economy to protect it from unprecedented meltdown. It is also going to be effective in moving upward a grossly slowdown economy.

Professor Valeed A. Ansari, Course Coordinator said that AMU is the first and only Central University to introduce a Post Graduate Diploma in Islamic Banking and Finance 2009-2010. He said that all the students have done their training in most reputed firms like Reliance Capital Services, Secure Investment, Bajaj Allianz, Tauras Mutual Fund, etc.

In his presidential address, AMU Vice Chancellor, Prof. PK Abdul Azis said that AMU is an institution of great historic legacy and this institution has a deeply inspiring feelings among its alumni. Prof. Azis said that new building for management institute will be constructed. Mr. Ameer Ahmad, an alumnus has donated rupees one crore to this project.

Dr. Iqbal Masood Al-Nadwi, Shariah Scholar, Canada, Mufti Barkatullah, Advisor, Islamic Bank of Britain, Mr. Noorul Ameen, CEO, Reliance Capital Services, Mr. Sumesh Krishna, MD, Grameen Kovta, Micro Finance, Mr. Shariq Nisar, Director, TASIS, Bangalore, Dr. Abdul Hadi Shaikh, Senior Research Analyst, Data Rating Intellegence (S & P) and Mr. M.Y. Khan, Firmer Advisor, SEBI were the resource persons.

Ms. Nida Ghawar conducted the inaugural session.

http://www.ummid.com/news/2010/April/29.04.2010/amu_on_islamic_banking.htm

Islamic finance likely to advance on firm growth

Chennai: Just when many of the world’s financial systems have been fighting to weather the capital market turmoil, Islamic finance growth has stayed strong and will likely be brisk during the next year, said Standard & Poor’s Ratings Services in a report ‘Islamic finance is likely to advance In 2010 on firm growth and widening geographic reach’.

“We believe Islamic finance has become a recognized and a specific segment of finance on its own with still-bright growth prospects,” said Standard & Poor’s credit analyst Mohamed Damak. “We think Islamic finance is set to make further inroads in developed Western markets while Southeast Asian countries will likely fuel Islamic finance advance in Asia in 2010.”

At the same time, though S&P believes there are a number of important questions for which the answers are not necessarily clear, they may play a part in shaping the sector’s future growth. Specifically in non-Muslim countries, and especially in Europe, we consider they include the size of demand for Sharia compliant products, regulatory and tax environments, support of the political and financial communities, sovereign sukuk issuance, and the possibility of a common strategy for extending Islamic finance across EU countries.

Assets of the top 500 Islamic banks expanded 28.6% to total $822 billion at year-end 2009, compared with $639 billion at the end of 2008, according to publicly available information.

http://www.financialexpress.com/news/islamic-finance-likely-to-advance-on-firm-growth/574586/

Islamic finance resists equity shift – may stunt growth

Photo

By Liau Y-Sing

KUALA LUMPUR (Reuters) – When Kuwait Finance House Malaysia helped develop a $1.3 billion real estate project in the country in 2005 as a partner in the deal, Islamic equity property ventures were a rarity.

Five years on, the bank is embarking on its fourth building project using a similar equity concept but few others in the industry want to follow the same path, reflecting Islamic finance’s slow and difficult shift away from debt instruments.

Debt funding’s dominance of sharia finance has earned the $1 trillion industry the tag of “copycat” and limited its growth as critics question its ability to offer a fairer way of sharing risks and rewards that truly distinguishes it from conventional banking.

“Profit-sharing or equity structures are the true way of doing Islamic financing,” said Siti Mariam Mohd Desa, Kuwait Finance Malaysia’s real estate advisory director.

“It is a different concept because if you were to give out straight loans, you may as well go to a conventional bank.”

As the global financial system emerges from the debt crisis and banks shy away from assuming added risks, practitioners want Islamic finance to rely more on partnership structures and less on straight financing which they say has created a brand of finance which is sharia compliant in form, but not in spirit.

They say equity financing such as musharaka and mudaraba are closer to the sharia’s aim of ensuring gains and losses are shared equitably and a shift back to it would help banks win new business beyond its traditional markets.

While Islamic finance has flourished in Muslim markets such as the Middle East and Malaysia, many non-Muslims are unconvinced, saying the industry differs from conventional banking only in name.

“We cannot add value in markets which are mimics of conventional markets. At the moment, it’s difficult to see the value-added,” said Safdar Alam, head of Islamic structuring at JP Morgan in Bahrain.

“It’s a real opportunity, with the increased awareness globally of Islamic finance, to demonstrate this value and the difference and benefits. This is a chance that we might miss if we don’t do this well quite quickly.”

But banks’ reluctance to bear the risk of projects funded, companies’ unwillingness to share profits and scarcity of banking capital make equity financing an unappealing proposition.

The recent property slump in the Gulf, where equity financing is more common, badly hit Islamic firms such as Bahrain’s Gulf Finance House and could compound banks’ fears of becoming project partners.

Kuwait Finance Malaysia, which uses the musharaka equity structure to develop real estate, had a non-performing financing level of 6.73 percent in September, more than thrice the industry average.

Its parent Kuwait Finance House, the Gulf state’s top Islamic bank, posted a 24 percent drop in net profit in 2009 to 118.74 million dinars.

NO RISK, NO REWARD

Equity financing models were born out of a belief in Islam that the financier must share the risks if he wants the rewards and that profits should be earned through enterprise.

While equity funding is commonly associated with higher returns, bankers say it may not necessarily be more profitable than debt as the latter allows for higher leverage.

Traditionally, popular Islamic debt-based instruments such as istisna and murabaha have been likened to interest-based loans where banks take limited risks and are guaranteed a return.

But as Islamic finance grew beyond traditional roles such as agriculture financing to funding government budgets and billion dollar real estate projects, some banks began leaning more towards debt instruments to limit their risks.

As banks’ capital grows scarce, they will be wary of parting with large sums to back equity ventures, said Mohammad Faiz Azmi, PriceWaterhouseCoopers’s global Islamic finance leader.

“On the demand side, the issue is are there enough corporates who are essentially willing to give up the upside?” Faiz said, referring to profit-sharing structures.

“The reality is that the people that would want to have equity forms of financing are usually the ones that you want to avoid lending money to anyway.”

Some practitioners say the push for more Islamic equity financing is ill-conceived.

“From the sharia’s perspective, there is no such evidence to support (the view) that Islamic banks or whoever wants to do business should do profit-sharing more than debt-based,” said sharia scholar Aznan Hasan, who advises Barclays Capital London and Malaysia’s stock exchange operator Bursa Malaysia.

“Whether it is debt or equity that suits you better, it depends on commercial and business decisions, not sharia matters.” ($1=3.205 Malaysian Ringgit)

(Editing by Kim Coghill)

(For more business news on Reuters Money visit www.reutersmoney.in)

http://in.reuters.com/article/businessNews/idINIndia-48026020100427?sp=true

India looks to start Shariah compliant financial products

By Sarbajeet K Sen & Dipak Mondal Apr 27 2010 , New Delhi

India needs to actively consider allowing introduction of Shariah-compliant Islamic finance products to channelise savings of the muslim community, K Rehman Khan, deputy chairman of Rajya Sabha, said onTuesday.

Speaking at the India Shariah Finance Summit in the capital, Khan said the mutual fund industry is the best vehicle for popularising Shariah-compliant products. He pointed out that mutual funds are largely compliant with Islamic finance principles since they do not pay interest.

The concept of charging or paying interest is prohibited under Islamic law. “We should start adopting the mutual fund route in a bigger way for Islamic banking. Shariah compliant mutual fund schemes will help to channelise savings of the huge Islamic population in India,” Khan said.

Khan said Indian Muslims should have the option to invest in Shariah-compliant products. “Muslims have every right to seek an avenue for investment that complies with their religious faith,” he said.

Speaking on the occasion, Abizer Diwanji, executive director and head of financial services, KPMG, said the mutual fund sector could be opened up for Shariah compliant products. “The present laws are amenable to mutual fund instruments that are compliant with Islamic finance. However, innovation in the industry is lacking and hence such products are not hitting the market,” he said.

Diwanji said bringing out Islamic finance products would be a step towards greater financial inclusion.

“Muslims are an underbanked community in India. Islamic finance could be a very big component for financial inclusion that the government is pushing for,” he said. Muslims account for around 13.4 per cent of the population or around 175 million people in absolute terms. Diwanji said the Reserve Bank of India could also consider offering specialised licences for Islamic banks, while doling out fresh bank licences as promised in the Union budget.

Sashi Krishnan, chief investment officer, Bajaj Allianz Life Insurance, which offers — Pure Stock Pension Fund –a Shariah-certified scheme, said Islamic financial products have seen growing acceptance in India over the past few years.

“The government is already working on a project to analyse the future of interest free banking in India, while the mutual fund and insurance industry are also developing Shariah compliant products,” he added.

Krishnan said the challenges to the popularity of Islamic finance in India are distributors who are not equipped to sell Shariah compliant products, besides a lack of certifying agencies and standardisation of Shariah-based products.

http://www.mydigitalfc.com/mutual-funds/india-looks-start-shariah-compliant-financial-products-737

Economics of Islamic Banking in India

Economic exigencies and political expediency in a country with more Muslim population than Pakistan, at least after six decades of independence, should consider introduction of Islamic Banking as part of reforms in the Banking Sector. Since this intervention requires some important changes in the regulatory regime in line with those obtaining in more Muslim liberal countries like Malaysia, the logic and logistics in this regard require some explanation which this article intends to present.  It is good to recall that even Raghuram Rajan Committee on Financial Sector Next Generation Reforms made a reference to this aspect.

Prospects for Islamic Banking in India:

Few companies are already dealing big in Shariah Investments funds. Many financial sector players eying upon trillion dollars Islamic investment funds. Parsoli and Eastwind have launched their Islamic Indices; and Reliance Money and Religare have launched Shariah compliant PMS, and Indian Stock market is observing fair business in Shariah Compliant Stocks. If China is going for Islamic banking to attract Islamic Investment Funds, why should India hesitate developing Islamic banking with 150 millions Muslim who may help to pool around one trillion dollars Islamic investment funds from Gulf countries that too on equity base; which may keep our national current account and fiscal deficit under control?

No visualization document for Islamic banking in India:

So far Islamic banking has been considered as a religious matter for Indian Muslims and thus it was denied with a fear of financial segregation, a threat of parallel banking system along with a hidden fear for SCBs to loose Muslim depositors. There has never been any public committee analyzing the impact of Islamic banking in India because Muslims of India were never so evocative about features of Islamic banking in India. Though the concept of Islamic banking is driven by ethics of Islam, it has more economic rationality compared to its religious rigour which needs some genuine study by professionals having basic knowledge of Islamic banking with expertise on Indian economy because Islamic banking carries more advantageous features to boost real sector economy compared to financial sector.

Islamic banking and bankruptcy:

Islamic banking also restrains the chances of bankruptcy because it adheres to strict credit rating system by disallowing indebted economic agents to avail more debt finance. The strict regulations for credit rating under Islamic banking could save our financial and economic enterprises from bankruptcy. The Islamic banking mechanism would certainly strengthen the credit rating system to provide security of funds for depositors and investors. Moreover since equity finance by Islamic banking allows the banks to recover the assets by right of ownerships, it would be fairer on the part of financial institutions to recover assets in case of bankruptcy or crisis by any individual or enterprise.

Islamic Banking for Inclusive Growth:

Islamic banking is more desirable for achieving Inclusive growth of India. It is interesting to evaluate probable impact of Islamic banking in different segments of Indian economy. Islamic Banking has the potential to tame the liquidity and inflation problems along with allowing inclusive growth. Structural changes in the Indian economy during post-reform period are no barometer for equitable growth. For real inclusive growth, we have to ensure increase in income and employment status of workers in all segments. Empirical evidences reveals that though India has registered better growth rate in recent years, the number of poor living below poverty line has increased. Our household consumption which has declined in recent years is driven by household income; while corporate savings reflects income of the corporate sector which has increased over the years during the last decade and half. The fruits of growth seem to have favoured more the corporate sector than vast sections of population below the poverty line.

Similarly the share of financial sector in GDP has increased in recent years. It is well known that the SCBs extend debt finance. The interest component ipso facto becomes part of GDP.  Interest rate sensitivity to inflation is well known. However, equity finance if extended with far lower costs of credit has potential to restrict inflation and there is enough evidence from West Asia in this regards.  Simultaneously the dividend shared by depositors on equity finance helps equitable distribution of income generated by financial sector.  Once the basic difference between the debt and equity credit is understood, it will be easy to appreciate its potential contribution to better economic growth.

With low collateral strength of farmers and poor workers associated with unorganized sector manufacturing units and retail service outlets do not encourage SCBs to extend more debt finance. With schemes of loan waiver, the debt markets are shrinking in agriculture sector. Even the SHGs and JLG schemes of Micro Finance have failed to add livelihood stocks for the poor and vulnerable. Inequitable distribution of resources led naturally to serious imbalances both across sectors and regions and need systemic corrections that are possible with the new instrumentality of Islamic Banking. It is time that the policy makers realise these options as imperative at this moment of economic history when the youth unrest is showing itself in drifting to intrusive terrorist attractions. Enough price has been paid by the economy that cannot afford this any longer.

Insights into Islamic banking reveal its potential to build infrastructure for our agriculture sector where the economies of scale are hostile to adding new infrastructure to the farm worker households. Islamic banking could also help our unorganized sector due to its non-insistence on collateral as a precondition for lending even small sums of money. This would also alter the desperate labour-capital ratios in rural India, in particular, in States like Uttar Pradesh, Bihar, West Bengal and the seven sisters of North East.  Financial empowerment of the vulnerable sections of population is a near possibility at quicker pace with Islamic Banking.

Islamic banking may induce our political leaders to substitute grants and subsidies with equity finance schemes through specialized financial institutions because equity finance allows access to credit without adding debts to borrowers. Equity Finance helps achieve self-reliance. The stabilization funds for poor farmers / artisans may be utilized to experiment such finance. Islamic banking unlike what many think has less to do with religion than with economics.

Islamic Banking and Financial Inclusion:

Though we do not have any survey to compare community wise financial exclusion in India, the study of data available through Sachar Committee report reflects Muslims are most disadvantaged community in financial sector, and banking is inversely related to concentration of Muslim Population. Muslims have over 80% financial exclusion due to interest based deposit and credit schemes available with financial institutions and SCBs. Due to restrictions on Islamic banking India, financial sector could not attract even the rich Muslims to partake in the growth story of India. Even the worker participation in institutional growth is evident from the Muslims employed in the financial sector, if one were to go by the statistics put out in this regard: RBI and SCBs, have just 0.78% and 2.2% share of Muslims in employment with RBI and SCBs. Similarly the participation of Muslims in specialized financial institutions and corporations like SIDBI, NABARD and NMDFC is also desperate. Hard to believe but true, that even Institutions like National Minority Development and Finance Corporation (NMDFC) have no Muslim managers.

The Sachar Committee Report reflects that Indian Muslims have a share of 7.4% in saving deposits while just get 4.7% in credit (in terms of PSAs). If we consider this as a standard proportion in national aggregate deposits at and credits by SCBs according to annual report of RBI for year 2007-08, Indian Muslims annually loose around Rs. 63,700 crores because Muslims would have a credit deposit ratio of 47% against national average of 74%. It shows that Indian Muslims annually loose around 27% of their deposits (by not availing as credits). After Islamic banking this deficit may be removed to curb financial loss to Indian Muslims. With 31% Muslims living below poverty line and 40% Muslim workers as own account workers, this big deficit of credit is apparently a serious economic disadvantage. Muslims avail just 4% and mere 0.48% credits from special financial institutions like NABARD and SIDBI respectively because there also the community has to indulge in interest which is strictly prohibited in Islam. Of course, although it is well understood that the credit worthiness does not get related to either caste or creed but on the related assets and repayment capabilities the underlying assets could generate, quicker and easy access to finance has the innate potential for asset creation and related product markets at least in the domestic environ as proved in the SHG group efforts in the southern States.

The schemes launched by RBI, NABARD, SIDBI and Ministry of Finance for financial inclusion focus on providing access to credit and other financial products. Just as allowing access to Meat shops for non-vegetarians by definition is the surest route for excluding all vegetarians, interest-based banking system has a potential for exclusion of a majority of Indian Muslims. On the other hand, introduction of Islamic banking will allow the Muslims to work with other community members in banking sector; it would definitely help us build civilized economy.

Introduction of Islamic banking in India apart from pleasing 150 million Indian Muslims, the second largest community of India, our government will certainly gain diplomatic advantage to make financial dealings with Muslim dominated nations especially to attract trillion dollars of equity finance from gulf countries. The fall of giants in the world financial sector like Lehman Brothers in the aftermath of the US sub-prime mortgage crisis, we need to be alert to the alternate sources from where FDIs could flow into the Indian economy and Islamic nations are the potential alternatives. Our opening the doors for Islamic Banking at this juncture would also accelerate the fund inflows and slight decoupling of the US Dollar to inviting the Euro. Since Islamic Banking encourages equity finance even the small players could enter the Equity Markets and the SME bourses likely to come into being shortly would have better access through Islamic Banking channels as the SMEs mostly have inadequate collaterals to offer for their expansion needs in their growth stage.

Islamic banking and nationalized banks:

It must be made clear, however, that Islamic banking is not a children’s game. It requires even better professional expertise compared to conventional banking because it deals more with commercial projects than mere monetary credit and debit transactions. Indian Muslims may feel privileged in terms of Islamic ethics required for Islamic banking but they certainly lack professional efficiency to manage modern commercial banking on Islamic ethics. The organic link between the Islamic and nationalized banking emerges from the innate professional competencies developed by Institutions like the SBI, Bank of Baroda, Bank of India, Corporation Bank that has recently opened its representative office in Dubai with a view to shortly raise to the status of a commercial bank, Under Islamic banking mechanism thrust would be on equity deposits and credits while interest charged would be replaced with profit margins on commercial credits and interest expended over deposits would be replaced by dividend on equity finance with deposits mobilized as equity deposits by banks.

It is expected that with introduction of Islamic banking in India, the first choice of depositors and investors would be nationalized banks as despite contradiction of interest, Indian Muslims have a confidence in nationalized banks. To ensure safety of deposits majority of Muslims depositors would prefer to join Islamic banking managed by nationalized banks. However it is expected that Foreign Investors looking to invest in India through Islamic banking, would prefer to have services of foreign banks. As far as Indian Muslims are concerned, they have to make hard efforts to find their place in managing Islamic banking in India because they lack required financial depth; infrastructure and more importantly they have poor credibility among the depositors and investors due to some past failures of financial institutions.

Interest-free banking may add Muslims to formal financial sector. Through this financial inclusion of Indian Muslims to formal sector Islamic Banks, it is expected that Indian nationalized banks may see additional savings and credit which may help banks to gain higher rate of profits compared to their SLR. After successful operation of Islamic banks by our nationalized banks, private banks may also enter into business of Islamic banking.

Stock Market Capitalization

Since Islamic banking focuses on equity deposits and finance, it is expected that Stock market will be the most preferred avenue for investments by future Islamic banks of India because currently it is our stock market which is attracting new investments under Shariah Finance schemes. Technological innovations would facilitate easier flow of equity-based deposits of Islamic Banks into the rising Indian Stock Markets. It is just common sense that when equity based financing takes place through Islamic banking route, the number of D -mat accounts may surge in millions.

Corporate Sector and Islamic Banks

Even the Corporate sector would be a gainer. All the companies listed in stock markets will get additional potential investors to genuinely subscribe their shares instead of speculator trading. Even the Bond Markets may stabilize.  Long term resources for the infrastructure sectors like the irrigation, power, Oil, and communication projects could be faster and easier through Islamic Banking route. New modes of public private partnerships for the execution of infrastructure projects may emerge. The total investment in India for infrastructure, during 2006–07 was estimated to be around 5% of GDP. It has to be 9% of GDP by 2011-12, it means that we would require Rs. 207,291 crores in 2006-07 and Rs. 574,096 crores by 2011-12 to finance our infrastructure. The total investment amounts to Rs 20,56,150crores for the 11th five year plan of which Rs. 1436,559 crores is supposed to be met from Public Investment while Rs. 6,19,591 from private investments.

Islamic banking through promoting equity finance from national and international markets may reduce this burden of keeping national current account and fiscal deficit well under control and probably we need not to worry about interest payment on borrowings. Since Islamic banks may also have managerial control over commercial financing, government might use Islamic banking units as source to mobilize tax revenues as well, which might reduce mobilization costs for public revenue for governments.

With equity finance, our Government may also convert grants, subsidies and stabilization funds into equity for Islamic Banks to lend equity finance to priority sector agents instead of highly subsidized lending which costs a lot to the exchequer.

Islamic banking to counter Terrorism:

The experience of Islamic banks of Malaysia and Britain may be interesting; as in Malaysia, the Chinese businessmen are the biggest customers of Islamic banking; in Britain also, Islamic banks are not for Muslims alone. Stringent anti-money laundering measures are in place in these countries and have seen far less terrorist intrusions during the last decade. The Shariah principles require transparency in monetary routes. Every extended credit under Islamic Banking will need supportive document with managerial control of the fund to monitor the use of credits, which may not be available with debt finance under interest-based banking. All we have to put is a fairer and strict audit system to monitor the fund flows. The universal nature of banking through Islamic Banks prevents surreptitious routes for investments and mutual funds.  The petro-dollars and SDRs have the potential for greater flows and these would also contribute to more dynamic commodity markets. With the financial muscle, the youth among the Muslims may look to better contribution to domestic GDP through better education and higher productivity.

In fine, Islamic Banking should be seen as a powerful economic instrument capable of creating multi-sectoral impacts and should therefore be invited with lot of cheer instead of sneer. It contributes to greater stabilization, helps the real economy significantly, and reduces unemployment and more than any thing acts as a powerful antidote to poverty sans huge subsidies and grants that are making a big dent in our fiscal framework. It would open the doors for financial inclusion faster and quicker.

*The author would like to thank Dr. B. Yerram Raju, Regional Director, PRMIA, Hyderabad Chapter and Dr. Ausaf Ahmad, Former Economist, IRTI, IDB, Jeddah for their valuable guidance in making out this paper.

http://www.roubini.com/emergingmarkets-monitor/253554/economics_of_islamic_banking_in_india

Islamic Finance to Reduce Fiscal Deficit in India

At a time when economic recovery needs more stimuli by the Government of India (GoI), there is also an urgent need to safeguard the economy from the debt trap because the GDP growth rate fell to 6.7% in 2008-09 from 9% in 2007-08; the debt servicing reached 58.83% of the total expenditure for the year 2008-09. It means maximum receipts are now spent for debt servicing which accounted for 15.87% of the Gross Domestic Product (GDP), while the debt receipts were 9.78% of the GDP in 2008-09. Even the interest payments were 21.39% of the total expenditures by GoI and 5.77% of the GDP in 2008-09. Notably the revenue deficit in 2008-09 is already 30% due to high debt serving ratio to total revenue expenditure.

In an attempt to find the actual reasons behind the high fiscal deficit, it is observed that the increased debt receipts by GoI to finance revenue expenditures (especially high debt servicing); increased subsidies on food, fuel and fertilizer; and rural development through schemes like NREGS, farmer’s loan waiving scheme and Sarva Shiksha Abhiyan are the three most important factors of high fiscal deficit. Since there is a need for more stimuli to counter recession in the economy, it is expected that the plan expenditures may further increase whereas due to recession, the revenue receipts may decline. This decrease in revenue receipts and increase in plan expenditure may increase the fiscal deficit to an unwanted high level. Working upon different options to reduce the fiscal deficit, it is found that Islamic finance can reduce the fiscal deficit even if revenue receipts decline and plan expenditures increase.

Islamic financial products have a great role to play in reducing the fiscal deficit in emerging economies by replacing the debt based investments for infrastructure with funds mobilized through equity based Government Securities for infrastructure projects. Let’s see how Islamic finance may help us reduce our present fiscal deficit.

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Notably the total revenue expenditure is 142.92% of total revenue receipts reflecting 30.03% revenue deficits. The major cause of this high revenue deficit is high debt service ratio to total revenue expenditures. For a developing economy like India, in the proposed plan we project increasing capital expenditures, but in the revised estimates of 2008-09 budget, the revenue expenditure is 89% and the capital expenditure is just 11% of total expenditure; all due to high debt servicing ratio (66%) to total revenue expenditure. Notably the interest payment alone is 24% of total revenue expenditures. So, with capital expenditure being as low as just 11% of total expenditure and debt serving being as high as 59% of total expenditure, how can we go about planning to foster inclusive growth?

Debt Finances crossed the Planned Estimates:

The debt based finances for investments under 11th five year plan document was proposed to be 48.42% of total receipts for 2008-09, whereas the revised budget estimates reveal that the debt receipts were 96.38% of total capital receipts in 2008-09. This reflects our inability to mobilize targeted amount of non debt receipts, causing high fiscal deficit due to interest payments over borrowed debt receipts.

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According to 11th plan documents, projected investments in 2008-09 should be of Rs. 321,579 crores while total plan capital expenditure in the revised budget observed just Rs. 41,301 crores. So the plan capital expenditure is just 12.84% of targeted investment in 2008-09. This shows our inefficiency to make budget development pro inclusive growth and to foster growth. So, it is better that GoI reduce debt borrowings which ultimately increases revenue deficits; and shift the focus on infrastructure investments to stimulate the economy at a time when GDP growth rates and employment growth rates are falling.

Actual Debt Receipts are 210% of the planned Estimates:

Since the revised estimates on debt receipts (Rs. 326,515 Crores) is already 210% of estimated requirements of debts (Rs. 1,55,704 Crores) by year 2008-09 as projected in 11th five year plan documents, the GoI should seriously think about this increased debt receipts. The funds utilized for debt servicing (Rs. 530,010 Crores) are already 162% of debt receipts to finance fiscal deficit (Rs. 3.26.515 Crores), the GoI should revisit its budgeting. How good is it to increase the debt receipts at a time when Indian industries are looking for more affordable credits from banks to meet the challenges after the global meltdown?

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In year 2008-09 the deficit budget cost an amount of Rs. 192,694 crores to GoI which was paid as interest over the debt receipts borrowed to finance the deficit budget. This may be called as loss to GoI because had there been equity based receipts against debt receipts, GoI would have saved this amount.

Financing Fiscal Deficit through subsidized bank loans is not good

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Islamic finance can do wonders, particularly in a country like India

Prasoon S. Majumdar

Editor, Economic Affairs

The Sunday Indian

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?

http://www.iipmthinktank.com/asp/musings.asp?s_id=8302&pageno=1

Universalising Islamic finance – Let’s embrace Islamic banking and finance

Prasoon-S-Majumdar

Prasoon S. Majumdar

Editor, Economic Affairs

The Sunday Indian

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?

http://www.thesundayindian.com/05072009/storyd.asp?sid=8302&pageno=1

Islamic financial system solution to meltdown

March 29th, 2009 – 8:35 pm ICT by IANS

Aligarh, March 29 (IANS) Greed and individualism must give way to a cooperative approach of Islamic financial system to rid the world of the current economic meltdown, a renowned Muslim scholar said Sunday.
Nejatullah Siddiqui, the scholar, was speaking at the inaugural session of the conference on Islamic Finance and World Economy organised by the Department of Business Administration, Aligarh Muslim University in collaboration with the Taqwaa Advisory and Shariah Investment Solutions (TASIS).

Siddiqui observed the main causes of the current financial crisis were the absence of ethics and morality.

“Man must learn to live in moderation in view of the limits our environment imposes. Moderation in pursuit of material gains and in consumption has been part of the teachings of religions in general and Islam in particular. It is time to bring them in.”

He said the international financial institutions – like the IMF and the World Bank – were the tools to serve designs of the rich and powerful nations.

Chief investment officer of Bajaj Allianz Shashi Krishanan highlighted the scope of Islamic finance and the ethical and moral approach of Shariah based investments.

He said India has Shariah compliant stocks more than any other Islamic country. More than 50 percent of the people investing in these stocks are non-Muslims, he said.

http://www.thaindian.com/newsportal/business/islamic-financial-system-solution-to-meltdown_100172852.html

Is Islamic banking the boiled ice-cream?

By Dr. Shariq Nisar

On January 5, 2010, in response to a PIL filed by Dr. Subramanium Swamy, the High Court of Kerala put a stay on the activities of the proposed Islamic Non-Banking Finance Company, Albarakah Financial Services Ltd. The Non-Banking Financial Company (NBFC) in question has been co-promoted by the state owned business entity Kerala State Industrial Corporation (KSIDC) and some business men belonging to different religious communities including Hindus and Christians.

The entity was aimed at bringing much needed financial resources to the state of Kerala, which is poor in mineral and other resources required to develop the state into an industrial one. The feasibility study was conducted by one of the reputed consulting firms, which while conducting the feasibility study from legal aspects, also mentioned about the existence of RBI approved several Islamic NBFCs in India including the one in Kerala. The only novel aspect about the present venture was participation of a state owned economic entity (KSIDC) in the company with 11% stake. Remaining 89% or 89 crore was to be brought in by private businessmen, all Indian.

Where is the money to sustain this growth? A street in Patna [TCN Photo]

The presumptions made by the litigant are that the organization was (1) to be a banking organization, (2) to exclude the non-Muslims, (3) to abuse the provisions of the Indian Constitution granting right to practice religion of one’s choice and (4) function under an extra-constitutional Sharia authority with supra regulatory powers.

It is very clear that Islamic banking is not possible in India at the moment, unless certain changes are made in the regulations. This is also the crux of the Anand Sinha Committee of RBI, which was formulated to look at Islamic banking products in the Indian milieu.

It is understood that the proposed company itself never sought to project itself as a banking organization. Whatever reports that appeared in certain sections of the media describing it as an Islamic bank can hence be put down to either poor awareness of the technical differences between an NBFC and a bank, or the common tendency to hype any news item relating to “Islamic” aspects on the part of sections of the media.

The allegations made by the plaintiff are:

1. Order of State of Kerala allowing setting up of the financial company by KSIDC is a clear instance of the state favoring a particular religion.
2. KSIDC identifies with Islam to the exclusion of all other religions.
3. The actions mentioned above amount to the State promoting a particular religion.
4. The company is going against the Constitution by adhering to Sharia rules prohibiting certain activities such as charging of interest and trading in alcohol, pork, and entertainment including cinema and music, which are legally permissible in India.

The Honorable High Court of Kerala is seized of the matter with regard to the above. Further, the Court in its stay order (dated January 5, 2010) opined that the matter needs deeper deliberations; and therefore, it (the Court) decided to include the Union of India and the Reserve Bank of India as additional respondents in the matter. The matter is subjudice; and therefore, any comment on the above would not be appropriate at the moment. Dr. Swamy has also written critically on the same subject in a recent issue of Organiser (Vol. LXI, No. 28, New Delhi, January 17, 2010). While refraining from commenting on any aspects of the order of the Court, one can certainly analyze in a dispassionate and objective manner the issues raised by Dr. Subramanium Swamy in his usual strident fashion in the article. The author writes:

An Islamic bank cannot charge interest, but then what does it do to survive? By giving by one hand, and taking away twice as much or more by the other hand!

It is well understood now that the essence of Islamic finance is relating returns from a business to its results. It is in this respect that Islamic finance differs fundamentally from conventional finance, wherein the operations are basically debt-driven and returns fixed in advance, as too the RBI committee report acknowledges. So Islamic finance does not need any creative accounting or duplicity to survive, as Dr. Swamy insinuates. In fact a large number of non-Muslims participate (even in India) in Sharia-compliant schemes. Surprisingly, some of these schemes have also been found to be among the best performing schemes in the market.

“… an Islamic bank is like a boiled ice-cream; it cannot exist in real life without tricking our confidence.”

It is amazing that he can make such a claim when one finds Islamic finance in operation in 75 countries across the globe, including many non-Islamic and secular countries. In secular countries with small Muslim minorities, such as UK, USA, France, Germany, South Africa, and India, or Muslim countries with large non-Muslim minorities, such as Malaysia, one finds substantial non-Muslim participation in Islamic finance institutions and schemes. Aren’t the authorities in all these countries willing participants in a giant cooperation being perpetrated on their gullible Muslim and non-Muslim citizens in the name of an alien religion? Dr. Swamy needs to answer that.

“It is clear that Islamic bank or NBFC cannot be started in India without violating numerous laws and regulations.”

As we have noted, Islamic banking is not possible in the current Indian regulation and this is why there is no Islamic bank functioning in India as yet. This does not; however, mean that the present scenario needs to continue necessarily for all time in future, or that there is something in Islamic finance that is fundamentally against the Indian Constitution. It is really a question of pragmatic economic policy of a country at a point of time. Till less than two decades ago, private banks, private mutual funds, and private insurance companies were all prohibited. However, today these, in addition to many Islamic NBFCs, are already functioning in India with the approval of RBI.

“Islamic banks will not be permitted by Sharia to give loans for liquor manufacturing, cinema, hotel, entertainment industry, etc. These; however, are under current laws of India legitimate and legal activities.”

When one refers to an Islamic NBFC (whether in the Indian context or anywhere else), it should be understood that the primary mandate the institution operates under is derived from the law of the land. Further, it is “Islamic” in the sense that it voluntarily binds itself to adhere to certain additional restrictions in its business operations, which Islam prescribes. Nor are the doors of such “Islamic finance” institutions closed to adherents of religions other than Islam or to atheists too, for that matter. It can be no one’s case that a business has to necessarily enter all the spheres of business to be in compliance with the Constitution. Similarly, we need to make a distinction between permissible and compulsory. Certain activities are no doubt permissible in the Indian legal system, but it is not compulsory that everyone must be engaged in these to adhere to the Constitution. There are many states in India where alcohol is banned; it does not mean they are violating the Constitution. Secondly, many of the activities that the Sharia prohibits are accepted as harmful to society by a fairly sizeable segment of the civil society too.

Then we have Dr. Swamy spewing the usual BJP vitriol against the government for “appeasing” Muslims. “Dr. Manmohan Singh believes that Muslims must get first charge on our resources, they are keeping silence, much as Bhisma and Drona kept quiet when Draupadi was disrobed. …now patriots in Kerala must rise and protest to save Kerala from fast-creeping Islamisation. And the rest of India must help.”

Arguments like the above put forth by the maverick politician are motivated and highly instigating in nature. The less said about them the better. It may perhaps be in the interest of KSIDC to adduce some of these writings of Dr. Swamy before the Honorable Court to put in perspective his motivations for filing the case.

It is unfortunate that an imaginative measure designed to draw funds into productive investment for the common good, from adherents of an excluded section of society (while keeping the measure equally accessible to other sections as well) is sought to be subtly and insidiously transformed and falsely portrayed by the Plaintiff as a question of favoritism to a faith.


Dr. Shariq Nisar works as a Director at Taqwaa Advisory & Shariah Investment Solutions (TASIS) Pvt. Ltd., based at Bangaluru.

This article has been published by Finance Islamicus [Vol. I No. 1 :: January-February, 2010], a Bi-Monthly newsletter on Islamic Finance published by the Finance Islamicus Group – http://www.financeislamicus.com . For any comments/suggestions/feedback, please contact the editor of the newsletter at [email protected] or [email protected]