Islamic finance in India has been a slow starter unlike its global counterparts. While there have been various reasons for the rather lackluster show to date, there appears to be a change in the momentum in the past few months.
The market and the regulators appear to be warming up to the idea of Islamic banking and finance gradually. Islamic finance does have immense potential and scope in India and there is a latent demand for products and services based on Shariah principles. The infrastructure deficit in India is also one of the key areas which would benefit in the event Islamic finance is brought into effect.
Review of 2015
In late 2014, one of the largest public sector banks in India, the State Bank of India (SBI), had proposed to introduce a Shariah compliant equity fund. It even announced the launch. The scheme had received approvals from the capital market regulator, the Securities Exchange Board of India (SEBI). Unfortunately, the launch of the fund was indefinitely deferred. It has been gathered that the fund was to be reoffered in a better and more attractive format, but there has been no development in this regard to date. The fund could have been an opportunity to provide medium to long-term capital gains by investing in Shariah compliant equity and equity-related instruments.
Certain developments were also seen on the academic front. The Maulana Azad National Urdu University and the Bombay Stock Exchange Institute have collaborated to introduce courses on Islamic finance and banking. Several leading corporates across varied industries such as manufacturing, financial services, education and skill development have signed MoUs with this university to train its students to enhance their employability skills.
The regulatory front also saw considerable movement in the past year. On one hand, the draft Indian Financial Code is in its final stages, which is set to revamp the regulatory framework by replacing almost 20 legislation in India. On the other hand, an inter-departmental group on alternative banking was set up within the Reserve Bank of India (RBI) on the advice of the government, to examine the legal and technical issues on introducing Islamic banking in India. The group has submitted its report to the RBI for its consideration. The RBI has also constituted a committee with the objective of working out a five year action plan for financial inclusion. These developments together evidence that a change in the regulatory scenario is being contemplated and has been set in motion.
In the capital market sector, the RBI has recently issued guidelines for the issuance of rupee-denominated bonds overseas. This ushers a completely new era for debt-raising by Indian companies, and will integrate financial markets in India further with the rest of the world. The move also follows robust demand for such bonds issued by the International Finance Corporation (IFC) and the Asian Development Bank. In November 2014, the IFC raised US$250 million equivalent of 10-year ‘Masala bonds’ at 6.45% listed on the London Stock Exchange to increase foreign investment in India, mobilizing international capital markets to support infrastructure development in the country. This paves the way for the issuance of Sukuk, particularly rupee-denominated.
Preview of 2016
The Indian Financial Code which is proposed to be implemented in the next few months is much-awaited to bring about coherence and efficacy in the financial regulatory framework. Meanwhile, the RBI can also be expected to take forward the report submitted by the inter-departmental committee on the feasibility of introducing Islamic finance. Though the Indian Financial Code does not explicitly permit Islamic banking, it will certainly promulgate an Islamic finance-friendly regulatory environment. The introduction and implementation of Islamic finance within the regulatory framework may well be a long-drawn-out process. However, active consideration by the regulators is a concrete first step toward achieving the end goal. Even though there has been a huge time lapse in actively taking this up, the fact that it is being considered once again enthusiastically is a definite positive move.
It has been proposed that a US$75 billion dollar fund will be created jointly by the UAE and India to invest in Indian infrastructure. The fund is to support the expansion of India’s network of railways, ports, roads, airports and industrial corridors. The countries also aim to increase trade by 60% in the next five years. The UAE, being one of the major players in the global Islamic finance sector, would give tremendous impetus to the introduction of financing models based on Shariah principles and Sukuk issuances. This would attract investors across the globe and in turn benefit the Indian economy.
Investments based on Shariah rules have been slowly gaining traction in India. The RBI has found Islamic banking and finance as “inconsistent with the existing laws” and hence not been permitted. However, the stringent views appear to be changing. The regulators and the common person have become more pragmatic in their views and accepting of change. Though not a short-term goal, the inclusion of Islamic finance within the regulatory framework does not seem like a very distant dream anymore.