Islamic banking could become available in India

Minority Affairs Minister K. Rahman Khan says the government wants to bring more Muslims into the country's financial system. Interest-free banking, in line with Sharia law, could be one step.

By Udayan Namboodiri for Khabar South Asia in New Delhi

March 19, 2013
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Islamic banking, which follows Sharia requirements and does not allow interest to be charged, could be introduced as an option in India, officials there say. The ruling coalition, led by the Congress Party, has made "financial inclusion" a key item on its agenda. Many of India's 177 million Muslims, who constitute the nation's largest and most influential minority, are outside the banking system, and the authorities would like to change this situation.

  • Minority Affairs Minister K. Rahman Khan (right) takes the oath of office in New Delhi in October. Khan said India could soon be implementing an Islamic banking system to help the country's 177 million Muslims manage their finances. [Raveendran/AFP]

    Minority Affairs Minister K. Rahman Khan (right) takes the oath of office in New Delhi in October. Khan said India could soon be implementing an Islamic banking system to help the country's 177 million Muslims manage their finances. [Raveendran/AFP]

"If 100 million Muslims feel discriminated against because their faith prohibits interest-taking, then it's time the government upheld the Constitutional guarantee under Article 25 to secure every citizen's right to practice his or her faith," Minority Affairs Minister K. Rahman Khan told Khabar South Asia.

Experts say many Muslims are reluctant to participate in the current financial institutions because of their objection to riba (interest). Moreover, there is widespread distrust and fear of exploitation among Muslims, many of whom are at an economic disadvantage.

"The introduction of Islamic banking will free many poor Muslims from the clutches of devious money lenders who charge them high rates of interest against loans," Ghulam Rasool Idris, an economics lecturer at Moradabad Government College, told Khabar. "They are instructed by their religious leaders not to deal with the secular banks. So Islamic banking, if regulated by the government, is a good thing."

Move could boost economy, increase goodwill

Minister of State for Finance Namo Narain Meena told Khabar that nearly Rs. 1.5 trillion ($27.7 billion) is lost annually due to the lack of a Sharia-friendly alternative.

He said the government may introduce Islamic banking in stages. "It could be tried out in our rural banks in the first stage. The micro-lending sector in India is huge, estimated at about Rs. 5 trillion ($91.8 billion) annually. If it works there then it will be transplanted on to the big banks," Meena said.

A recent report by the Credit Rating and Information Services India Limited (CRISIL) stated that not only would Islamic banking work among India's Muslims, it would also be attractive to depositors from other faiths.

"The inadequate capital investment in the unorganised sector of India can receive a boost through the equity finance system of Islamic banking," the report said. "People in India's unorganised labour sector lack collateral for loans and therefore they are not ordinarily eligible for debt financing. Islamic banking is tailor-made for this situation and could lead to the next revolution in agriculture and small-business sector."

"Last but not least, it would create a 'feel good' mood among India's Muslims," the CRISIL report added.

Precedents in other countries

Earlier, the Reserve Bank of India (RBI) had come out against the introduction of Islamic banking, saying that current legislation did not provide for a twin structure. RBI Governor D. Subbarao told reporters in November that "other options" may be considered to bring Muslims into the banking system.

The bank has since rethought its position, according to Khan, the minority affairs minister.

"There are a host of mechanisms available for channelising the savings of Muslims. Sharia-based banking is very scientific and the RBI has modified its earlier stand," he told Khabar.

"If 75 countries around the world, including Britain, can get around the difficulties, there is no reason why we cannot. Besides, the RBI now acknowledges that there are dynamic possibilities through which Muslims' savings can be tapped," he added.

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Reader Comments
  • AhmedAugust 15, 2013 @ 10:08:49AM

    It should be done very soon. Why delay. Because this very needy for everybody. Please everybody should help for this.

  • ZakiJuly 4, 2013 @ 03:07:29PM

    Islamic (Shariah) based banking should be practiced in India at the earliest possible in all types of financing specially in Housing.

  • ShabbirJune 19, 2013 @ 09:06:41AM

    Sharia compliant banking will bring more Muslims into banking sector. and for sure it will help both the Government of India as well as millions of Muslims across India. Thanks to " Minority Affairs Minister K. Rahman Khan to initiate working on this issue, it is the necessity of time.

  • Syed Zahid AhmadMarch 20, 2013 @ 08:03:53AM

    Government of India need to declare its policy stand on Islamic banking because it is lingering for a longer period and tend to frustrate Indian Muslims striving for economic development of the community through Shariah finance. There is too much ambiguity among Muslims when and how things are going to help the community out of poverty with freedom of religion, otherwise the economic growth model so far applied being non compatible with Islamic ethics has not helped the community come out of poverty level. Hope the UPA Government will ascertain Indian Muslims that they have right to economically improve their living of standard along with following Islam and the community would not need to compromise with religious ethics for seeking finance.

  • Adam KhanMarch 19, 2013 @ 02:03:53AM

    Islamic Finance is one mechanism to achieve financial inclusion. I believe people still have no clue about what exactly it is including muslims. There should be right awareness given on this subject.

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