New Delhi: The rising demand to allow Islamic banking in the country has led the Reserve Bank of India (RBI) to request the government to tweak existing banking laws. Once that happens, it is likely to fetch India billions of dollars in investments from countries in the Middle East.
RBI Governor D Subbarao said: “The Banking Regulation Act of India does not conform to Islamic banking because it allows banks to borrow from and deposit money with the RBI on interest. But we are in correspondence with the government on how our laws can be restructured or amended so that they are in conformity with Islamic banking.”
Islamic banking is an interest free system that is allowed in many developed economies, including European markets like France, Germany and the UK.
The subject, whether India should allow Islamic banking, has been discussed at several national and international forums. But the long-standing debate took a twist recently when the National Commission for Minorities (NCM) stepped into the picture. A constitutional body, headed by the former Information Commissioner of India, Wajahat Habibullah, met officials of the finance ministry with expectations to open the doors for interest-free banking.
Habibullah said, “The conventional form of banking is not stable as is evident from the collapse of the banking systems across the world. Implementation of interest-free model will provide that stability. And also help the country to channelise more funds from the Muslim business community abroad.”
In the latest development, Law Minister Salman Khurshid announced that he had written to the Planning Commission and the RBI on the issue.
The idea is reverberating all around and the need and relevance of Islamic banking in the post-economic meltdown era is being felt ever so strongly.
In 2009, after the financial tsunami hit the West, Executive Chairman of the World Economic Forum, Klaus Schwabb, had declared, “Today we have reached a tipping point, which leaves us with only one choice — change or face continued decline and misery.”
The change envisaged by Schwabb was the introduction of an alternative banking system based on equity, justice and fair play instead of debt financing.
A market analyst says, “The current jittery state of the world’s lending markets is making the task of funding harder. The issue is felt not only in the West, but is particularly pertinent to Asia.
“The struggle is evident seeing the efforts being made to keep up with escalating prices of commodities as well as the surging population. And the answer lies in finding alternatives to conventional methods of financing.”
Incidentally, The Economist magazine in its recent report also pointed out that the emerging markets in Asia (namely, China and India) would generate around two-thirds of the world’s economic growth in the next five years. This meant that by 2015 emerging markets were being projected to account for 41 per cent of global GDP compared to an estimated 31 per cent in 2011.
The analyst said, “While both China and India are the focus of the GCC countries, India has an edge due to its close proximity to the region, as more than 6 million Indians are presently serving in the Gulf countries. And it would do well for us to explore prospects and open up to Islamic banking.”
Sharing the sentiments, Prof R Vaidyanathan of the Indian Institute of Management, Bangalore commented that the farmers, landless labours and self-employed and unorganised sector were all bereft of any kind of financial benefit.
Emphasising on the “inclusive growth” of the entire population, Vaidyanathan said: “Even after 40 years of nationalisation of banks, 60 per cent people do not have access to formal banking services. And only 5.2 per cent villages have bank branches.”
The state of affairs has compelled many economists to suggest that Islamic banking, which propagates zero interest lending, could hold the key to solving the crisis and provide solution to the farmers’ suicides.
Even the doyen of the Indian judiciary, V R Krishna Iyer had said during an international conference on Islamic Finance, “The system has proven successful in poverty alleviation and sustainable growth in many countries. It is very relevant in India, where 20 million people are starving.”
The success of Islamic banking, which is expected to reach $2.7 trillion by 2015, has inspired many in the conventional banking industry. At its core it is a system that follows stringent set of principles. It aims to be socially and ethically responsible and embraces high transparency and shared risk. The matter of concern is — how long India will continue to ignore it?