Islamic banking coming to India! But people need a crash course in how it works!!

by Aseem Rastogi on February 5, 2011


Islamic banking has been very common in the Gulf for decades now. With its interest free banking approach and a way for people to share the profits and losses, it has proved to be a benefit for masses there in a big way. The fact that it operates on the principles of sharia which over and above the points mentioned here prevents people from investing in businesses that are haraam for them like liquor and tobacco manufacturing makes it more Islamic as the name suggests.

According to a report in 2008 by BCG, Islamic banks had more than US $400 billion in assets and have been started with pretty good results in the West with many non–Muslims using its facilities.

Islamic Banking in India

And now that it’s finally coming to India after the Kerala HC has dismissed the petitions filed against it recently, people need to be educated regarding the concept. From what I have heard around and read at places, people seem to have many questions. Is Islamic banking similar to Islamic Jehad? Will it destroy the cultural fabric of our society? Will it affect the cosmopolitan culture of this country?

I guess we are not to blame to think this way. The media has sadly created such an image of the word Islamic that everything associated with it is looked upon in a negative vein . More than US $3.5 trillion are lying in the stocks of the Arab investors. Now that’s big money, isn’t it? Looks like all the sheikhs and the big shots seem to be flowing with money. But the problem is where to invest?

With the Western world increasingly isolating the Middle East after 9/11 and successive terrorist strikes, the Arabs aren’t interested to invest anywhere close to such places. Instead they are planning to look at China and India as these are the fastest growing countries on the planet.

With a vibrant democracy, good socio–economic principles and a good business climate, India offers a good option. But then according to the sharia law, the money in their hands can be invested in an interest free banking system only.

And this is where the need for modifying the banking regulations in India needs to be done. With the Kerala Industrial Development Corporation taking an 11% stake in Al Barakat Financial Services and plans to start an NBFC, a new era in banking could start for the Indian industry. Many NRIs in the Gulf are waiting for such a move to invest in India as can be seen from the offer of 10,000 cr from one Indian businessman alone based in Muscat.

The proponents of such a concept say that its participatory nature where the investors become shareholders getting a part of the profits or losses is a lovely one for this country. Probably India’s requirement of US $500 billion in infrastructure over the next five years could come from here. Who knows? But before that the Islamic banking industry needs common and internationally accepted standards on capital adequacy, risk and asset quality management

What do you think of this concept?


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