After proving its usefulness in the US, Europe and the Far East in Asia, Islamic finance has now been knocking on Indian doors. With a compounded annual growth rate (CAGR) of 17.3%, it is the fastest-growing sector in the financial industry. The Islamic finance market currently falls in the range of US$1.66-2.1 trillion, with an expectation of becoming US$3.4 trillion by the year 2018 according to estimates by the International Shari’ah Research Academy for Islamic Finance. According to the IMF, Islamic finance’s risk-sharing features and ban on speculation could pose less systemic risk than conventional financing. Globally, interest-free banking, also known as Islamic banking, has witnessed a significant increase, especially in the wake of the 2008 financial crisis.
Review of 2016
Piloting Islamic finance into India was also helped by the execution of an MoU between the IDB and the Export Import Bank of India (EXIM). The MoU’s terms permit the IDB to open its foremost branch in India to offer Shariah compliant financial and banking services. 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 pursuant to the MoU. A state-of-the-art rural mobile network in Gujarat worth US$55 million has also been promised by the IDB. The SME sector appears to be the primary focus of the IDB’s funding and investments into India.
In 2016, India’s first fully Shariah compliant and Securities and Exchange Board of India (SEBI)-registered fund launched its third investment fund, the Realty AIF 1 (Alternative Investment Fund). The fund is focused on the real estate sector. Promoted by Secura Investment Management (India), the fund’s investments and operations are in compliance with the principles of Islamic finance. The fund is expected to have a lifespan of seven years with the first close on the 31st December 2016 and a target to raise INR2 billion (US$29.53 million) with a green shoe option of INR1 billion (US$14.76 million). The minimum investment under the scheme is INR10 million (US$147,636).
The primary objective of the fund is to carry out investments as permissible under the regulations of SEBI and raise resources to provide venture capital assistance to portfolio companies operating in the Indian real estate and allied sectors to generate superior risk-adjusted returns. In the broader market, a number of asset management companies such as the Taurus Mutual Fund and Tata Mutual Fund have offered Shariah compliant investment schemes in India. These were not specifically marketed as Islamic but rather as ‘ethical funds’ in order to attract non-Islamic investors as well.
Another step in providing thrust to Islamic finance as a mode of banking and finance in India has been the setting up of the Lokmangal Cooperative Bank in Solapur, Maharashtra. This bank offers interest-free deposits and other similar products. The approach sought to be taken by the opening of this bank is essentially to promote the financial inclusion of the masses and minority sectors. Reports suggest that the bank has so far managed to distribute INR250,000 (US$3,690.91) to those financially in need. The bank is aiming to follow a ‘participatory approach’ model, where participation is being encouraged by the state government
In addition, we now also have Jammu and Kashmir Bank (J&K Bank) reassessing to offer Islamic banking to its customers in the state. It is looking to examine the proposal after taking the Reserve Bank of India (RBI) on board. In the past, J&K Bank has considered setting up a subsidiary for Islamic finance.
Preview of 2017
Keeping in mind the upward trajectory of the global Islamic finance industry, India is also working toward broadening its potential to become a preferred investment destination for Middle Eastern and Southeast Asian investors looking for Shariah compliant investments. For public investments, for example in much-needed infrastructure improvements, Sukuk have been increasingly seen by the Indian government as an alternative source of funds to allow issuers and investors to participate in major infrastructure projects. A report released by the Economist Intelligence Unit acknowledges the fact that the GCC’s trade and investments are flowing toward emerging markets like China and India instead of the US and Europe.
The agricultural sector could benefit from Islamic finance which would assist to pause the cycle of debt and interest payments which often regresses the progress of farmers. Observers say that with the Indian government’s approach toward Islamic finance having turned neutral, if not positive, the introduction of a respective framework could be set in motion quickly since the central bank has been working on a way for the entry of Islamic banking into India for nearly a decade now.
In countries where Islamic finance is prevalent, it is seen as an ethical and socially responsible way of encouraging investments.
India needs reforms and quick. To develop the Sukuk market for infrastructure development like in Malaysia, the Middle East and Europe and to introduce interest-free Islamic finance and banking for inclusion of the marginalized and the minorities, India will need to reform policies relating to project execution and long-term funding. There is nothing that restricts India from becoming the hub of Islamic finance and banking.
The government of India, the finance ministry and the RBI will need to consider the impact of Islamic finance on the markets and permit/create regulations to ensure that there will be a conducive environment for Islamic finance investors to participate in the market.
H Jayesh is the founder and partner while Aditi Bagri and Monil Chheda are partners at Juris Corp. They can be contacted at [email protected], aditi.ba[email protected] and [email protected] respectively.