India and the Islamic Banking System

India and the Islamic Banking System 

Dr. Naved Khan

Islamic Banking System has been gradually gaining footholes in many countries. But heated arguments have been going on whether this system would be more stable than the traditional banking system. Not surprisingly India too has been drawn into the debate. Arguments for both sides have been made by economists and political leaders.  

Islamic banks are organized on the same structural pattern as conventional banks. But the use of interest is eliminated from their operations. (Siddiqui, 1983)  The Islamic banking and finance sector has been increasing its market share day by day in global finance industry. Today, over 300 Islamic banks and finance organizations have been successfully running their businesses from Dubai, LOs Angeles, London, Karachi, Jakarta, Cairo, Riyadh and many other cities in the world. Total assets of all these are well in reach of the mile-stone of $ 400 billions. (Bakhsh, 2011)  HSBC bank also started its branches as “HSBC Amanah” in some parts of the world.  It is the global Islamic financial services business of the HSBC Group. It was established in 1998 with the aim of making HSBC the leading provider of Islamic financial services worldwide. With established and successful operations in the Middle East, Asia-Pacific and Europe, HSBC Amanah represents the largest and most comprehensive Islamic proposition of any international bank. (HSBC Bank, 2011)

 The debate in India has also been going on a wide scale. Prime Minister, Dr. Mahmohan Singh said that he would ask RBI to take a look at the demand for establishing Islamic banking in India. He said that he would seek the Central Bank's views on the matter. The statement is significant as it comes against the backdrop of the RBI governor D. Subbarao's statement that Islamic banking cannot be allowed within the current rules of the RBI. “With the present set of Banking Regulation Act, Islamic banking just cannot take place as many of the banking principles in place are based on interest payments. However, Islamic banking is possible through a separate legislation.” (Ramesh, 2010)

The Muslim countries of the world have not been investing in Indian banking sector owing to the RBI policies based on interest. If India adopts the Islamic banking, capital inflow would increase to a great extent because of the investment of the Gulf countries.  India is aggressively pitching for $1 trillion worth of Sharia-compliant funds from the Gulf countries for investments in its infrastructure development; the UPA government has drafted a report on Islamic banking and RBI and finance ministry are jointly working on necessary legislative changes to implement the same. (TNN, 2010) A committee headed by the Cabinet Secretary and comprising secretaries from other ministries, including finance, has submitted a report to the government recently on the prospects of Islamic banking in the country and on drawing investments from abroad. Rajya Sabha deputy chairperson K. Rahman Khan said the government has already started similar initiatives with UTI and SBI where certain mutual fund alternatives are available for people to invest in such funds. (TNN, 2010)

No doubt, the conventional banks have been vigorously flourishing with the interest REGIME.  On the other hands, the Islamic banks have also been thriving by making their transactions without, charging or offering, interest because interest is prohibited in Islam.  Conventional system of banking has been successfully using the tool of credit creation for making money and for controlling money market.  Islamic banks have also been creating credit but unlike the conventional banks, they have not been charging or offering interest.  In lieu of charging interest Islamic banks have been using some other tools, like Mudaraba, Musharka, Murabaha, Ijarah etc for credit creation or for controlling money market.  

But, of course, the implementation of Islamic Banking System in India is not an easy task.  Almost all the RBI policies related to finance are based on interest. Adoption of this system may lead to re-framing these policies. The task is not so easy but some steps can be taken to initiate the changes through legislation.  The very well known example of this system in India is Muslim Fund (an Islamic Bank) started in Deoband around 40 years ago and has been doing well even today.

As the Islamic banking system is against exploitation, it will facilitate the development of the poor and the marginalized.  The system should be given a chance in developing countries like India.

Dr. Mohd Naved Khan

UGC Academic Staff College

AMU, Aligarh

Notes and References:

HSBC Bank, http://www.hsbcamanah.com/amanah/newsroom/pressreleases/qatar_ branch. html.  Accessed on 12 March 2011

Ramesh, P.R., “PM to Seek RBI's Views on Islamic Banking”, The Economic Times, Kuala Lampur, 28 October 2010

Siddiqi, M.N., 'Banking Without Interest' The Islamic Foundation, Leicester, UK, 1983.

TNN “Government may allow Islamic banking, eyes $1tn funds”, The Times of India, New Delhi, 28 January 2010.