This document discusses the potential for Islamic finance to promote financial inclusion in India. It notes that India's large Muslim population of 180 million currently has limited access to financial services due to religious prohibitions on interest. Islamic finance models that avoid interest could help address this exclusion. The document reviews literature on Islamic microfinance initiatives elsewhere and their success in promoting inclusion. It outlines the current problem of financial exclusion faced by Indian Muslims and argues that establishing Islamic banking in India in line with Shariah principles could help address this issue by providing new options for banking and investment that are currently unavailable. The prospects and challenges of implementing Islamic banking in India are discussed.
Islamic Finance Key to Financial Inclusion in India
1. Islamic Finance:
A Tool To Achieve
Financial Inclusion
in India.
Institute for Technology and Management
Islamic Finance:
A Tool To Achieve
Financial Inclusion
Institute for Technology and ManagementInstitute for Technology and Management
2. Islamic Finance: A Tool to Achieve Financial Inclusion in India
Capstone Project Report
Submitted
In the partial fulfillment of the degree of
Master of Business Administration
By
SUBHAAN TANVEER KAZI
PGDM (FINANCE) – 333
Under the Guidance of:
Prof. C.S. Adhikari
INSTITUTE FOR TECHNOLOGY AND MANAGEMENT
KHARGHAR, NAVI MUMBAI
2012-2014
3. Contents
Certificate by the Guide
Acknowledgments
Executive Summary
1. Introduction 2-9
1.1Literature Review 4
1.2Problem in Hand 7
1.3Objective of the Study 8
1.4Research Methodology 9
2. What is Islamic Finance? 10-16
2.1Models of Islamic Finance 13
2.2Islamic Finance v/s Conventional Finance 16
3. Status of Muslim Population in India 17-18
3.1Access to Financial System 18
3.2Reasons for Financial Exclusion 18
4. Prospects and Challenges 20
5. Recommendation and Conclusion 22
References
Appendix
4. CERTIFICATE BY THE GUIDE
This is to certify that the Capstone project report titled “Islamic Finance: A Tool to
Achieve Financial Inclusion in India”, is a bona fide work carried out by SUBHAAN
TANVEER KAZI ,a student of PGDM program 2012-14 batch of the Institute for
Technology & Management, Kharghar, Navi Mumbai under my guidance and direction.
Dr. C.S. Adhikari
Date: 07th
March, 2014
Place: Kalwa, Thane
5. ACKNOWLEDGEMENT
I take this opportunity with much pleasure to thank all the people who have helped me through
the course of my training towards producing this project report.
I am obliged to Dr. C.S. Adhikari for giving me this opportunity to work on this project. I am sure
this will have an impetus over my career which I am about to embark. I gratefully acknowledge
support from my faculty guide for guiding me through the project.
I also express my gratitude to all my colleagues and the esteemed respondents for helping me in
completing my project.
Lastly, I thank almighty, family and friends for their constant encouragement without which this
assignment would not be possible.
6. EXECUTIVE SUMMARY
At 180 million, Indian Muslims constitute the second largest Islamic population in the
world after Indonesia. However Indian Muslims still remain a socio-economically
backward community. The main culprit is the abstinence from financial system due to
religious ideologies pertaining to money which prohibits transactions with entities
working on the basis of ‘interest’.
The Islamic finance industry has attracted the attention of policy makers and
international donors as a possible channel through which the Indian economy can
achieve financial inclusion, particularly among Muslim adults. Yet cross-country,
demand-side data on actual usage and preference gaps in financial services between
Muslims and non-Muslims have been scarce. This paper uses novel data to explore the
use of and demand for formal financial services among self-identified Muslim adults. In
a sample of 120 adults from diverse backgrounds, the analysis finds that Muslims are
significantly less likely than non-Muslims to own a formal account or save at a formal
financial institution. The data highlights various factors which are responsible for
hindering Islamic Finance in India
Other arguments have been made that Islamic banks and financial institutions offer
methods of finance which are superior to Western interest-based counterparts because
they are more equitable, stable and ethical, and offer less risk and volatility.
Consequently in light of these propositions various Islamic Banking models are briefly
explained and how the community is trying to promote social welfare through various
avenues for distribution of wealth.
Further, the paper includes the status of Muslim Population in India and the extent to
which the community is financially excluded. It also includes various prospects and
challenges involved with Shariah-compliant banking in India and how the authorities are
trying to design the model through innovative ways and on scope of implementing
various amendments in the Banking Regulation Act, 1949 to make it eligible for
functioning.
Finally, the suggestions and concluding part includes how the Muslim community will
benefit immensely from this initiative. The non-Islamic community and corporate will
have wider choice of financial products which would eventually contribute towards the
goal of Financial Inclusion
7. 1. Introduction
Financial Dealings and Investments of a follower of Islam have to be in accordance with
the laws of Shariah, which contains tenets and code of conduct on these topics. These
tenets not only prohibit the concept of interest in any financial dealing, they also specify
the type of contracts and nature of contracts, which are permissible. This led to the
growth of a branch of finance, which could be as per the shariah laws, and it has come
to be popularly known as Islamic finance. India has a negligible presence of Islamic
finance despite a vast population of 180 million following Islam and, as such, it opens up
an array of opportunities to both the investors and financial service providers.
Although the concept of Islamic Finance can be traced backed to 8th
Century in Muslim
countries, modern Islamic Financial Services started in Egypt in 1963 by Ahmed El
Najjar. In 1975, the Islamic Development Bank was set-up with the objective to provide
funds to projects of its member countries. The first commercial Islamic bank, Dubai
Islamic Bank opened its doors in 1975.
Globally, Islamic Banking is operational in more than 75 countries excluding India.
During the past decade, the assets of Islamic Banks have grown at an average rate of
15%. At the end of 2013, Assets-Under-Management (AUMs) in the Islamic finance
industry has reached $1.8 trillion mark, growing at a compounded annual growth rate of
24.8 per cent per annum during the preceding four years.
Islamic Banking has a huge market potential and good prospect in India given the
diverse Indian canvas and holds good for India from a development point of view. It
presently faces many challenges that need to be addressed. Hence, the easiest way to
introduce Islamic Financial system in the Indian Financial market is to start doing
whatever is permissible within the extent laws and get noticed. The Government and
the Regulator then, will have to step in, to regulate the working of Islamic Finance. In
any case, it is not necessary to wait for the Government to put on platter all the
Legislative reforms for financial transactions to be carried on, based on Shariah.
Something similar needs to be done to increase awareness among the masses and
create a demand for Islamic Financial Transactions. For the success of the Islamic
Financial Institutions, there has to be a demand and the demand would be made only
when people are aware of what is possible. Again, for the Government and the
Regulator to feel the need for regulatory changes, there has to be enough Islamic
Finance activity to justify introduction of Legislative changes.
The Writ petition in the Kerela High Court against the effort of establishing a Shariah
compliant NBFC where the Government of Kerela was inclined to be a minor
participant, shows that those interested in the introduction of Islamic Finance in India,
will have to work for making their demand acceptable by bringing awareness and show
that the benefit of the structure proposed by them is for all to avail the benefit more than
that the conventional arrangement.
8. This requires a dedicated effort of a strong committee which can take an unbiased
stand both from economic and secular perspective and recommend changes to be
brought in ‘Banking Regulation Act’ for introduction of Islamic banking in India. These
changes once done would help the authorities to extend their inclusion count to the
Muslim minority population.
This paper, hence, is aimed to discuss how an Islamic Finance Model would help
extending financial service to the minority populations in India.
9. Literature Review
This section presents the discussion of the related literature and keeping in view the
specific objectives of the study, the review of various studies have been presented
relevant to the present undertaking. It also provides a brief summary on each reviewed
article.
Muhammed Obaidullah (2008) provided valuable insights and guidelines on how
microfinance may be provided in a Shariah compliant framework. The paper proposed
poverty alleviation through micro—finance enterprises in conjunction to Shariah-
compliant financial services. It drew valuable lessons from the case studies in terms of
the two complimentary approaches to microenterprises development contributing to
poverty alleviation. It also explained the Grameen model of group-based and graduated
financing for developing livelihood enterprises along with a case study of Rural
Development Scheme of Islami Bank, Bangladesh. It demonstrated how various
organizations at various levels have strengthen each other and produce the desired
results of enhancing financial inclusion, development of microenterprises and poverty
alleviation. The study also highlighted some areas of concern and made suggestions to
overcome them.
Syed Zahid Ahmad (2008) seek justice for the Muslim Countrymen who are deprived of
their religious need to transact interest free banking. The article mentioned Muslims as
Minority Community in India. It highlighted the appointment of the Sachar Committee
towards the investigation on Minority population in India. The writer tried to defense the
Muslim community by proving The Sachar Committee unjust. He stated few lines which
prove the denial of the demand for interest free banking by Muslim community. There
are statistics which shows the exclusion of the Muslims from the Credit System and how
it hampers the economic growth of the country. Finally the writer seeks for justice for the
community and demands for Policy Initiatives and Special Credit Policy.
Purnima S. Tripathi (2009) emphasized on the demand for Shariah-compliant banking
that has gained support from a wide spectrum of political parties. The paper revealed
the status of Muslim minority in the country and how they have a disproportionately
small presence in banking activity. The paper also mentioned the outcome of the
various committees which studied the socio-economic conditions of Muslims in India
vis-a-vis other minority communities. The author tried to emphasize over real economic
issues concerning the Muslim community that took place. The demand for Shariah-
compliant banking products is gradually emerging and the government should take
specific measures to introduce so that a vast section of Muslims who fail to access
banking services for reasons of faith can avail themselves of these services and
improve their lot.
10. Faisal Fasih traced the rationales for experimenting Islamic banking in India, which
among other things promotes the constitutional mandates in a better manner and in a
way, comparison is made between conventional banking and Islamic banking. The
paper talks about the Indian economy and paradoxically the increase in the rate of poor
people. The author mentions that the State must endeavour to establish an egalitarian
society. However, most of the Indian citizens do not have access to credit. The present
banking system is not conducive for protecting the interests of all sections of the
population. The banking system of Islam, based on Islamic law, has been
institutionalised in many parts of the world in the last couple of decades. Islamic banking
has the potential to uplift the vulnerable groups such as farmer and Small and Medium
Enterprises (SMEs) and can fosters inclusive economic growth. Besides, there is a
strong argument that interest-free finance may attract investment from the Gulf region.
Finally, it provides impetus to the socialist goal envisaged by the Constitution. It also
talks about the studies done by Planning Commission Report of 2008, favouring Islamic
banking in India. Apart from the objections on theoretical grounds and its working, it is
not possible to establish such banking system under the present legal regime. However,
it seems that the recent trend in India is to promote religious law for advancing the goal
of secular law. In this context, the Kerala High Court has upheld the constitutional
validity of Islamic finance in the case of Dr. Subramaniam Swamy vs. State of Kerala &
Ors. (Decided on 3rd February, 2011) An attempt has been made to demonstrate the
viability of Islamic banking
Zamir Iqbal and Abbas Mirakhor (2012) talks about Islam's perspective on financial
inclusion and argued that the core principles of Islam lay great emphasis on social
justice, inclusion and the sharing of resources between the haves and the haves not. He
is referring to the impact of Financial Inclusion on a country’s economic growth and
various other economic parameters. He mentioned the challenges involved with the
Conventional Approach to Financial Inclusion. The paper further explained the concept
in the Islamic perspective by quoting various verses from The Quran and the sayings of
The Prophet Mohammad. Eventually, the author mentioned about the Instruments of
Islamic finance that allows risk sharing and risk diversification through which individuals
can mitigate their idiosyncratic risks.
AHMED ROSTOM et.al (2012) identified gaps currently existing in Organization of
Islamic Cooperation (OIC) countries on shariah compliant micro-finance and financing
for small and medium enterprises and the state of traditional redistributive instruments.
The paper concluded that Islam offers a rich set of instruments and unconventional
approaches, which, if implemented in true spirit, can lead to reduced poverty and
inequality in Muslim countries plagued by massive poverty. Therefore, policy makers in
Muslim countries who are serious about enhancing access to finance or “financial
inclusion” should exploit the potential of Islamic instruments to achieve this goal and
focus on improving the regulatory and financial infrastructure to promote an enabling
environment.
11. Ethica Institute of Islamic Finance and Infinity Consultants (2012) highlighted various
statistics, contribution and achievement towards Islamic Finance in India. The authors
focused on the prospects of Islamic Finance in India. They are supporting their claims
by providing the statistics on the topic. There has been a comparison made of India with
other countries with respect to Muslim population and the coverage of Islamic Finance.
The article is concluded by highlighting the demand for Islamic Finance and its present
status along with the measure to implement the same in conjunction to couple of cases.
Asli Demirguc-Kunt et.al (2013) explored the use of and demand for formal financial
services among self-identified Muslim adults. In a sample of more than 65,000 adults
from 64 economies (excluding countries where less than 1 percent or more than 99
percent of the sample self-identified as Muslim), the analysis finds that Muslims are
significantly less likely than non-Muslims to own a formal account or save at a formal
financial institution after controlling for other individual- and country-level characteristics.
But the analysis finds no evidence that Muslims are less likely than non-Muslims to
report formal or informal borrowing. Finally, in an extended survey of adults in five North
African and Middle Eastern countries with relatively nascent Islamic finance industries,
the study finds little use of Shariah-compliant banking products.
Fintrain Academy in its November (2013) issue covered various topics pertaining to
Financial Inclusion. The issue talks about the present scenario by providing the
statistics of the population having access to Financial System. It also covers various
measures that took place to achieve Financial Inclusion. There is one exclusive article
on Financial Literacy and its significance towards achievement of Financial Inclusion at
a much faster pace. The issue also includes the initiatives taken up by RBI to foster
Financial Inclusion with regards to the Financial Literacy material. The remainder talks
about the Consumer Protection through Financial Inclusion with the help of Financial
Education.
Mayada El-Zoghbi et.al (2013) explored the state of Islamic microfinance sector and
identified key obstacles to its growth. Islamic microfinance is undoubtedly gaining
momentum. But despite the doubling of Shariah-compliant microfinance providers since
2006, and the rapid increase in the number of their customers, Islamic microfinance is
still dominated by a handful of service providers in a handful of countries offering
primarily two products. There is considerable room for growth (even taking into account
the smaller size of the potential pool of Islamic microfinance clients)—customers using
Shariah-compliant products represent less than 1 percent of total microfinance
outreach.
Several articles have been written on Islamic finance and Financial Inclusion in global
perspective. A detailed study on India perspective would be a massive contribution in
the area.
12. Problem in hand
Over the last few years, the Muslims in India have been trying to restructure their lives
on the basis of Islamic principles. They strongly feel that the political and economic
dominance of the West, during past centuries, has deprived them of the divine
guidance, especially in the socio-economic fields.
In the economic field, it is the biggest challenge for such Muslims to reform their
financial institutions to bring them in harmony with the dictates of Shari‘ah. In an
environment where the entire financial system is based on interest, it is a formidable
task to structure the financial institutions on an interest free basis. Lack of Shariah
compliant investment opportunities in India has discouraged Muslims to invest, not only
through banks but also through other available avenues.
The community is striving for the revival of their Islamic identity to organise their
collective life in accordance with the Islamic teachings. It can address the long drawn
issue of ‘Financial Inclusion’ which would eventually result in the economic development
of the country.
India has strong ability to emerge as a potential market for Islamic banking, provided
there is supportive political environment and increased awareness among people in
India as a whole. Presently, there is no Islamic bank in India except few Shariah
compliant funds and several other Islamic financial institutions and credit cooperative
societies. India is in prime need of an Islamic bank because as per Sachar committee
report, about 80% Indian Muslims are financially excluded due to interest based deposit
and credit from conventional banks. The long held issue of financial inclusion can be
taken care by introducing Islamic Banking. Majority of the Muslims are so poor that they
are not targeted by the Commercial Banks and whose savings lie idle at their homes.
Muslims in India generally lack creditworthiness primarily because they form part of the
ghettos or negative areas, which were drawn back and are still in vogue.
The Reserve Bank of India (RBI)’s much-awaited move allowing Islamic finance to be
practiced in the republic has been well-received by the global Islamic finance industry.
Recently, RBI has allowed Cheraman Financial Services, a firm in Kerala to operate as
a non-banking financial company (NBFC) that follows Islamic principles - a small step
towards developing shariah-compliant finance in the country. Although authorized under
the Non-Banking Financial Companies (NBFCs) provisions of the Reserve Bank of India
Act 1934, financial transactions are nonetheless allowed to be made in accordance with
Shariah principles.
The appointment of the much-celebrated ‘rock star’ economist who predicted the global
financial crisis, Dr. Raghuram Rajan, as the new governor of RBI in September, 2013 is
expected to breathe a new life in efforts to advance Islamic finance in the republic.
13. Objectives:
This study aims to achieve the following objectives:
1. To emphasize on the benefits of the Islamic Instruments and draw a comparison
between Islamic and conventional banking system.
2. To examine the present status of Muslims having access to the Financial System
and critically analyse the reasons for Financial Exclusion of Muslim Population
3. To provide valuable insight and guidelines on how Islamic Finance will help India
achieve financial inclusion with the help of Shariah compliant framework.
14. Data & Methodology
This paper draws an individual-level database comprised of survey data collected over
the 2013-14 calendar year. The database covers more than 120 adults. The target
population was the students, working-class individuals and lower middle-class Muslim
population of age 18 and above. Surveys were conducted in the major languages
accepted by the class of people.
A simple random sampling method is used in this thesis. It is assumed that the selected
sample provided useful insights for an intellectual enquiry of this type. This selection is
motivated by the following reasons: First, the availability of relevant financial data
necessary to substantiate any conclusions about to be made. Secondly, they comprised
an appropriate sample that can help us determine the benefits associated to
introduction of Shariah-compliant products in financial institutions.
A simple Questionnaire was used to carry out the Survey. The survey was conducted
online and manual handouts circulations. The target audiences were divided into two
groups.
1. Educated Individual
2. Lower and Middle Class Muslim Population
In order to achieve the objective of developing an understanding about people’s
perceptions towards Financial Inclusion through Islamic Finance, a well structured
questionnaire was designed. Responses were collected by taking into consideration the
questions regarding Awareness of Islamic Finance and Financial Inclusion, the factors
hindering Islamic Finance Model in the Country and the potential growth of the model in
conjunction to the Muslim population. The survey was conducted among educated
individuals and Lower Middle Class Muslims Families. The findings are based on a
sample of 120 respondents in Maharashtra. The response rate was 95% as the
individuals were contacted personally. The data was eventually collated in an Excel
Sheet and the findings are displayed in graphical representation.
It should be noted that this paper does not intend to build a new theory, but rather, to
investigate the research questions based on available secondary data with a view to
contribute to available literature. This is mainly due to difficulty in obtaining primary data
for the project.
15. 2. What Is Islamic Finance?
Islamic finance is based on four main principles, which are all derived from the Quran
and Sunna. The first dictates that paying interest (i.e. any predetermined payment over
and above the principal) is prohibited. As a result, Islamic banks have to use contracts
that create exposure to the real sector and must thus ensure efficient risk management.
The second principle involves the profit and loss sharing concept. Parties to a financial
transaction must share both the risks and the rewards that may be attached to it; in this
way, excessive losses and profits are minimised. The third principle is the prohibition of
uncertainty or speculation. Uncertainty in contractual terms and conditions is forbidden.
However, risk-taking is allowed when all terms and conditions are clearly stipulated and
known to all parties. The fourth principle demands the use of asset-backing. Each
financial transaction must relate to a tangible and/or identifiable underlying asset,
ensuring that Islamic banks remain connected to the real economy.
Islamic Banking is a system of banking based on Islamic law (known as Shariah).
Shariah forbids the payment or acceptance of interest (known as riba or usury) for the
well being of the society. Interest from the conventional bank and economic arguments
can lead to the divide between the rich and poor, and inflation which can create financial
and economic instabilities. Just like conventional financial systems, Islamic finance
features banks, capital markets, fund managers, investment firms, and insurance
companies. However, these entities are governed both by Islamic law and the finance
industry rules and regulations that apply to their conventional counterparts.
Although the Islamic finance industry itself is quite young, Islamic theories of economics
have existed for more than a millennium; by the mid-12th century, in fact, many Muslims
scholars had presented key concepts of Islamic economics that are still relevant today.
Nowadays Islamic finance has become an important part of the international financial
system and is, certainly, one of its fastest growing components over the last decades. In
the wake of the financial crisis, there has been a renewed debate on the role that
Islamic finance can play in the stabilization of our financial system, given its strong
ethical principles and religious foundations.
But political and social turmoil put the brakes on Islamic finance for a very long time;
only in the 20th century did Muslim scholars and academics seriously begin to revisit
these topics and, in doing so, set the stage for the modern Islamic finance industry to
emerge in the 1970s.Islamic economics is based on core concepts of balance, which
helps ensure that the motives and objectives driving the Islamic finance industry are
beneficial to society. It balances material pursuits and spiritual needs thereby balancing
individual and social needs. A core concept of Islam is that Allah is the owner of all
wealth in the world, and humans are merely its trustees. Therefore, humans need to
manage wealth according to Allah’s commands, which promote justice and prohibit
certain activities. At the same time, Muslims have the right to enjoy whatever wealth
they acquire and spend in shariah-compliant ways; they don’t need to feel shame about
being wealthy as long as their behavior aligns with Islam.
16. A Muslim believes that Islam doesn’t restrict economic activity but instead directs it
toward responsible activity that benefits other people, protects the earth, and honors
Allah. In other words, Islam allows for a free-market economy where supply and
demand are decided in the market and not dictated by a government. But at the same
time, Islam directs the function of the market mechanism by imposing specific laws and
ethics. A key purpose for imposing these laws and ethics is to promote social justice;
Islam and social justice are inseparable. Therefore, social justice is a key concept of the
Islamic finance industry.
Islam tries to achieve social justice in the economy in many ways:
• Promoting adherence to Islam
• Requiring Zakat (taxing the property of people who acquire wealth and
distributing that tax to people in need)
• Prohibiting usury (interest)
• Encouraging shared risk
Based on the core concepts of Islamic economics, Islamic finance institutions adhere to
certain principles that distinguish them from conventional finance:
• Prohibiting interest (riba)
• Steering clear of uncertainty-based transactions (gharar)
• Avoiding gambling (maysir or qimar)
• Avoiding investment in prohibited industries (Tobacco, Liquor, Pornography etc.)
Additional Features:
• Islamic banking has grown out from the conventional banking only in the year
1971. However, still at infancy stage, its growth is tremendous and impressive.
• It can induce the habit of savings among people and create the financial insertion
required in India.
• Islamic banking can help in eradicating poverty by lowering down the economic
disparities there is no interest obligation on the part of the unfortunate borrowers.
• Islamic banks offer financial instruments that are not only profitable but also
reasonable and are ethically fair.
• Islamic banks would give advantage to entrepreneurs who have profitable
proposals but lack collateral.
• Islamic banking draws finances from both Muslims and non-Muslims alike. More
than 40% of the investors and 60% borrowers in Malaysian Islamic banks are
non-Muslims. One-fifth customers of Islamic banks of Britain are non-Muslims.
17. Islamic Finance in the Global Financial System
Islamic finance has developed significantly over the years to become a noticeable part
of the international financial system. The value of Islamic financial assets worldwide
increased from USD 150 billion in the mid-1990s to about USD 1.8 trillion by end 2013,
led by the Islamic banking sector and the global sukuk market. And, in 2014, it is
estimated to reach USD 2 trillion. Despite the formidable growth of the last few years,
Islamic finance still accounts for a relatively small share of global finance, and remains
mostly localised in selected areas of the world, particularly in the Middle East and Far
Eastern Asia.
The growth of the Islamic finance industry has mainly been driven by the following
factors:
Abundant liquidity flows from the recycling of petrodollars generated by high oil
prices over the years.
The active role played by some jurisdictions around the world to promote the
development of Islamic financial markets in their respective countries.
A growing Muslim population and the related higher demand for Shariah-
compliant products.
An increased perception that Islamic finance can support efforts to promote
global financial stability.
The fact those multilateral organizations (e.g. the IMF) as well as a number of
central banks have embarked on extensive studies/research initiatives to
examine prospects for Islamic finance within their respective economic
blocs/regions.
18. Models of Islamic finance
Some common financial instruments currently being utilized in Islamic finance in various
forms are as follows.
1. Murabaha
This is effectively cost-plus financing, as used for trade and asset finance, allowing
deferred payment by customers rather than lending money as in conventional loan. The
bank purchases the requested commodity (thereby taking it on risk) and sells it to the
customer at the agreed mark-up price. In recent times, murabaha contracts have been
the instrument of choice for many financial products, be it trade and asset finance or the
provision of working capital facilities. Istisna’a: Along with murabaha products, it is one
of two types of finance which allows the sale of a commodity prior to production.
Istisna’a contracts are clearly aimed at long-term projects, and are frequently used to
finance the construction of real estate and turnkey projects.
2. Ijara:
This is a quasi-debt instrument, essentially equivalent to leasing. Often used in the
context of home purchasing, most aspects of an ijara are the same as those of
conventional leasing, whereby the investor (lessor) purchases and leases the
underlying asset to the prospective borrower (lessee) for a specified rent and term. Ijara
are frequently used to finance the acquisition of real estate and equipment, although
they have also been utilised to affect leveraged buy-outs in private equity transactions.
3. Musharakah:
Musharakah is a joint venture arrangement, through an equity participation contract.
Ownership is distributed according to each partner’s share in the financing, and profit
and loss is shared by the partners. Such contracts are often used in connection with
large project finance and private equity funds. Despite it being a preferred option by
many Islamic scholars, musharakah captures only a tiny portion of all Islamic finance.
Recent times have witnessed a shift in emphasis away from ijara towards diminishing
musharakah (DM) as a mode of financing Islamic mortgages. Many of the major Islamic
mortgage providers have either already switched to DM or are planning to do so
imminently. DM is a hybrid financing technique involving both ijara and musharakah. It
appeals to Islamic investors because it is based on the fundamental principle of sharing
risk. The attraction for financiers is twofold, in that it can incorporate a variable rate of
return and has a credit profile that would be acceptable to most conventional
institutions.
4. Mudarabah:
This is essentially an investment fund where one party provides the entire capital, and
the other party provides the management (usually the bank, but can be the reverse).
Profit sharing is agreed up-front, although the loss is borne by the provider of the funds
alone.
19. 5. Sukuk
This is an investment certificate (bond) that represents a proportionate interest in a well-
defined pool of assets that yield income and capital returns. Usually setup through the
conventional securitisation process, with a special purpose vehicle acquiring the assets,
the returns from the assets are passed to sukuk holders (investors). Nowadays popular
asset classes have included real estate. This method has been a popular way for many
governments to raise funds for infrastructure, and accounts for the largest portion of
Islamic finance.
Distribution of Wealth
The wealth produced in a society must be distributed in a just and fair manner, so that it
may not be concentrated in the hands of a few people. The Holy Quran says: ' so that it
may not circulate only among the rich among you' (Holy Quran 59:7) 20 richest Indians
earn as much as what 30 crores poorest people are earning, writes Bimal Jalan, former
RBI Governor. While GDP growth is nearly 5%, Aam Aadmi, the 860 million
marginalised Indians earn only Rs 20 per day. The system has created two sections in
our societies: super rich and super poor.
The study by specialists at Oxford University based on an innovative multidimensional
poverty index" or MPI, more than 410 million people live in poverty in the Indian states.
The study's conclusions reinforce claims that distribution of wealth generated by India's
rapid economic growth (10 percent in one year, recently) is deeply unequal. Prime
Minister Dr. Manmohan Singh’s repeated statement that he wants to see 'inclusive'
development. Hence, Islamic finance set values and principles that may remove this
disparity and provide justice and equity for all.
1. Zakah
Zakah is supposed to be a major instrument for social security, eradicating poverty,
curbing excessive economic disparities and stimulating economic activity by transferring
substantial purchasing power to the have-nots. Collective system of zakah and its
proper distribution has to be strengthened as it was prevalent in the days of the prophet
and up to the seventh century hijra, till the invasion of the Tatars.
2. Waqf
The institution of waqf provides a foundation set up by keeping a property in perpetual
existence and making its income available for specified beneficiaries which plays an
important social and economic role. The waqf properties have traditionally financed
expenditure on mosques, schools, research, hospitals, social services, etc. Today it can
support microfinance institutions that can provide interest free loans to the needy and
marginalised sections of the society.
20. 3. Insurance
The conventional insurance system is based on gharar (speculation) and maysar
(gambling) and the investments are made on unethical businesses, a new system has
been evolved called Takaful based on Islamic principles.
4. Microfinance
Based on the successful experiments of Prof. Yunus of Bangladesh Grameen Banks,
similar institutions are the need of the hour. Although India has witnessed tremendous
growth in Microfinance industry by Self Help Group (SHG) and other financial products,
finance collected and guidance provided to earn the decent livelihood to the needy has
to be evolved. Finance provided has to be interest free and the development should
focus on the family instead of only women folk.
5. Islamic Banks
Almost non-existent 30 years ago, modern Islamic finance has risen to become a 2
trillion dollar industry. The sector, though small in global terms, appears to have held up
well in the crisis, with the Asian Development Bank putting annual growth at more than
15% over the next 5-10 years. Long focused on a potential global market of 1.5 billion
Muslims, Islamic banking is now drawing attention from players the world over.
Nowadays, major establishments such as Al Rajhi Bank of Saudi Arabia, the Kuwait
Finance House, and Malaysia's Islamic bank may compete with western financial
institutions such as Barclays, HSBC and Deutsche Bank. Several banks have set up
separate Islamic financial services departments in their home markets as well.
In the UK, the Financial Services Authority has introduced regulatory standards for
Islamic financial products and has a separate department dealing with Islamic financial
institutions. Moreover, non-Muslims make up as much as half of Islamic bank customers
in some cases. Similar developments have taken place in Singapore, Japan, Hong
Kong and France. If London, Singapore, Hong Kong, Tokyo and Paris can become hub
and house of Islamic finance and banking, why not Mumbai and Kochin?
Committee on Financial Sector Reforms (CFSR) of the Planning Commission of India
headed by Dr. Raghuram Rajan has recommended interest free finance in the main
banking sector of the country for inclusive growth with innovation.
Recently Dr. MS Swaminathan, father of green revolution has suggested Islamic
Banking with zero interest to be the solution to the crisis of the farmers’ suicide deaths
in Vidharba and even Vatican has offered Islamic finance principles to Western banks
as a solution for worldwide economic crisis.
21. Difference between Conventional and Islamic banking
Conventional Banking Islamic Banking
• Money is a commodity besides
medium of exchange and store of
value. Therefore, it can be sold at a
price higher than its face value and
it can also be rented out.
• Money is not a commodity though it is
used as a medium of exchange and
store of value. Therefore, it cannot be
sold at a price higher than its face
value or rented out.
• Time value is the basis for charging
interest on capital.
• Profit on trade of goods or charging
on providing service is the basis for
earning profit.
• Interest is charged even in case the
organization suffers losses by
using bank’s funds. Therefore, it is
not based on profit and loss
sharing.
• Islamic bank operates on the basis of
profit and loss sharing. In case, the
businessman has suffered losses, the
bank will share these losses based
on the mode of finance used
(Mudarabah, Musharakah).
• While disbursing cash finance,
running finance or working capital
finance, no agreement for
exchange of goods & services is
made.
• The execution of agreements for the
exchange of goods & services is a
must, while disbursing funds under
Murabaha, Salam & Istisna contracts.
• Conventional banks use money as
a commodity which leads to
inflation.
• Islamic banking tends to create link
with the real sectors of the economic
system by using trade related
activities. Since, the money is linked
with the real assets therefore it
contributes directly in the economic
development.
22. 3. Status of Muslim Population
India is the 2nd largest Muslim populated country in the world
million Muslims who spend on average, only 32.7 Rupees per day.
population is projected to increase from 177.3 million in 2010 to
In spite of various programs implemented by the Indian Government for the Muslim
Community, the community lags behind the majority in many socio
dimensions such as land ownership, poverty, income growth, unemployment etc. T
community is trapped under 3 major socio
and ignorance.
The total revenue of Muslim owned businesses generates 50000 crores in the
economy. In the absence of Islamic Banking in India, they use the conventi
and finance for their business needs. However, recently corporate have st
cognizance of Islamic Banking and Financial products.
One of the major obstacles faced by Muslims entrepreneurs in specific and the Muslim
Community in general is the abili
which depicts the proportion of banks accounts owned by Muslims and the credit
disbursements of Muslims.
Important Points:
• In India, almost half the country is
• Only 55 per cent of the population has deposit accounts and 9 per cent have
credit accounts with banks.
• India has the highest number of households (145 million) excluded from Banking.
• There is only one bank branch per 14,000 people.
• 6 lakh villages in India, rural branches of SCBs including RRBs number 33,495.
• Only a little less than 20% of the population has any kind of life insurance and
9.6% of the population has non
• Just 18 per cent have debit car
0%
20%
lim Population
India is the 2nd largest Muslim populated country in the world after Indonesia
million Muslims who spend on average, only 32.7 Rupees per day. The Indian Muslim
is projected to increase from 177.3 million in 2010 to 236.2 million in 2030.
In spite of various programs implemented by the Indian Government for the Muslim
Community, the community lags behind the majority in many socio
dimensions such as land ownership, poverty, income growth, unemployment etc. T
community is trapped under 3 major socio-economic factors which are poverty, illiteracy
he total revenue of Muslim owned businesses generates 50000 crores in the
economy. In the absence of Islamic Banking in India, they use the conventi
and finance for their business needs. However, recently corporate have st
cognizance of Islamic Banking and Financial products.
One of the major obstacles faced by Muslims entrepreneurs in specific and the Muslim
Community in general is the ability to obtain credit. This is evident from the RBI report
which depicts the proportion of banks accounts owned by Muslims and the credit
In India, almost half the country is unbanked.
Only 55 per cent of the population has deposit accounts and 9 per cent have
credit accounts with banks.
India has the highest number of households (145 million) excluded from Banking.
only one bank branch per 14,000 people.
es in India, rural branches of SCBs including RRBs number 33,495.
Only a little less than 20% of the population has any kind of life insurance and
9.6% of the population has non‐life insurance coverage.
debit cards and less than 2 per cent having credit cards.
0%
20%
Muslim as % of
total
Bank Accounts &
Credit Disbursment
13% 13%9% 5%
Population Access to Finance
after Indonesia with ~200
The Indian Muslim
236.2 million in 2030.
In spite of various programs implemented by the Indian Government for the Muslim
Community, the community lags behind the majority in many socio-economic
dimensions such as land ownership, poverty, income growth, unemployment etc. The
economic factors which are poverty, illiteracy
he total revenue of Muslim owned businesses generates 50000 crores in the
economy. In the absence of Islamic Banking in India, they use the conventional banking
and finance for their business needs. However, recently corporate have started taking
One of the major obstacles faced by Muslims entrepreneurs in specific and the Muslim
y to obtain credit. This is evident from the RBI report
which depicts the proportion of banks accounts owned by Muslims and the credit
Only 55 per cent of the population has deposit accounts and 9 per cent have
India has the highest number of households (145 million) excluded from Banking.
es in India, rural branches of SCBs including RRBs number 33,495.
Only a little less than 20% of the population has any kind of life insurance and
credit cards.
Source: RBI
23. In the World Bank Findex Survey, 2012 it was pointed out that only 35% of Indian adults
had access to a formal bank account and 8% borrowed formally during 2011-12. Only
2% adults used an account to receive money from a family member living in another
area and 4% used an account to receive from Government.
As per the Census 2011:
1. Over 2/3rds of urban households (67%) are getting banking services.
2. Only 54% of rural households have access to banking services.
3. Only about 5% of the nearly six lakh villages in the country have bank branches.
4. There are as many as 296 under-banked districts in the country.
Incidentally, 100% financial inclusion is not possible or achievable without ensuring
‘Financial Literacy’. Financial Literacy is nothing but the knowledge of effectively
managing one’s own money. The old saying “A penny saved is a penny earned’ has
today changed to, ‘A penny saved and invested is two pennies earned.” A person who
is financially literate can spend well and still have more surplus than a person who is
financially illiterate and that is the power of financial literacy.
The below data represented below shows that 41% of the respondents support
Interest/Usury as a factor that keeps the Muslim Population away from Financial
System. 54% of the respondents claim Lack of Experts hindering the growth of Islamic
Finance Model in India.
54%
10%
14%
22%
Hinderance to Islamic Model
Lack of Experts
Violates Banking Regulation Act
Avoid Inflow of Black Money
Don’t Know
48%
44%
8%
Religion
Muslims Hindus Christian
31%
41%
23%
5%
Factors that keep the Muslims away from
Financial System
Poverty Interest/Usury Illiteracy All
24. Financial exclusion and poverty are non
financial exclusion is a self-reinforcing force in which there are certain factors that are
related in circular way so as to result in continuation of poverty and under develop
in India. This examines the demand and supply factors influencing the accessibility of
financial services by lower middle class. Demand related factors are income,
occupation, interest rate, age, education, dependents in the family, awareness and
poverty affect the demand for credit, which can dir
The production also falls which reduces the disposable income of borrowers. This in
turn creates a lack of educational opportunities and a dearth of awareness, which
causes a barrier in accessing institutional credit. This is the trap from which it is difficult
to come out and it is named as the vicious circle of financial exclusion.
Low Income
Lack of
Educational
Facility
Lack of
Awareness
exclusion and poverty are non-mutually exclusive forces. The vicious circle of
reinforcing force in which there are certain factors that are
related in circular way so as to result in continuation of poverty and under develop
examines the demand and supply factors influencing the accessibility of
financial services by lower middle class. Demand related factors are income,
occupation, interest rate, age, education, dependents in the family, awareness and
rty affect the demand for credit, which can directly influence accessibility for
The production also falls which reduces the disposable income of borrowers. This in
turn creates a lack of educational opportunities and a dearth of awareness, which
auses a barrier in accessing institutional credit. This is the trap from which it is difficult
to come out and it is named as the vicious circle of financial exclusion.
Low Demand
for Credit
More
Burden of
Interst Rates
Low
Production
Low Income
Lack of
Awareness
mutually exclusive forces. The vicious circle of
reinforcing force in which there are certain factors that are
related in circular way so as to result in continuation of poverty and under development
examines the demand and supply factors influencing the accessibility of
financial services by lower middle class. Demand related factors are income,
occupation, interest rate, age, education, dependents in the family, awareness and
ectly influence accessibility for credit.
The production also falls which reduces the disposable income of borrowers. This in
turn creates a lack of educational opportunities and a dearth of awareness, which
auses a barrier in accessing institutional credit. This is the trap from which it is difficult
25. 4. Prospects and Benefits of Islamic Banking
The prospects of Islamic banking in India are bright; with reference to demographic
structures and the benefit of Islamic banking in itself.
Flow of Funds
The absence of Islamic banking is an obstacle to the flow of substantial funds into the
market. According to Shariq Nisar, Director, TASIS, there is approximately INR 50
billion unclaimed interest in Kerala state alone. People generally choose to invest their
money in gold or jewellery, which is regarded as worst kind of investment. There are at
least 300 Islamic societies which accept deposits and lend money, but can’t make a
business of it because of the Shariah prohibition of interest. And these Islamic societies
cannot convert themselves into bank because the regulation restricts interest free
banking. Some of these societies have collected more than INR 2 billion in interest-free
deposits, but they do not have any opportunity to invest the fund (Sampath, 2008).
Evading Petro-Dollar Loss
Islamic banking is expected to benefit Indian government through diplomatic rewards in
financial dealings with Muslim dominated nations. Particularly, trillion dollars from Gulf
Cooperation Council (GCC) countries can be attracted. The GCC countries interest in
venture capitalism and real estate financing can help towards infrastructure
development in India.
Increase in Sharia-Compliant Companies
According to Ashraf Mohamedy, MD, Idafa investments, there are almost 80% of the
Indian companies are Shariah compliant to the extent their business in India is concern.
In the year 2009, SEBI has given licenses for Shariah compliant portfolio products. In
2011, National Stock Exchange (NSE) with Ratings Intelligence Partners (a London
Kuwait-based global Islamic consulting company) has launched NSE Shariah Index
S&P CNX 500 Shariah. Whereas, in the same year Bombay Stock Exchange (BSE)
with Taqwaa Advisory and Shariah Investment Solutions (TASIS) has launched a
Shariah Index known as BSE TASIS Shariah 50. According to Shariq Nisar, the Director
of TASIS, BSE has the highest number of Shariah compliant companies across the
globe.
Project Financing for Economic growth
The financing in Islamic banking concerns more with the viability of projects instead of
credit worthiness of borrowers. In other words, Islamic banking is financing projects
which link to the economic growth. According to Siddiqi and Khan (2003) interest based
loans give advantage to credit-worthy individuals and do not necessarily finance
profitable projects. Conventional banking system priorities credit worthiness of the client
rather than expected profitability of the project.
26. At times promising projects might fail to receive finance if it comes from one who does
not have a guarantee to support the project. The emphasis on equity and profit sharing
which is the key aspect to determine whether a project is worth financing is a valuable
asset of implementing the Islamic banking in India. Furthermore, the inadequate capital
investment in unorganized sector can receive a boost through equity finance promoted
by Islamic banking. This sector normally lacks collateral, hence are not eligible for debt
financing. Islamic banking can overcome this situation and thus can lead to the next
revolution in agriculture and unorganized sector.
Safeguard against Economic Decline
As per the global downturn scenario, Islamic banks are a solution to the economic
decline. One of the important factor which leads to international financial crisis are
innovative financial products, transactions and short selling. Islamic banks are shielded
from interest based transactions because Shariah prohibits interest as well as short
selling.
Reduction in Income Disparity
According to United Nations Development Programme (UNDP) human development
report, India needs to draw attention towards increasing income disparity as they
reported it to be 36.8, quite close to world’s average and with a rising trend (UNDP,
2011). This wide income disparity in its severe ravenous from has lead to widen the
divide in society. Muslims who follow Shariah do not avail credits and remain isolated.
Hence, Islamic banking would assist in the upliftment and the disparity reduction.
Increased participation in Stock Market
It is expected that the introduction of Islamic banking and development of Islamic funds
would lead to addition of new stock trading accounts, thereby giving a rise in the stock
market. In line with Dow Jones' Islamic index, similar Indian Islamic indexes like BSE
TASIS Shariah 50 and S&P CNX 500 Shariah will attract funds from Muslims wishing
for Shariah compliant investments.
Islamic window for Business Diversity
A growing number of commercial banks around the globe are considering the prospects
of offering Islamic financial products. Banks are not only planning to offer services to a
growing Muslim population, but also motivated to tap the growing global investors
attracted to Shariah-compliant products. Considering the idea, Indian banks may want
to explore the potential of this market, and hence may be interested in launching a pilot
project. There have been arguments that banking based on religion has limitations to
spread in a secular country like India; which is not true.
27. Britain, with less than 2 million Muslims population, already has 6 Islamic banks which
are fully Shariah compliant. According to Ali Ravalia, associate, UK Financial Services
Authority, people have started to realize that Islamic banks are not a threat but an
opportunity for economic growth. In addition to the large and available Muslim
population, Islamic banking is currently beginning to catch the attention of non-Muslim
customers, who are interested in alternative way of banking.
According to Fiorina (2008) Islamic banking will be benefited from the new customer’s
interest and grow even more quickly than it recently did. In addition, corporate giants
like Tesco (UK) and Toyota (Japan) have used Islamic financial instruments to fulfil
capital requirements (DiVanna and Sreih, 2009). This proves that not only individuals,
but also corporate giants have showed confidence in Shariah compliant financial
instruments.
Challenges ahead of Islamic Banking
Regulatory Framework
Banking Regulation Act 1949, RBI Act 1934, and Cooperative Societies Act and
Negotiable Instruments Act 1961. Many sections of the said acts are in opposition to the
basic tenets of Islamic banking. For instance, payment of interest on deposits is
mandatory as per section 21 of the Banking Regulation Act; sections 5(b) and 5(c);
specifically prohibit investments based on profit and loss sharing; and section 8 of the
Banking Regulation Act 1949, which reads “No banking company shall directly or
indirectly deal in buying or selling or bartering of goods.” Directly contradicts the
Murabaha concept of Islamic banking which allows banks to enter into sale and
purchase agreements. The interest earned on fixed deposits is subject to TDS as per
the Income Tax Act 1961, whereas the profit on Islamic banking deposits is treated
differently.
Infrastructure Support
Commercial banks borrow from other banks or the RBI to meet their short term funding
requirements, but Islamic banks can’t do so because it involves interest. Islamic banks
are required to closely monitor their investments in various businesses, as well as
ensure that the investee firms are managed properly. This calls for expensive
supervisory infrastructure.
Dearth of Islamic Professionals
There is a serious dearth of Islamic banking experts and trained personnel in India.
Although there are a few training institutes, they are unable to compensate for the
shortage of experienced Islamic banking professionals.
Lack of Awareness
There is a lack of awareness about Islamic Banking. Most people mistakenly believe
that Islamic Finance is not a viable tool for Indian economy. Also the industry lacks
experts to work towards enhancement of the existing models.
28. SUGGESTION
Indian government should allow conventional banks to open an Islamic banking window
for early development of Islamic banking system. Islamic window is a facility within a
conventional bank through which customers can make use of Shariah compliant
products (Kamaruddin et al., 2008). The concept of Islamic banking window has been
successful in Malaysia, Pakistan and Hong Kong. Currently, India has strong setup with
88 SCB and these banks have a joint network of over 69,160 branches.
According to Khan and Ahmad (2003) to function in globalised economy, banks have to
meet international standards. Islamic banks have to learn a lot from conventional banks,
especially on their managerial skills, financing tools and transparency standards. The
conventional banks will not only provide infrastructure to Islamic banking window but will
also provide the initial experience needed to establish the same. Considering large
network of conventional banks in India, India is suggested to start Islamic banking by
opening Islamic window to reach the prospective customers. Opening an Islamic
window will require the bank to establish the suitable measures to avoid the mixing of
Islamic and conventional funds. Once a conventional bank has run an Islamic window
and gathered a substantial clientele base for its Shariah compliant products, it may
choose to launch a full-fledged Islamic bank.
Indian government may consider Malaysian Islamic window as a role model. The first
Malaysian Islamic bank was Bank Islam Malaysia Berhad established in 1983 did not
get anticipated success. Therefore, in 1993 the government allowed conventional banks
to offer Islamic banking services through Islamic window assuming it will be more
effective and efficient in increasing the number of Islamic financial institutions and
lowering cost within short span. The effectiveness of Islamic window is proven as it has
leaded to an improved performance and enhanced efficiency of banking industry
(Mokhtar et al., 2006).
In addition to that, for the growth of the Islamic banking in India, proper amendments in
the different acts and regulations should be made to accommodate Islamic banking.
This is to ensure that Islamic window division can work according to Shariah principles
within the existing setup. So that, funds at the disposal of such mixed banks cannot be
pulled from Shariah prohibited earnings.
29. CONCLUSION
India has a huge market potential for Islamic banking. The growth of Islamic banking in
Southeast Asian countries like Malaysia and Singapore shows it as a viable option for
India. The entry of Islamic banks is positive in terms of growth, product innovations and
financial inclusion and may encourage the adoption of best practices among the present
banks.
Islamic banking would open new doors for the Muslim communities. More and more
Muslims would seek credit from these banks; invest in business activities and thus help
in upliftment of the community as a whole. This will help the Indian Government in
achieving financial inclusion for all.
Islamic banking can help in eradicating poverty by lowering down the economic
disparities as there is no interest obligation on the part of the unfortunate
borrowers.
It can induce the habit of savings among people and create the financial insertion
required in India. Islamic banking draws finances from both Muslims and non-
Muslims alike.
Islamic banks offer financial instruments that are not only profitable but also
reasonable and are ethically fair.
Islamic banks would give advantage to entrepreneurs who have profitable
proposals but lack collateral.
For these, Indian government should look for the opportunities and take a stand in
introducing Islamic banking. However, there are challenges to be faced to introduce
Islamic banking in India. The challenges lie in inventing and implementing a mechanism
that would be able to unshackle humanity from the bonds of money and era of human
supremacy over money rather than money over human beings. Although interest on
finance has been denounced by all religions, a serious effort has to be made to find out
a practical mechanism to provide institutional finance on an interest free basis.
Therefore we should try to overcome the most insurmountable of all obstacles. It would
be an era of prosperity for all. Few decades back, the vision of an interest -free world
was considered as impractical concept. Given the ingenuity and will of man, however,
this dream can come true. It would make the 21st century worth living. It would virtually
transform the whole earth into a heaven.
30. References:
1. INTERNATIONAL JOURNAL OF RESEARCH IN COMMERCE &
MANAGEMENT, Vol. 4(2013), Issue No. 1 (January).
2. Asli Demirguc-Kunt, Leora Klapper, Douglas Randall, ’Islamic Finance and
Financial Inclusion’, The World Bank, October 2013.
3. Financial Inclusion: The Islamic Finance Perspective, Zamir Iqbal and Abbas
Mirakhor, 2012
4. Financial Exclusion of Indian Muslims, Published on- 20th February 2008, Syed
Zahid Ahmad
5. Inclusive Banking, Purnima S. Tripathi, (HinduOnnet)
6. The Role of Islamic Finance in Enhancing Financial Inclusion in Organization of
Islamic Cooperation (OIC) Countries, Islamic Economic Studies, Vol. 20, No. 2,
December 2012, Zamir Iqbal and Abbas Mirakhor
7. Fintrain Academy, Kolkata, Monthly Newsletter on Banking & Finance, Issue:
November 2013
8. Why India needs Islamic Banking, Thought Paper by Infosys, India.
9. ISLAMIC FINANCE: AN ETHICAL ALTERNATIVE TO CONVENTIONAL
FINANCE, Robert E Michael, the Head of Islamic Finance at the New York City.
10.Interested Parties, Islamic banking has some pluses. But with our secular
banking rules, PRAGYA SINGH, Outlook Magazine.
11.The CGAP Report, Trends in Sharia-Compliant Financial Inclusion, March 2013.
12.IRTI Research Articles (Islamic Research and Training Institute).
13.Ethica Institute of Islamic Finance, Achieving Islamic Finance in India, How can
Islamic Finance Help?
14.Islamic Economics Bulletin, Volume 6-10, Shariq Nisar Website.
15.Social Science Research Network (SSRN), Principles and Practice of Islamic
Finance Systems, Dr. Julius B. Bertillo and Dr. Josefina B. Salando, CPA.
16.Crisil Young Thought Leader, 2008, Diagant Haria
31. Glossary
Fatwa: A legal opinion or pronouncement made by a Shari’ah board, a mufti or a
Gharar: a risky or hazardous sale, where contract details are unknown
Haram: Forbidden
Hijiri: Islamic Calendar Date
Ijarah: Leasing contract
Ijma: Consensus or agreement of various schools of thought
Maysir: Gambling
Mudarabah: Profit and loss-sharing
Mudarib: Entrepreneur
Murabahah: Mark-up sale; a “commodity
Musharakah: Joint partnership
Qard hasan: Interest-free financing
Qimar: Gambling
Riba: Usury, Interest
Shari’ah: Islamic law
Sukuk: Islamic bonds
Sunna: Prophetic tradition
Takaful: Islamic insurance
32. Questionnaire
Financial Inclusion through Islamic Finance
Did you ever hear about Islamic Finance?
• Yes
• NO
Did you read about RBI promoting Financial Inclusion?
• Yes
• No
Do you agree that majority of the Muslim Population does not have access to Financial Services?
• Agree
• Disagree
Which factors keep the Muslims away from Financial System?
• Interest/Usury
• Poverty
• Illiteracy
• Other:
Why do you think RBI is not introducing Islamic Finance Models in India?
• Less Scope
• Violates the rules Banking Regulation Act, 1949
• Avoid inflow of Black Money
• Lack of Experts
• Other:
33. With 200 million Muslim Population and only 40% having access to Financial System, Can
Islamic Finance help RBI achieve Financial Inclusion?
• Yes
• No
Islamic Finance growing at 24% CAGR globally, do you think India is potential market for
Islamic Finance?
• Yes
• No
34. Student’s Profile
This report was prepared by SUBHAAN KAZI, second year MBA-Finance core
student at Institute for Management and Technology, Kharghar, Navi-Mumbai.
In case of any clarifications regarding this report, kindly mail me at kazi.t@itm.edu