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Re-imagining Islamic banking

For now, the RBI has ruled out the possibility of Islamic banking in India unless existing laws are amended. But worldwide, Islamic banking is one of the fastest growing financial sectors with current global Shariah-compliant banking assets estimated at $1,166 billion, up from $1,086 billion in 2011.   

Since the launch of the first Islamic bank in the 60s, the model has gained a lot of traction in countries with significant Muslim communities. But the UK, with a Muslim community representing 3 percent of the population, is ranked ninth globally with Shariah-compliant assets of $19 billion that surpass even predominantly Muslim countries like Pakistan, Bangladesh, Turkey and Egypt.

The development impetus for Islamic banking in the UK has been based on an acknowledgement of its benefits to the economy. But even so, the Financial Services Authority's (FSA) ‘no obstacles, but no special favours’ approach recognizes the impracticality of defining separate standards and applies the same principles to authorize financial institutions, conventional and Islamic. 

The FSA also retains a flexibility to address product level inconsistencies. For instance, under Shariah law, customers assume the risk of capital loss on deposits while the FSA mandates capital certainty. Banks addressed this compliance mismatch by giving customers the option of full deposit protection, which they could choose not to take on religious grounds. 

Clearly, India is losing a significant opportunity here.  To cite a specific instance, the asset-backed risk-shared model of Islamic finance is emerging as a more viable funding source for infrastructure projects across the world. In this country, where infrastructure development is a critical determinant of GDP growth rate, Islamic finance can help address the huge infrastructure deficit.   

Islamic banking no longer refers to a niche model targeted at a particular group of customers.  Certain inherent standardization and compliance issues of Islamic banking are currently being addressed by global industry bodies like the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) and the Islamic Financial Services Board (IFSB). Existing regulation, therefore, cannot be the sole criterion against which to judge the validity of Shariah-compliant finance. Governments and regulators need to consider the broader implications of the model and make the systemic changes required to realize the potential of Islamic banking$FILE/IBCRReport2011(LR)%20Final.pdf


Comments: (1)

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 19 March, 2013, 17:35Be the first to give this comment the thumbs up 0 likes

This just out: 

Islamic banking could become available in India

Earlier, the Reserve Bank of India (RBI) had come out against the introduction of Islamic banking... The bank has since rethought its position, according to Khan, the minority affairs minister.