Why India Needs Islamic Banking

Transcript

Challenges or Islamic banking in India Regulatory ramework: • Indian banking is governed by the ollowing: Banking Regulation Act 1949, RBI Act 1934, and Cooperative Societies Act and Negotiable Instruments Act 1961.Many sections o the said acts are in opposition to the basic tenets o Islamic banking. For instance, payment o interest on deposits is mandatory as per section 21 o the Banking Regulation Act; sections 5(b) and 5(c); specically prohibit investments based on prot and loss sharing; and section 8 o the Banking Regulation Act 1949, which reads “No banking company shall directly or indirectly deal in buying or selling or bartering o goods.” directly contradicts the Murabaha concept o Islamic banking which allows banks to enter into sale and purchase agreements. • The interest earned on xed deposits is subject to TDS as per the Income Tax Act 1961, whereas the prot on Islamic banking deposits is treated diferently. Support inrastructure • Commercial banks borrow rom other banks or the RBI to meet their short term unding requirements, but Islamic banks can’t do so because it involves interest. • Islamic banks are required to closely monitor their investments in various businesses, as well as ensure that the investee rms are managed properly. This calls or expensive supervisory inrastructure. Dearth o Islamic banking proessionals:  There is a serious dearth o Islamic banking experts and trained personnel in India. Although there are a ew training institutes, they are unable to compensate or the shortage o  experienced Islamic banking proessionals. Lack o awareness: • There is a lack o awareness about Islamic Banking. Most people mistakenly believe  Thought Paper 04 derivative contracts o the kind which led to the 2008 sub-prime crisis. Apart rom being a viable alternative to capitalist nancial systems prone to extreme risks, the interest-ree solutions o Islamic Banking could restore equilibrium in Indian society by providing succour to debt-ridden armers, labourers and other marginalized groups. Hence, Islamic Banking has potential as a tool o nancial inclusion. As per the Pew Research Centre, India was home to nearly 177 million Muslims in 2010, making it the country with the third largest Muslim population in the world. A considerable number o Indian Muslims either invest in non-interest bearing accounts or donate the interest rom interest-bearing accounts to charity. There is an opportunity or Islamic banks to attract unds that interest paying conventional banks cannot.  Traditionally, Indians practised participatory banking by creating cooperative banks, non- banking nancial institutions and micro credit programmes; the same platorm can be used to introduce Islamic Banking. According to the Planning Commission, India is acing a unding gap o US$ 300 billion – or 30% – in meeting its inrastructure unding requirement until 2017. Following the example o countries such as Malaysia, Indonesia, UK, France and Germany, India could use Islamic nancial products such as Sukuk (long term bond) to und inrastructure and other sectors. Specically, India could attract the Middle East’s high investible surplus through Islamic banking and nance. Conclusion Growth o Islamic nance depends on two important actors: domestic demand and India’s role in the globalization o the nancial sector. By not introducing Islamic nance, India is losing the opportunity o garnering capital rom a large section o the Muslim population as well as rom Islamic nations in the Middle East and elsewhere. Islamic nance is an idea whose time has come. It is time the Indian Government recognized this signicant opportunity.  Thought Paper 05 that it is only meant or Muslims, whereas in Malaysia, UK and elsewhere, 40% o the customers o Islamic Banks are Non-Muslims (4) . • Banks should educate customers regarding the benets o Islamic Banking. Admittedly, this is a herculean task, given that Islamic Deposits like Mudarabah Deposit, do not guarantee principal, nor pay a xed return. Suggestions • The latest RBI directive is clear that Islamic banking can’t be adopted in India under the current legal ramework. India needs to ollow the UK example and introduce new laws to govern the Islamic Banking business. • More efort is required in the area o training and education; the State can play a pivotal role in promoting this subject by including it in the curriculum o proessional courses. • The myth that Islamic banking is only or Muslims must be dispelled, and awareness o  Islamic Banking as an alternative, ethical orm o banking should be created. Public seminars and discussions are a good way to do this. Reerences 1. www.im.org 2. TwoCircles.net 3. www.dnaindia.com/analysis/report_islamic- banking-is-not-or-muslims-alone_1669157 4. twocircles.net/node/181672 5. World Islamic Banking Competitiveness report 2011-12 published in www.ey.com 6. http://timesondia.indiatimes.com Riaz Akhtar Senior Consultant, Inosys Babita Talreja Principal Consultant, Inosys Finacle from Infosys partners with banks to transform process, product and customer experience, arming them with ‘accelerated innovation’ that is key to building tomorrow’s bank. About Finacle © 2012 Infosys Limited, Bangalore, India, Infosys believes the information in this publication is accurate as of its publication date; such information is subject to change without notice. Infosys acknowledges the proprietary rights of the trademarks and product names of other companies mentioned in this document. www.infosys.com/finacle For more information, contact   [email protected]