ISLAMIC FINANCE FOR FINANCIAL INCLUSION AND INFRASTRUCTURE DEVELOPMENT IN INDIA

India is on track to overtake the UK to become the world’s fifth-largest economy in 2018, according to data and forecasts from the IMF. Soon it will trail only Germany and the ‘big three’ – the US, China and Japan. However, the Indian banking system is gasping for breath with high non-performing assets and growth plummeting by 2% after the twin blows of demonetization and the introduction of the single Goods and Services Tax (GST) throughout the country. H ABDUR RAQEEB writes.

Demonetization of large denomination currency notes in November 2016 invalidated 86% of the cash in circulation in an economy where more than 90% of transactions were cash based and the countrywide introduction of GST created short-term uncertainty. In this scenario, there is little possibility of the government turning toward the introduction of Islamic finance and banking until the national election to the parliament takes place in 2019.

India’s central bank – the Reserve Bank of India (RBI) – has been considering Islamic banking’s entry since Dr Raghuram Rajan’s committee recommended it in 2008. In 2015, an RBI committee was tasked to study financial inclusion in India on the specific instructions of Prime Minister Narendra Modi. The Committee on Medium-term Path on Financial Inclusion, headed by Deepak Mohanty, released a report detailing the advantages of adopting an Islamic finance-based model in India, recommending ‘interest free windows’ in existing conventional banks. The report states: “One area that has not been adequately addressed is the role of interest-free banking in financial inclusion. Globally, interest free banking, also known as Islamic banking, has witnessed a significant increase, especially in the wake of the financial crisis.” Finally it recommended: “Commercial banks in India may be enabled to open specialized interest-free windows with simple products ... .”

 In 2014, the finance ministry asked the RBI to form a high-level interdepartmental group (IDG) to examine the legal, technical and regulatory issues regarding the feasibility of introducing Islamic banking. The IDG visited several countries like Malaysia and Mauritius and submitted a technical feasibility report that recommended allowing interest-free windows in conventional banks with most of the Islamic products except Musharakah under the name of ‘participator banking’ by a notification of the government.

Based on the aforementioned two reports, the RBI went to the extent of mentioning in its Annual Report 2015-16 that an interest free option in banking will be provided in the year 2016-17. When no steps were taken by the government, a query under an RTI (right to information) was submitted to which the central bank replied that the required notification was withheld by the government after considering the “wider and equal opportunities available to all citizens to access banking and formal finance”.

It is worth mentioning that way back in 2012, the Indian Centre for Islamic Finance (ICIF) after a roundtable discussion at the National Commission of Minorities with the Finance Ministry submitted to the RBI a document prepared in collaboration with Dar Al Sharia (Dubai) and India Law Services (Mumbai) for the introduction of Islamic finance products through interest-free windows in a few banks by a notification of the government thereby making a breakthrough for the introduction of Islamic banking in the country.

Before that, the RBI insisted (based on the Anand Sinha Committee Report) that interest-free Islamic banking can only be introduced by amending the Indian Banking Regulations, which required a majority of parliament members voting for amendments which were not possible to undertake in the prevailing political scenario, therefore to begin with, a way out was proposed to introduce interest free windows with a notification by the government.

 India’s largest public sector bank, the State Bank of India, deferred the launch of its Shariah Equity Fund after announcing the date. However, we are still waiting for the launch even though the matter was raised in parliament and discussions held with the finance minister.

According to TASIS, a Mumbai-based Shariah advisory institution which launched the BSE Tasis Shariah 50 Index along with the Bombay Stock Exchange, about 20% of Indian stocks are Shariah compliant in India and both Muslims and the Jain community are investing in a big way in these Shariah compliant stocks. According to research by Ideal Ratings, a US-based global Shariah compliance product screening group, the whole of the South Asian market is practically untapped for Islamic finance and in these markets Indian stocks would be amount the top 50 for Shariah compliant investments.

Another Islamic financial product that has attracted attention is Sukuk where the Ministry of Finance formed a committee that reviewed the legal, regulatory and taxation issues impacting the market for Islamic finance bonds. An RBI study on the corporate bond markets was lauded, especially the Malaysian Islamic bond market, for the innovative ways Sukuk are drawing investors.

At a G-20 meeting in Turkey, finance ministers and central bank governors (based on a report prepared by the World Bank and the IDB) discussed how Sukuk can be used more widely as a financing tool. The RBI as well as the National Institution for Transforming India confirmed to the ICIF that Sukuk are under active consideration for infrastructure developments.

A concrete step toward ushering in Islamic finance into India was the execution of an MoU between the IDB and the Export-Import Bank of India (EXIM Bank). A commercial line of credit amounting to US$100 million is to be extended by the Islamic Corporation for the Development of the Private Sector to EXIM Bank. The SME sector was the primary focus of IDB funding and investments in India. Due to the change in presidents of the IDB, there seems to be a delay in providing funding, but of late the new president has shown interest in it.

Recently, at the third conference of Asian Infrastructure Investment Bank held in Mumbai, IDB President Dr Bandar Hajjar announced that it is exploring joint opportunities with other multilateral development banks to invest in India’s infrastructure development. It is a welcome step as India requires around US$1.5 trillion in investment over the next 10 years to bridge the existing infrastructure deficit.

A major step taken toward a breakthrough in the introduction of interest-free Islamic finance and banking is the public interest litigation filed by the J&K Peoples Forum, an NGO, which approached the JK High Court to issue an appropriate order to the RBI and J&K government for “prescribing [the] appropriate notification to permit [the] opening of Shariah banking windows by Jammu and Kashmir Bank at all its branches”. The petition was admitted by the High Court and both the finance ministry and the RBI have been asked to submit their replies.

Several interest-free microfinance societies based on the Multi State Co-operative Societies Act like Sanghamam, Alkhair, mutually aided cooperative societies under the Sahulat Co-operative Society and Janseva and others like Rahat & Khidmat are operating successfully in several states in the country.

The first non-banking financial company (NBFC), Alternative Investment & Credit, is facing the cancelation of its RBI registration case in court. Another NBFC approved by the regulators to operate on Shariah principles is Cheraman Financial Services in Cochin, Kerala which is progressing steadily with initiatives like the construction of a mall on Waqf property and leasing medical equipment to hospitals and such.

A few venture capital initiatives like Secura Housing in Kerala and other Shariah compliant funds like Mount Judi of Rehbar have commenced. Due to the reluctance of the government and regulators in introducing Islamic finance in banking and equity funds, a few Ponzi schemes are also operating in the market and falsely claiming to be Shariah compliant.

The PHD Chamber of Commerce & Industry, the third-largest in India, held an international conference on interest free and equitable financing to meet the financing requirements in various areas of the economy, focusing on programs like Smart Cities, Digital India, Make in India and areas like affordable housing, agriculture and the supply chain.

According to a recent report, it has been estimated that the global expenditure of Muslim consumers in food and lifestyle sectors is expected to reach US$3.7 trillion by 2019, growing at a compound annual growth rate of 10.8%. India, which is home to around 200 million Muslims, will have a major share of the Halal business. During the 10th India Foodex 2018 and the 10th AgriTech India 2018 events, a new vertical ‘Global Halal Expo India 2018’ event was proposed. IBA Halal Care, India’s first Halal certified cosmetics brand with a wide range of products, is successfully run by two Jain community sisters in Ahmedabad, Gujarat.

In a statement to the Indian parliament, the minister of corporate affairs said that the curriculum of chartered accountancy courses was recently revised by the Institute of Chartered Accountants of India (ICAI). Besides including chapters on corporate social responsibility and GST, the ICAI also added Islamic finance under the subject of strategic financial management.

Anil Bokil of Arthakranti, a Pune-based financial think tank, who reportedly suggested to Modi some of the key measures to contain the flow of black money in the economy including banning big currency notes, opined that Arthakranti is the closest to Islamic banking, which prohibits the widespread use of interest.

A not-for-profit health assurance scheme called Uplift Mutuals Biradaree started operating in April this year at two of Mumbai’s Muslim-majority localities. The scheme works on the model of mutual assurance, with certain features of Shariah compliant finance very similar to Takaful. When the Select Committee of the Upper House of Parliament carried out a review to amend the insurance law in 2015, the ICIF proposed to include mutual and cooperative insurance like Takaful; the committee included it in the final report and will look into this option in the future. re-Takaful has been operating successfully under general insurance in India.

Baituzzakat Kerala organized an international conference toward popularizing the concept of institutionalization of Zakat in the country in Cochin, Kerala recently where it saw the participation of several internationally renowned individuals and institutions. Two documents published by UNDP detailing the role of Zakat and both Zakat and Islamic banking in supporting the UN Sustainable Development Goals have created financial literacy among the masses and encouraged the population to institutionalize Zakat in the light of Maqasid Shariah in India.

The outcome of the national election in 2019 is eagerly awaited. Once thought to be a cakewalk for the ruling party, this election seems to be turning into a contest. Whoever wins and comes into power, it is hoped that concrete steps will be taken toward introducing Islamic finance and banking for the financial inclusion of the minorities and the marginalized as well as for infrastructure development in India.

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