In September 2015, the IMF estimated that the aggregate
financial assets, held in Islamic accounts, were above US$2
trillion globally and that they would outperform the growth of
conventional finance in many countries.
Renowned Indian economist MS Swaminathan, who is also the
pioneer of green revolution in India, stated that Islamic finance
could be an effective solution for resolving farmer suicides in
India. Though Islamic finance has been sluggish in its traction in
the Indian economy, there have been developments from an Indian
context which provide hope for the future.
A concrete step toward ushering in Islamic finance into India
was the execution of an MoU between the IDB and the Export-Import
Bank of India (EXIM). The MoU's terms permit IDB to open its
first branch in India to offer Shariah compliant financial and
banking services. A commercial line of credit amounting to US$100
million is to be extended by the Islamic Corporation for the
Development of the Private Sector to EXIM pursuant to the MoU. A
state-of-the-art rural mobile network in Gujarat worth US$55
million has also been promised by the IDB. The SME sector seems to
be the primary focus of IDB funding and investments in India.
The Committee on Medium-term Path on Financial Inclusion (the
Committee), set up on the 15th July 2015 by the Reserve Bank of
India (RBI) and headed by Deepak Mohanty, released a report (the
Report) that strongly advocated the introduction of interest-free
banking in India and also set out the advantages of adopting an
Islamic finance-based model in India. The Report was submitted on
the 28th December 2015, with various recommendations pertaining to
the existing policy on payment and small banks, socially inclusive
financial products and services and credit facilities which may be
extended in the agricultural sector.
The Report elaborated upon the disadvantages the lower strata of
Indian society faces due to the lack of access to Shariah compliant
funding from conventional banks. The Committee delved into
empirical research at a household level and collated the same in
detail to reflect the present need for such a model of financing in
India. The Committee acknowledged that commercial banks may
approach this model and offer Shariah compatible instruments in a
limited manner or as pilot projects initially.
One of the main reasons behind the slow growth of Islamic
finance in India has been the lack of an adequate legislative
framework for setting up Shariah compliant finance institutions.
Due to the lack of laws to promote this financing model and the
reluctance on the part of the legislature to amend the existing
framework regulating the banking and finance sector, individuals
and entities following Shariah rules find it difficult to invest or
undertake any ancillary financing activities in India. This also
leads to a sparsity of institutions, banking and investment
products in this sector.
Private equity and venture capital investments based on the
Islamic finance model have seen tremendous growth globally,
although the same remain nascent in the Indian markets. Off shore
investors based in countries which are a part of the OIC consider
India an untapped market; the opening of this avenue will present
innumerable options in the funding sector not just from an off
shore perspective but also for investors domestically.
A development in this sphere took place in 2014 when the Indian
capital markets regulator, the Securities and Exchange Board of
India, was all set to introduce a new type of bond in the Indian
market known as 'Sukuk bonds'. However, on the eve of this
progressive step, the plan was abandoned and the scheme never took
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Note: This article was first published in IFN (Islamic Finance
news), 17th August 2016 (Volume 13 Issue 33).
Click here to access the website.
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