The untapped potential of Islamic finance in India and other nations in Asia has been identified as a key driver of Islamic banking in the region. India is not only home to the world’s third-largest Muslim population, but has one of the most unequal wealth distributions in the world. According to World Bank data, in 2013 the country was home to 20.3% of the world’s poorest people, but also hosted some of the richest, ranking eighth in a list of the highest number of millionaires per nation. REBECCA SIMMONDS explores the shifting landscape of Islamic finance in India.
Legal and regulatory
In July 2014, it was disclosed by local reports that the Reserve Bank of India (RBI), the country’s central bank was conducting a review of regulations on Islamic banking following the introduction of differentiated banks. The move has stepped up the call for reforms in India’s banking sector and greater inclusion of Shariah compliant banking in the face of a statement made by the RBI in 2012 that Islamic banking was not possible in India, due to legal complications. Forms of Islamic finance are present in the country, but the industry has struggled to flourish due to regulatory constraints and opposition from within the government.
Business environment
Optimism over India’s recent change in government can be seen in the target of 4.1% of the GDP set as the fiscal deficit goal for the current year. The deficit for 2013-14 was 4.7%, but the central bank has said that the goal is attainable. The country’s growth target for GDP is 5.5%, which is also ambitious, although the International Monetary Fund (IMF) has predicted potential growth of 6.75-7% in the future. The IMF forecast for the country’s GDP growth rate in 2014-15 is 5.4% rising to 6.3% for 2016.
In terms of access to banking, at least 60% of India’s population of 1.2 billion does not have access to formal banking services and only 5.2% of the country’s villages have bank branches according to World Bank figures. The country’s Muslim population is estimated to be about 14.6% of the total population and forms the second largest religious body in the country after Hindus; as such in the campaigning for the country’s elections earlier in the year, N Chandrababu, leading the Telugu Desam Party pledged to establish Islamic banks in the states of Seemandhra and Telangana in addition to launching a Muslim empowerment program.
The development of Shariah compliant financing and the industry that surrounds it is present and acknowledged by the government, despite its slow development. In August this year, an effort was made by the government to push through reforms in academic courses, including Islamic finance, offered by Arabic colleges in India — however the resistance to the changes occurred on the side of the colleges themselves. In terms of business stemming from Islamic finance funding, projects such as Delhi-based ABZ Agro Foods using Shariah compliant financing for a proposed buffalo meat plant in Bihar are growing more frequent. The company has secured a subsidy offer by the government for INR53 million (US$864,844) as well as a contribution of INR52 million (US$848,527) from developers and is currently seeking further finance from investors in Saudi Arabia.
Microfinance
According to analysts, outstanding loans in the country’s microfinance sector are worth US$2-3 billion, much less that at the peak of the country’s foray into microfinance in 2010. The public listing of microfinance company SKS which floated an offering of US$350 million which was 13 times oversubscribed, lead to a subsequent boom and then collapse of the industry; despite this microfinance has once again revived, with the country’s regulators taking a more involved role and Shariah compliant microfinance is creating its own niche. An example is JanSeva Cooperative Credit Society is licensed to operate in 12 Indian states including Rajasthan and West Bengal and is active so far active in six states, with 10 offices providing interest-free microfinancing services based on Islamic finance concepts.
In May this year, the Indian Forum for Interest-Free Banking invested in a participatory microfinance scheme in Kerala, helping families to establish a living in goat farming. Under the pilot scheme 50 families, regardless of their religion, have each been given five goats worth a total investment of INR1.2 million (US$20,437). Three of the goats and their kids will be returned to the facilitator and the proceeds of the sale at local market price will be distributed between the financier, the farmer, management and the project monitoring committee. According to social investment bank Grameen Capital, US$144 million of equity was cycled into microfinance projects in 2013, more than double the figure for 2012.
Sukuk
In April this year, the Securities and Exchange Board of India (SEBI) began consultation with stakeholders on a plan to establish trading in a minimum of four new categories of debt including: Sukuk, municipal bonds, covered bonds and bonds issued by cooperative societies. Trading in the new products is projected to be up and running this year, with SEBI studying the framework for the implementation of the products in the domestic market.
Foreign investment
A number of GCC banks are growing expanding their business overseas and see India as a land of opportunity, given the local Muslim market and the increasing level of wealth among various levels of society. Banks which offer Shariah compliant products including the Bank of Bahrain and Kuwait, First Gulf Bank and National Bank of Abu Dhabi have made firm commitments to developing business in India and Qatar-based Doha Bank has agreed the purchase of HSBC Oman’s operations in India in a deal that is projected to be concluded in the second half of 2014.
Outlook
The high number of Muslims in India creates an attractive potential market for providers of Islamic finance, however the level of poverty among the majority and the lack of a regulatory framework, or system favorable to Islamic finance could make the pursuit of success and development of the sector particularly taxing. India has been identified as a world growth engine by Ernst & Young (EY) and Islamic finance could be a bridge between the country and high potential markets such as the GCC and Southeast Asia.