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Islamic Banking Will Strengthen Democracy In India

The Government must nurture young sapling of Islamic Banking so that the country may reap the benefit of its fruit in the coming years

Photo Credit : Shutterstock


The Jeddah-based Islamic Development Bank (IDB) is getting the final touch in before setting up office in Prime Minister Narendra Modi's home state, a move that will usher Islamic finance for indigenous startups and fund Indian exports to many African and central Asian Muslim countries. Islamic finance is currently one of the fastest growing industries and is expected to reach $3 trillion by 2018 but it is still in an incipient stage. But with the an estimated 180 million Muslims living in India 'Islamic Banking' or 'Interest Free Banking' can prove to be very effective if it is looked at through the broad economic kaleidoscope and not a narrow religious prism.

The idea behind adopting Islamic Banking in India
India is a country with a 15 per cent Muslim population, highest in a non-Islamic country and second highest in the world offers huge opportunities to exploit. Broadly speaking, if in the Indian market Hindus & other people of other faiths are 100 crore, Muslim population itself is about 15 crore and stands in majority of them.

There are so many people who are looking for interest free banking and finance in the name of religious faith and it is quite feasible to have a parallel banking system based on Sharia along with a conventional one.

This is more important after the fall of the titans like Lehman Brothers because it reflects the economic downturn in the west and the need of alternative sources of FDI for the Indian economy. India needs to provide a congenial economic environment to attract the financial inducement from the Gulf region. Another opportunity is mutual fund which is based on 100% equity.

For example, Tata Mutual Fund made a pioneering attempt when, at the instance of the Barkat and some other Islamic financial group. This specially tailored scheme surprised many when they were able to raise Rs.230 million from the public in 1996 as a large number of Muslims who were considered unworthy of credit by commercial banks welcomed the idea of Islamic Banking in India. And these opportunities can prove to be safe havens for people who have collected crores in interest-free deposits, but they do not have any avenue to invest that money.

Since, the Indian banking sector has opened up considerably in the past decade or so and openness to interest-free banks is a logical next step. By 2020, the global Islamic banking industry profit pool is expected to reach $30.3 billion.

Why RBI finds it inevitable for India?
The high powered Raghuram Rajan Committee draft Report as released on 7th April 2008, strongly suggested interest-free banking as a part of recommendations made for financial sector reforms. The Committee proposed that interest free banking is another area that falls broadly in the ambit of financial infrastructure. Certain faiths prohibit the use of financial instruments that pay interest.

Invariably the question relating to revenue generation arises in absence of interest in whole system such as How the Islamic Bank will pay salaries to their staff, high rent for bank building or other establishment expenses? What kind of guarantee is offered to the depositors and what shall be the restrictions on withdrawal of funds by depositors on demand? And the biggest one being related to communal banking systems. Will it trigger the onset of Islamic banking open the doors for Hindu, Sikh or Christian banking too? The answers will be found in the long-term as and when the existing concept in adopted in India on a large scale but at least the

Counting the Benefits of Islamic Banking
With introduction of Islamic banking, Indian government will certainly gain diplomatic upper hand to make financial dealings with Muslim dominated nations especially to attract trillion dollars of equity finance from the gulf countries. Islamic Banking will clearly ameliorate the deplorable condition of the poor and marginalized segments of society. Banking products which comply with Islamic law are becoming increasingly popular, not only in the Gulf countries and far eastern states like Malaysia, but also in other developed markets such as the United Kingdom.

Reputed banks like Standard Chartered, Citibank, HBSC are operating interest free windows in several West Asian countries, Europe and USA. There is a huge potential market in India for Islamic banking products. Islamic banking finances (through its Joint ventures, partnerships and leasing)are provided by investors or banks to the borrowers with a condition that financial risk is to be borne by the investors, and other risks to be borne by the borrower. This helps even the indigent and vulnerable to get finance at a no risk and cost basis, but definitely requires other credits like strong business proposal, rational planning, skilled hands and specialized art to attract the financier.

We have seen the fall of giants in the world of financial sector like Lehman Brothers in the aftermath of the US sub-prime mortgage crisis. Therefore, it is of paramount importance to be strict about credit rating system, to circumvent any chance of further bankruptcy. Since Islamic banking adheres to strict credit rating system and prohibits indebted economic agents to avail more debt finance, it could save our financial and economic enterprises from bankruptcy.

Under Islamic banking, equity finance needs cost yield and pre-rating analysis of projects. Thus it considerably subdues the mindless competition in financial sector to get more credit shares and tends to provide strength in the financial market. Islamic banks are unaffected by the subprime mortgage crisis. In fact, now many non-Muslim countries are turning up to Islamic banking as they are immune against such crisis due to inherent business ethics within Islamic banking.

A bank in India cannot raise deposits without promising a specified rate of return to depositors, but under Sharia, returns can only be determined post-facto depending on profit. Also banks have to maintain a Statutory Liquidity Ratio (SLR), which involves locking up a substantial portion of funds either as cash, gold or in government securities. Such cash will not get any return, keeping it in gold is risky as it could depreciate and government securities come with interest.
Moreover, Islamic banking can eliminate unaccountable economic activities, as every economic activity has to be financed through legal contract and physical verification of real assets under contract. There is no room for diversion of funds. Therefore, investment in consonance with Islamic banking principles will surely boost the engine of economic growth in our country.

Modi Sarkar's nod on this issue has created a huge enthusiasm among Islamic nations as it sees the unlimited opportunities it can avail. In fact, five Indian companies, Reliance Industries, Infosys Technologies, Wipro, Tata Motors and Satyam Computer Services figure in the Standard & Poor's BRIC Sharia Index. Islamic banking is an effective mechanism to subjugate the liquidity and inflation problems along with allowing inclusive growth.

However, it won't be very surprising to see if this banking system is turned into a political issue. Certain parties might abhor the use of the word "Islamic" and could term it as anti-Indian. They might argue that the very concept of Sharia banking would go against the secular fabric of our country.


Indisputably, both systems of banking interest one and interest-free can co-exist. Let the people of the largest democracy decide democratically which one they should bank upon. So, basically the Islamic financial system has a lot to offer in terms of inclusive banking, bringing in Muslim wealth in circulation in the economy and also offering a chance for non-muslims to participate in the 'interest-free banking system.' The Government must nurture this young sapling of Islamic Banking so that the country may reap the benefit of its fruit in the coming years.