The policy makers of our country have started realising that Muslims need to be brought into the mainstream of our economy. Till date the Muslim community has largely kept from capital markets as most of them do not fulfil the criteria set by Shari’ah.
Hence there are the speculations that Islamic Banking and, Shari’ah Indexes providing guidance and accurate information about companies engaging in Shari’ah compliant businesses will open way for the second largest majority of the country to have their share in the current financial system.
Islamic Banking is also required for eradicating economic imbalance in the society created due to the current system of finance.
Islamic finance/banking is a system where all the financial activity is consistent with the principles of Shari’ah: no lending or accepting of money on interest and no investment in haram (unlawful) activities like alcohol, gambling and pork, etc. Islamic finance works on profit and loss sharing basis.
At present the global Islamic finance industry is growing at the rate of 15% and the total asset under its management has crossed US$ 1 trillion. With the present growth rate, it will increase to an estimated US$ 2.8 trillion by 2015.
India is an emerging economy. As said in Goldman Sachs report, “BRICs and Beyond, January 2007”, it will be the world’s largest economy in future. India’s GDP (in USD terms) is expected to surpass that of the US before 2050, making it the world’s second largest economy. A recent research study concluded that by 2015 India’s market cap is expected to grow to $2.6 trillion making India the fifth largest in the world. Its GDP is also expected to grow to $2.9 trillion and so India will be the world’s eighth largest and fastest economy by 2015.
Despite India’s better growth rates in the recent years, the number of the poor living below poverty line has increased. The household income has declined while corporate sector’s income has increased. The fruits of growth seem to have favoured more the corporate sector than vast sections of the population.
With low collateral strength the farmers and poor workers associated with unorganised sector manufacturing units and retail service outlets, are unable to get more debt finance from SCBs. The schemes of loan waiver have caused the debt markets shrink in agriculture sector.
Even the Self Help Groups (SHGs) and Joint Liability Group (JLG) schemes of Micro Finance could not add livelihood stocks for the poor and vulnerable, leading to an economic imbalance in the society.
It is no secret that hundreds of thousands of farmers have committed suicide due to their inability to pay interest on the loans taken for their crops. Farmers find themselves in lurch when the crops fail either due to poor monsoon or other factors beyond their control. They approach private moneylenders for loan which are available only at exorbitantly high interest rates.
The conventional system of finance has only added to the misery of poor lots. With a large section of a county remaining financially unstable, it cannot traverse the way to inclusive growth.
A system which can help in justifiable redistribution of wealth in the society has become the need of time. Islamic banking/finance may prove to be a better alternative. The core principle of Islamic banking is sharing in both profit and loss.
It is by time, India takes a step to introduce Islamic banking in the country to remove the economic imbalance. Islamic finance is required for achieving Inclusive Growth of India. Insights into the banking reveal its potential to build infrastructure for our agriculture sector where the economies of scale are hostile to adding new infrastructure to the farm worker households.
Observing the suicide by debt laden farmers in Vidarbha, father of India’s green revolution, M.S. Swaminathan said that this suicide can be stopped by bringing Islamic banking in India. Islamic banking could help our unorganised sector due to its non-insistence on collateral as a precondition for lending even small sums of money.
Besides farmers, Indian Muslims – 13.9% of total population – are the most disadvantaged community in the financial sector, as per the Sachar Committee Report. Over 80% of the community is financially excluded, a major reason of which, according to experts, is interest-based functioning of our financial system. The number of Muslims opting for jobs in financial sector is very insignificant – in RBI only 0.78% and 2.2% in Scheduled Commercial Banks. Moreover, the Sachar Report has it that the share of Indian Muslims is 7.4% in saving account and only 4.7% in Credit, which translates into annual loss of around 69000 crore for the community.
The Muslim community too needs to be brought into the main-stream economy. Inclusive growth of our country cannot be achieved unless serious measures are taken to bring the community into the loop of financial system.
Muslims as well as other economically backward sections of the society, need financial assistance to keep pace with the changing economy, for a better future of their incoming generations and of course for higher education. They need: to save their earnings for future, to invest for wealth maximisation and to fund to run their enterprises.
The Indian government should make provisions to open opportunities for these financially excluded sections.
Here comes the Islamic banking to help the government reduce the gap between rich and poor through its redistribution effects and include all Indians in the growth.
In fact, the government has already taken certain steps in this direction. In 2005 a study group was established by Reserve Bank of India (RBI) under the Chairmanship of Mr. Anand Sinha to study the prospects of Islamic banking under the current regulatory environment. Later on, another high level committee chaired by Chief Economist IMF, Prof. Raghuramrajan recommended to the government of India for allowing Islamic banking in the country. The Committee also allayed the fear raised by a certain section of our policymakers that permission of Islamic banking can cause systematic risk to our financial system.
Undoubtedly, under the present regulatory framework, Islamic banking is not possible in India. But we should see it has been accommodated without substantial changes in the financial regulations of other secular countries like the UK, USA and Singapore etc. Apart from banking, there are other areas in our financial system wherein Islamic financing can be practised although at some limited scale.
Some non-banking financial institutions have already been providing interest-free and Shari’ah-compliant funding options. This window of opportunity could be exploited at higher levels.
The importance of Islamic finance has been realised by some big corporates in India. To take an example, Reliance launched Shari’ah compliant PMS and so as many others.
These small steps were fruitful and recently good news came that RBI is considering starting Islamic NBFCs in India. This can be a step towards opening doors for Islamic banking in the country.
In the Mutual fund industry, too, few but big mutual funds have launched Shari’ah compliant scheme. Tatas were the first one to launch a product targeting Muslim community. In 1996 they launched Tata Core Sector Equity Fund which rose about 23 crores.
A full-fledged Shari’ah fund targeting Indian investors was launched by Taurus Mutual Fund (known as Taurus ethical fund). This was first time in Indian corporate history that an external Shari’ah advisory body was roped in to guide the fund on Shari’ah matters.
All these Shari’ah related funds have done extremely well. And perhaps that is the reason why a substantial portion of investments in these funds is from non-Muslim community. This bode well for the nascent Islamic finance business in the country. This also removes certain misconception of the people at large that Shari’ah finance is all about Muslims.
Also in insurance sector, some corporates have tried to lure Muslims through Shari’ah compliant schemes. Owing to the major insurance companies investing in alcohol, pork, gambling and other Islamically prohibited products, Muslims treated the sector as taboo.
The Muslim community is in dire need of insurance coverage because of the rising cost of healthcare and at the same time insurance coverage should be Islamically viable.
So, Bajaj Allianz Life Insurance launched pure stock pension plan where the total investment is in equity of Shari’ah compliant firm. The pure stock pension plan saw a return of 97% as against a 72% return by the Nifty Index, as on December 31, 2009.
Other player in Islamic insurance in India is Tata AIG Life insurance which offers ‘select equity fund’ and ‘future select equity fund’ which are Shari’ah compliant. These big corporate players have shown that Islamic insurance/finance is possible even in India. This shows that there is enough opportunity of Islamic finance in India.
It is alleged that Indian stock market is not suitable for Shari’ah compliant investors. But there is a large number of companies which adhere to Shari’ah, giving an ample opportunity of investment in Indian market. Of all the companies listed on stock exchange in different years from 2007 to 2010, some 1046 to 1191 companies are Shari’ah compliant.
Almost 32.9% of the total number of companies is Shari’ah compliant on the basis of nature of business and this is quite sufficient for investors to build viable portfolios on Shari’ah compliant basis.
The above details are made available by the research of TASIS (Taqwaa Advisory and Shari’ah Investments Solution Pvt Ltd.). TASIS is the India’s first Shari’ah advisory firm and provides Shari’ah solution for the institutions wanting to come up with Shari’ah complaint business scheme.
Recently, TASIS working jointly with the BSE has launched a Shari’ah Index called the BSE TASIS Shari’ah 50. It is hoped that this Index will help forward the cause of financial inclusion of the Muslim community in India which so far has kept from the Capital markets because of lack of information regarding the company stocks they could invest in.
This Index will serve as a guide to them to invest in the Shari’ah complaint stocks. This Index is not beneficial for the Muslim community alone but for the other community also. This Index also screens out companies involved in businesses dealing with tobacco, pork, gambling, vulgar entertainment and interest based transactions. These things are prohibited in other religions as well.
So the above examples show that there are enough prospects for Islamic finance in India. Small but important steps have been taken in this field and these can be milestones in the field of Islamic finance. The future of Islamic finance could be very bright but it would require constant labour and efforts. As the economy of India has been showing a high growth rate and its GDP is expected to reach US$ 2.9 trillion. There will be vast opportunities for investments in the country.
Our policy makers need to be flexible in their approach. In the years to come Islamic Finance could do wonders to the country as a whole and put India in the league with the world’s economic powerhouses. We need to realise that the secular, large economies of the world that have allowed Islamic banking in their countries are not doing this for the sake of appeasement of their miniscule Muslim population but because of pure business sense. There is a lesson in this that we can learn.
[The writer is a Product Development Executive with TASIS. Email: firstname.lastname@example.org]