Islamic banking is not just about Muslims

New Delhi: Proponents of Islamic banking have welcomed Kerala High Court’s dismissal of the petition challenging the state government’s support to an Islamic financial institution, as a step in the right direction.

Rooting for India to include interest-free windows in conventional banks, Abdur Raqeeb, general secretary of the Indian Centre for Islamic Finance said nations around the world were looking seriously at Islamic banking.

“If UK, Hong Kong, Singapore, France can incorporate Islamic banking, India too can look at it,” he said adding that they had given RBI and finance ministry a report to introduce an interestfree window in conventional banks within the existing Indian banking regulation act. “We are hopeful,” he said.
Conventional banks have started testing the waters, making inroads into the new format. In 2008, Malaysia’s Securities Commission, which aims to make the country a hub for global Islamic banking, approved Reliance Asset Management as an Islamic fund manager. Indian banks ICICI and Kotak have Shariatcompliant windows in their Gulf operations. Asset management companies offer such services as well. But these are at a nascent stage and are likely to grow with Gulf funds and NRIs as potential investors.

Thats not all. Sensing the need for alternative banking systems post the 2008 recession, Aligarh Muslim University started a course on Islamic banking. Launched in July 2009 with a 20-member batch, it hopes to increase the number of seats to 30 with demand.

We sensed demand for this kind of course will grow, Mohammad Nejatullah Siddiqui, former AMU professor who designed the course, said. Although all students in the first batch that graduated last year did not find jobs, Siddiqui said demand was growing with corporate houses offering Islamic financial instruments.

To that end, the Kerala case, though restricted to investing in a non-banking financial corporation, is a step in the right direction. If the Kerala state initiative goes ahead, it will be good.

Raqeeb underlined the need to understand that Islamic banking was not Muslim-specific. In Malaysia, 40% customers are non-Muslims. Islamic banking is perfect for those who need equity finance and applicable for all underprivileged. At present, although government loans are available, few Muslims avail of them as they are interestbased and other backward people can’t avail of them because they are not creditworthy, said Siddiqui. No-ones looking at Islamic banking for the love of Islam, or for the love of Muslims. They do it for the love of money, reasoned economist Ausaf Ahmad, formerly with the World Bank, adding, transparency, accountability and regulation are important issues in Islamic banking, he said. But its worth the investment in creating a legal and regulatory framework to suit the practices.

For one, sharia compliance will unshackle savings of Muslims and attract Gulf nations and NRI investments, much of which has reportedly got routed to Malaysia in the past few years.
The Raghuram Rajan committee report on financial reforms released in 2008 also mooted interest-free banking opportunities for certain faiths that prohibit the use of financial instruments that pay interest. It refrained from using the term Islamic banking.


What is Islamic banking |
Islamic banking abides by the Islamic law (Sharia). Sharia prohibits usury / payment or acceptance of interest on specific term loans. Islamic banks would never knowingly have anything to do with companies involved in gambling, alcoholic beverages or porcine food products

Who plays regulator |
To ensure Sharia compliance, Islamic banks usually have boards of religious scholars

Is it only for Muslims |
No. Anyone can participate in Islamic Banking provided he/she has faith in Sharia. In 1994, Malaysia created the world’s first Islamic inter-bank money market. Now, nearly one-quarter of all Islamic banking business in Malaysia is transacted by non-Muslims

Some Islamic banking services

Islamic charge and debit cards | Unlike standard cards, these are linked to personal credit lines so users only “borrow” from themselves. The bank makes money by charging service fees

Islamic debt investments |
include asset-backed securities, in which Islamic assets are bundled into bonds

Convertible bonds |
morphs into shares of sharia-compliant companies

Islamic bonds |
The German state became the first European govt to issue an Islamic bond last year — a $121 mn 5-year floating-rate note that provides “rent” in lieu of interest from a series of govt properties that form the bond’s collateral THE INDIA STORY

Sharia compliant stocks in India

Out of 6,000 BSE listed cos, roughly 4,200 are Sharia compliant, say stock analysts. These are mainly in software, pharma and auto ancilliaries. BSE has a Sharia-compliant index. The BSE TASIS Sharia 50 Index includes some companies like Reliance Ind, Bharti Airtel, Tata Tele.

What makes shares sharia-compliant

The company must not deal in liquor, pork, hotel, casino, gambling, cinema, music, interest-bearing financial institutions. Conventional insurance firms are also out Company’s interestbearing debt at any point must remain below 1/3 of average market cap during the past 12 months. If firm has interestbearing income it must be less than 10% in any condition.

Islamic funds and Indian companies
Relaince Capital Asset Management has two Islamic funds which are managed from Malaysia
Benchmark Asset Management launched India’s first Sharia-compliant exchangetraded fund on 4 February. Reliance Mutual Fund, UTI Asset Management, Way2Wealth and Edelweiss Mutual Fund have Sharia-compliant mutual funds.

The first Islamic bank in the country with active involvement of the Kerala goverment is likely to start operations in Kochi by next year.

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