Islamic banking refers to a system of banking or banking activity that is consistent with Islamic law (Sharia) principles and guided by Islamic economics. In particular, Islamic law prohibits usury, the collection and payment of interest, also commonly called riba in Islamic discourse.
The Difference with Traditional Finance
- The first is the no-interest rule. That is, you can not earn interest on a loan nor be required to pay interest on loans.
- The second difference is that money is to be invested only in worthy causes. This is largely equivalent to the western concept of socially responsible investing.
- The Islamic financial model works on the basis of risk sharing.
- The customer and the bank share the risk of any investment on agreed terms, and divide any profits between them.
- The main categories within Islamic finance are: Ijara, Ijara-wa-iqtina, Mudaraba, Murabaha and Musharaka.
- Ijara is a leasing agreement whereby the bank buys an item for a customer and then leases it back over a specific period.
- Ijara-wa-Iqtina is a similar arrangement, except that the customer is able to buy the item at the end of the contract.
- Mudaraba offers specialist investment by a financial expert in which the bank and the customer shares any profits.
- Customers risks losing their money if the investment is unsuccessful, although the bank will not charge a handling fee unless it turns a profit.
- Murabaha is a form of credit which enables customers to make a purchase without having to take out an interest bearing loan. The bank buys an item and then sells it on to the customer on a deferred basis.
- Musharaka is a investment partnership in which profit sharing terms are agreed in advance, and losses are pegged to the amount invested.
- Spread across 70 countries, Islamic Finance has grown to almost a trillion dollar industry.
- The Prospect for the industry are quite bright given strong demand for financial services from a large segment of about 1.4 billion Muslim populations .
- Islamic Finance is growing at a rapid pace of 15-20% per annum globally, currently estimated to be worth approximately USD $ 300 Billion today.
- Retail and Investment banking Shari’ah compliant products are helping to unlock trillions of dollars of funds lying dead with high networked individuals and corporate world globally, who follow Shari’ah principles in their day to day business and investment and thus would not participate in usual financial transactions.
- Besides being the world’s second most populous country India is also the world’s second most populous Muslim country.
- The Indian Muslim market population is 151 million strong.
- DinarStandard estimates their total annual household income of $48 billion
Macro Economic Trends Favouring Indian Expansion
- Even though Islamic investors turned to Islamic countries like Malaysia, Pakistan and Indonesia, their economies provide limited opportunities and too inadequate to absorb the huge investment potential of the Arab Islamic countries. So, the Islamic investors are now coming forward to invest in India, as it is the best option with a large number of companies qualifying Shariah investment norms
- Changing political situation in America and European countries after the terror attack on World Trade Center and falling GDPs of Europe and North America have forced rich Islamic investors from the Gulf countries to look for investment opportunities in South East Asian countries, including India.
- There are several districts where Muslims constitute a majority and in a number of industries Muslims have traditionally maintained a larger presence.
- Since the last two decades, India has continuously managed an average saving rate of above 20 percent of the GDP.
- Considering their relative economic backwardness even a 15 percent saving rate for Muslims would place over Rs. 40 billion of investible resources with them annually. Besides, there are properties worth billions under the control of Awqaf (Trusts). Zakat (2.5% tax imposed on the wealth of rich people for distribution among the poor and destitute) potential of the Indian Muslims still remains largely untapped and underutilized.
- Indians working in Middle East and Middle Eastern companies flush with petrodollars can also be a good source of financial resources for Indian financial institutions offering Islamically permissible financial services.
Key Developments in India
- Taurus Asset Management plans to launch India's first Islamic or shariah-compliant fund .
- According to sources in the industry, Islamic investments close to $750 million have already been made in the capital market and infrastructure sector in the past few months.
- Kotak Mahindra Mutual Fund has launched an Islamic fund worth $300 million to enable Islamic investors to invest in Indian stocks in a shariah-compliant way. A few months ago, a Bangalore-based venture capital firm named '2iCapital' placed 250 million in an Islamic fund.
- Kuwait-based Khaleej Finance and Investment also recently invested $250 million in shariah-compliant venture in India and Beary's Investments, a Middle-East investment group, made an investment of over $50 million in real estate in Bangalore just two months ago.
Islamic Finance is in the early infancy stage in India and is expected to be a big business in the coming years