There are mainly three financial authorities in India which regulate the banking and financial sector. They are the Reserve Bank of India (RBI) for banking, the Securities Exchange Board of India for capital markets and the Insurance Regulatory and Development Authority of India for insurance. Over the years, RBI has been framing policies for financial inclusivity and ease of access to banking services. In 2008, it had sensed the need to introduce Islamic banking to extend inclusion to the community which comprised a large section of the unbanked population.
During the tenor of the previous government, Dr Raghuram Rajan, the then-RBI governor, conceived a framework to introduce interest-free banking in a phased manner. The idea was to initially open an Islamic window in conventional banks whereby they would accept deposits from the public which would not be engaged in conventional finance activities. Instead, they would be deployed on the basis of Islamic financing modes for equity and trade financing.
Unfortunately, the idea could not take root with the advent of the current government and its ideology. Since the political will has been missing, pleas to RBI regarding the installation of Islamic windows fell on deaf ears. As a result, certain economically disadvantaged strata of society have been denied access to Halal banking products and services. Likewise on the other hand, not paying heed to Dr Raghuram’s recommendations has robbed the country of a substantial amount of domestic savings as well as foreign investment cash flows, which could have been infused into key projects and the growth and development of the country.
Review of 2022
Access to the conventional financial system has improved over the years due to continuous efforts from the government to promote technology. The government is also promoting policies to cater to the needs of unbanked rural communities. In the union budget of 2022–23, it announced the launch of a digital currency which will soon be possibly known as the ‘Digital Rupee’.
Presently, efforts are on to make mobile banking the primary banking channel in the country. In that regard, RBI has taken several steps to strengthen digital transactions. As a result, the total number of mobile subscribers has crossed 1.15 billion. In July 2022 alone, mobile payments recorded 6.28 billion transactions worth US$133.41 billion.
India has become the fifth-largest economy by overtaking the UK during the last quarter. Subsequent close analysis has however revealed that India overcame the UK not because its economy performed extremely well but because the UK’s economy has been reeling under recession for quite some time. With the aforementioned factors and the Russia–Ukraine conflict, the UK’s economy has been hit very hard. So, it can be perceived here that India’s growth story is not as organic as it seems to be.
Fewer Muslims in India operate a bank account compared with other faiths. At 7.4%, the Muslim community’s share of bank deposits and loans is lower than the national average of 80% as they end up keeping money at home.
Despite all that, Islamic non-banking financial entities and Shariah compliant financial products can be found in India’s private space in the form of non-banking finance companies (NBFCs), cooperative societies and funds.
A handful of Islamic NBFCs and a couple of dozen cooperative societies have been set up and their numbers, particularly those of the latter, are on the rise. Islamic NBFCs face regulatory hurdles and the growth of most has been muted or erratic.
Though Islamic cooperative societies have been around since the 1970s, during the last decade, the growth of the Islamic (interest-free) cooperative societies segment has received a big boost due to the establishment of a specialized cooperative societies promotion and facilitation organization set up by a community religious movement.
Venture funds began to be set up only in the latter part of the first decade of this century and the sector has made slow but steady progress.
About 1,500 compliant stocks are listed on the two premier stock exchanges of the country though the number of investment quality stocks among them would probably be about 300 to 400. Retail (individual) Shariah investment in this segment has been growing well both in the primary market as well as the secondary market, particularly over the past decade. This is the fastest-growing segment of Shariah investment in the country, but it is difficult to put a finger on even an approximate number for it due to the paucity of systematic data and the dispersed nature of the universe.
Shariah stock investment under professional investment advisors and fund managers too has been growing at a respectable rate both under the small case as well as the PMS format. The organized mutual fund segment is dominated by a single fund started in the closing years of the last century by a reputed business house, though a couple of other offerings too have been around for more than a decade. With assets under management of just under INR15 billion (US$184.18 million), it is the largest player in the Shariah investment space in the country across all verticals. With the stock market booming in recent years, it has done exceedingly well in the past couple of years.
Preview of 2023
According to a UN report, India’s population will surpass that of China by next year. Out of the total, the human capital in the age group of 15–64 years accounts for around 67.5%. That means India puts a lot of hope in its working population, which again is one of the largest in the world. Whether those hopes will be vindicated or not will depend to a great extent on the government’s ability to provide its burgeoning population with adequate job opportunities. Unfortunately, the past record has not been too encouraging.
This country is also home to the third-largest Muslim population, currently standing at 195 million, which is all set to overtake Indonesia by 2050 and become numero uno.
During this year’s G20 summit in Bali, Indonesia handed over next year’s presidency to India which will play host to the group of 20 world leaders whose countries’ digital transformation has been chosen as one of the main items on the agenda by Prime Minister Narendra Modi.
The government is seriously considering digitizing transactions in the country. It recently launched the 5G network for faster internet services and also established the GIFT City in the state of Gujarat in order to give wings to start-ups especially of the fintech genre.
Institutional arrangements for producing human capital for Islamic finance in India have always been ahead of the requirements. Avenues for its deployment are, however, very limited, as there are not many institutions which can absorb it. We can only hope that in the coming years India will see a U-turn in the current policies and consequently open its doors to the sidelined community as well as allow additional avenues to emerge in the Shariah banking sector.
Conclusion
From a US$3 trillion economy, in just 25 years, India is estimated to become a US$40 trillion economy by 2047 and to be ranked among the top three economies of the world.
From the aforementioned developments which are taking place, India seems to be missing the bus in the US$2 trillion Islamic finance industry as a large part of this pie is taken up by the Middle Eastern and Southeast Asian countries.
The world population has surpassed eight billion this year and India is poised to become the No 1 most populous country by surpassing China next year. With the highest population, particularly in the working-age group, India has a lot to offer to the global economy if it utilizes its full human potential. For this to materialize, it will have to stop neglecting the needs of certain sizeable segments of society and make the environment conducive enough to fuel the economy. Only then can it fulfill its destiny and become a superpower.
Ahmad Bilal Khan is the assistant professor at the Rizvi Institute of Management Studies and Research, Mumbai, India. He can be contacted at [email protected].