Are Islamic Banks to Enter Indian Market?
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1 September 2010Prathima Rajan
Islamic banking has become a major global industry, with growth of 10% to 15% per year over the last decade. Islamic Banking is particularly developed in the Middle East, is definitively on the rise in the Asia-Pacific region, and is in an infancy stage in North Africa and Europe. There are about 300 Islamic banking institutions, and, as the market is growing rapidly, there is still a huge potential for entrants in Islamic banking Islamic banking is yet to make its headway into Indian market as currently only Non Banking Financial Institutions are allowed to operate under Shariah principles. Since the Shariah principles directly conflict with conventional banking principles, making it difficult for Indian banks to offer Islamic banking products. For instance Al Wadiah (for saving bank account): Section 21 of the Banking Regulation (BA) Act requires payment of interest on such deposits; thus, interest-free deposit and a simple charging of premium or Hiba is not permissible. Likewise Mudharabh (for term deposit or investment) under section 21 of the BR Act disallows such products where the bank can invest the money in equity funds (in India, equity exposure is determined by a separate set of rules), and the customer has complete freedom in the management. Reserve bank of India has formed a committee (Raghuram Rajan Committee) to look in to the matter and the Committee believes that it would be possible, through appropriate measures, to create a framework for such products without any adverse systemic risk impact. India with a 15% Muslim population, the highest in a non-Islamic country and second highest in the world thus offers huge potential to exploit. The size of the market will be very large as the Indian population is over a billion thus making it about 150 million Muslim population and majority of them, in the name of religious faith, are looking for interest free banking and finance. However, realistically speaking, Indian market will have to wait for another 2 – 3 years for an Islamic bank to become operational. Apart from this awareness of Islamic banking and products, dearth for Shariah scholars, designing Shariah compliant products are still are challenge.