Dr. Shariq Nisar, PhD in Economics from Mumbai, looks at the real need for Islamic banking in India
The development of Islamic banking in India stems from a public need for an alternative banking system that is both capable of delivering sound banking and financial services and that is compliant with Shari'ah.
As a matter of fact, the development of Shari'ah compliant financial institutions in India started well before the establishment of a number of the most prominent Islamic financial institutions worldwide. But due to certain legal issues and constraints, many of these these institutions could not grow beyond a certain limit, and those that did grow could not sustain themselves at that level over time.
There was therefore always a need to regulate financial institutions catering to the religious, financial and social requirements of Indian Muslims in a way that depositors in these institutions could be assured of the viability and stability. It also helps to bring more and more of their money into formal banking institutions in the country.
Religious reasons are without doubt some of the biggest hurdles that Indian Muslims need to overcome in keeping their money in conventional banks that are perceived to be usurious and consequently irreligious. A large number of Indian Muslims even avoid serving in financial institutions of the country. This is why we see that Muslim participation in banking services is even lower than Muslim participation in Indian Administrative Services (IAS).
Muslim non-participation in the country's formal banking institutions has not only hampered their economic prospects, it has also blocked a large swathe of money belonging to the Muslim community from participating in national development. Sometimes this is construed as Muslim unwillingness to participate in the economic development of the country, yet it is the responsibility of the policy makers in the country to understand the real cause of the problem. The Ministry of Finance's advice to RBI to draw a roadmap for Islamic banking is a step in the right direction. This, apart from bringing Indian Muslims into the country's financial system, will also induce a lot of big financial players from the Middle East to participate in the developmental efforts in India, particularly the infrastructure sector.
This may require some changes in the country's present banking regulation, but the large economic and social benefit that will accrue will serve India's national interest. The nature of Islamic banking and finance is such that it automatically avoids speculation, gambling and other unethical practices. Furthermore, there are other goals and objectives that will also help serve the national aim of achieving growth with social justice.
Throughout the world, Islamic banking has shown rapid development in terms of total assets. Not only in the predominantly Muslim countries, but also in countries that are strictly secular such as USA, UK, Germany, Sweden, Luxembourg and others that have small Muslim populations.
It is an established principle that the government wants to help the development of the economically backward sections. In India, Muslims are often backward socially, as well as economically. The main reason for this is their reservations about interest. Since they form an important part of India, it is necessary to provide them and other interest-averse sections with an alternative to the present banking system. This will speed up the development process for the country as a whole.
If an interest-free bank is established in India, it could operate viably, by attracting sufficient deposits and grow at a respectable rate. It could also be able to make ends meet. The objectives of government policy in respect of control of credit and direction of the economy will also be easily achieved by resorting to slightly different instruments and methods of control.
© Banker Middle East 2005
