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India offers vast scope for Islamic banking

It could expand the number of new customers and increase fund flow from the Gulf

  • By K. Raveendran
  • Published: 13:47 August 27, 2012
  • Gulf News

Dubai: Islamic banking may be in for some windfall gains if a reported move by Indian authorities to introduce some form of interest-free banking, aimed at bringing the country’s unbanked Muslim populations into mainstream banking, bears fruit.

If the initiative is taken to its logical conclusion, the Indian banking sector too stands to gain significantly as it will add huge numbers of new customers, while opening up a channel for substantial fund flow from regions such as the Gulf.

The Indian banking sector, which grabbed international news headlines last week, although for the wrong reasons — a nation-wide strike by employees of public sector banks and figuring in the controversy centering on Iran sanctions-related breaches by some international banking majors — however, provided some clues to the outside world about the kind of clout it enjoys in terms of customer base and business volumes.

Over a million employees of public sector banks went on a two-day strike protesting against possible financial reforms that might open up the banking sector to foreign ownership beyond the current ceiling of 20 per cent, which the employees feel will dilute their bargaining power and benefits. Given that public sector banks account for only 70 per cent of the overall banking sector, the country’s bank employee population is roughly of the same size as the population of Qatar. That should give an idea about the size of India’s banking sector.

There are in all 27 public sector banks in the country, with 87,000 branches and 63,000 ATMs, accounting for about 75 per cent of the country’s total banking business. Apart from these, there are a dozen old generation private sector banks and eight foreign banks, including HSBC, Standard Chartered, Citibank, etc.

Untapped market

Various estimates put the size of the unbanked Muslim population of India at about half of their total population, whose members are known to prefer keeping their savings at home and, therefore, excluded from the regular banking channels. With the world’s third largest Muslim population, one out of every 10 Muslims in the world live in India and the country’s Muslim population is projected to increase from 177.3 million in 2010 to 236.2 million in 2030, accounting for over 15 per cent of India’s total population by then. These numbers would sound like music to the ears of any banking enthusiast.

Yet, the introduction of Islamic banking in India continues to remain a tough call. Apart from its political and religious connotations, the country’s banking regulations do not permit interest-free banking. And this means that Islamic financial products, in whatever form these might be attempted, will have to be preceded by comprehensive changes to the prevailing norms.

Selective attempts to introduce Islamic finance-modelled products by private sector finance companies in the past have all failed due to regulatory issues as well as opposition from political parties. But a new initiative by the National Commission for Minorities, a constitutional body charged with the welfare of minority groups, in support of the idea has prompted the federal finance ministry to refer the issue to the Reserve Bank of India, the Indian central bank, for a fresh look.

Also under scrutiny will be the possibility of allowing some banks and non-banking finance companies to introduce some form of an Islamic window, offering non-interest bearing products and services, as it has been done in other parts of the world, including the UK, US, Malaysia, Singapore, etc.

Deliberations of working group

A working group of the Reserve Bank of India, which examined the financial instruments used in Islamic banking in 2007, had concluded that it was not feasible for Indian banks to offer Islamic banking at home or even outside the country, where such products may be available as a matter of routine.

In the following year, however, a committee set up to study financial reforms had suggested the introduction of interest-free banking in India through the creation of appropriate frameworks and measures to prevent systemic risks. Two major considerations weighed by the committee were the exclusion of religious faiths prohibiting earning of interest in the banking system as it exists today, as well as the possible access to huge Islamic fund resources in regions like the Middle East, where Islamic finance is the fastest growing segment of the banking industry.

While a number of uncertainties still remain, there is no doubt that the outcome of the new deliberations will be keenly watched both inside and outside the country.

— The writer is a UAE-based journalist

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