What are the reasons India should legalize and encourage Islamic Banking and Finance?

Apart from all the ethical and theoretical reasons one may cite, the top three reasons are, according to me:

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  • It will enable India to bring in much needed investment from middle-eastern countries at very reasonable terms
  •   A large portion of the unbanked Muslim population will hopefully be successfully targeted by banks who focus on Islamic banking. Hopefully the RBI will manage to make the banks look into the banking and finance needs of small retail customers in India
  •  If what happened in non-Muslim countries like UK or Sri Lanka is any indication, this can flourish into a significant economy, which means creation of a lot of new jobs – most of them well paid skilled jobs

According to some sources, with 150 million Muslim population, and a rapidly growing economy despite economic slow-down everywhere else, India will be a hot destination for Islamic investments and finance companies. These sources say that the potential of the Indian market is no less than 1 trillion in Islamic banking and finance. Some studies report that 80% Muslims in India are victims of financial exclusion. This is alarming if true – as financial exclusion may also lead to other social problems including a feeling of injustice within the minority community. The Sachar Committee report in 2006 confirmed that there is significant financial exclusion of Muslims in our country. It calculated annual financial exclusion of Indian Muslims at over Rs. 22,000 crores. This has been acknowledged by the political leadership – including the Prime Minister Manmohan Singh, who is an economist himself. Interest free banking has been a long standing demand of the Muslim community – which many people not having understanding of Islamic banking tend to think as utopian and impractical. In reality, in Islamic banking loans are just converted from being interest based to equity based. The bank has to play a slightly different role in the whole scheme, but it is by no manner impractical or unrealistic. At present, the law very tightly controls the role of the bank when it receives a deposit, or gives out a loan – these tight controls do not allow banks to take up Sharia compliant activities. If exceptions are made in law for banks to play the slightly different role that a bank needs to take in Islamic banking, only then it can be launched in India. Neighboring China, which also have a Muslim population of 80 million, has already awarded its first licence for Islamic banking to Bank of Ningxia. While no clear political opposition can be seen against introducing Islamic Finance in India, only the government knows what is holding it up. Source: http://islamicfinanceindia.com/reasons-india-should-legalize-and-encourage-islamic-banking/

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