Kerala offers huge potential for setting up financial institutions based on Islamic tenets, given its strong historical ties with West Asia and a large Muslim population that adheres to investment norms prescribed by Sharia. Islam prohibits giving or receiving of interest, which it categorises as usury. It does not prohibit trading and investment but advises followers to share risks. It tells the investor to share the loss, just as he would have shared the profit, in case the investment makes a loss. The West has successfully repackaged this investment process as Islamic banking. Kerala is trying to follow that path.
A customer wanting to buy machinery for a factory, for example, can have it bought by the bank. The Islamic bank would then charge an agreed premium on top of the cost in exchange for receiving repayment over a number of years. The same principle is followed for Sharia mortgages, where the property is bought in partnership by the bank and homebuyer and the bank gradually lowers its ownership stake as capital payments are made by the homebuyer. Currently, there are about 400-500 Islamic banks that are managing close to $1 trillion worldwide and this figure is expected to touch $4 trillion by 2020. London and Paris are the leading financial centres of Islamic banks and funds.
On the other hand, Kerala is home to the first private Sharia-compliant and Sebi-registered venture capital fund meant for the real estate sector and a portfolio management service for Sharia investment. Leading experts of Islamic banking like Muddassir Siddqui, a Sharia scholar and head of Islamic finance, Middle East, SNR Denton and Company, feels that Kerala could rival London and Paris. Many institutions and individuals in West Asian countries are very interested in investment opportunities in India, which is seen as a potential economic powerhouse and has traditional relations with Arab countries. According to McKinsey, investment surplus in the West Asian region is expected to touch around $9 trillion by 2020, up from around $1.5 trillion at present. India can attract a considerable portion of this by developing appropriate policies and regulations. The regulations for an interest-free economic system can be formulated in such a way that it does not go against the current system, says Siddqui.
A Taqwa advisor, who specialises in making funds or institutions Sharia-compliant says that there are 1,000s of dormant deposits in Kerala banks as people have issued instructions
against crediting interest into their accounts. One report says that nationalised banks in the Malappuram district alone have close to Rs 400 crore in such dormant accounts, known in informal circles as ‘786 accounts’. Studies show that 20% of the annual remittances received by India come to Kerala, perhaps exceeding $12-15 billion a year. The total number of non-resident Keralites is estimated at 2.2 million, of which nearly 48% are Muslims. The Muslim community, which forms nearly 25% of the state’s 32 million population, received 50% of the total remittances during 2006-07.
But the efforts of the Kerala government to start a Sharia-compliant Islamic Investment Company in association with some Kerala-based NRIs has suffered a temporary setback, with the State High Court restraining the government from associating with the venture. The state government was hoping to float an NBFC in the name of Al Baraka Financial Services Company through the Kerala State Industrial Development Corporation. The firm had plans to invest in India’s infrastructure through a product called Ijara, or leasing. Al Baraka would buy capital equipment and receive rent in return for leasing it out. The promoters were also hoping to turn the NBFC into a global Islamic bank as soon as the Banking Regulations Act 1949 is amended to accommodate Islamic banking.
Scholars attending an Islamic banking conference in Kerala have called on RBI to try interest-free windows in conventional banks as a first step towards introducing Islamic banks to India. Such windows are functioning in most of Europe’s leading banks and they are a great success. They could help in putting to rest ‘misunderstandings’ regarding Islamic banking in India. “We are just asking for a level playing field. We want to be part of the conventional system and we do not want any favours,” says Muddassir Siddqui.