Islamic banking in India will attract huge investment and create more jobs, says research scholar S M Wasiullah, who specializes in Islamic banking and finance. In this interview, he recognizes the Modi government’s increased interest in introducing Islamic banking in the country.
RBI is exploring to introduce Islamic banking in the country. What are the reasons?
Islamic banking and finance has been in discussion since last two decades. The first reason for introduction of Islamic banking is ‘financial inclusion’. India is a country with a population of 1.25 billion; out of which around 500 million are still unbanked.
Considering this fact, the Government of India (GOI) has decided to adopt the policy of financial inclusion to bring unbanked population into mainstream financial system. Islamic banking is one such measure of financial inclusion.
Second reason is that, India is developing with a GDP rate of 6-7% per annum. The nation has been targeting to achieve the GDP rate of up to two digits. So, for achieving this two-digit growth rate, we need a huge investment inflow.
I think these are two main reasons why GOI and RBI are looking for Islamic banking, as it has potential to satisfy these two demands of India.
With this measure, it is hoped that a substantial part of the unbanked population that is keeping distance from conventional financial and banking system will come into the fold of mainstream banking system.
Further, the capital and funds generated outside the country can be channelized into India through Islamic finance mode and it will benefit the nation.
Will Islamic banking be beneficial for Muslim only? What is the basic difference between Islamic banking and conventional banking system?
That is a good question, whether the Islamic banking or financial system is beneficial for Muslim only. My simple answer is, No. Though the Islamic banking is based on Shariah principle of not taking or giving interest, it could be opt by anyone irrespective of faith.
In Western countries like Europe, USA and Africa, you will find that a good percentage of customers of Islamic banks are from other communities than Muslim community.
Well, the basic difference between conventional and Islamic banking system is that the Islamic banks do not transact in ‘interest’. It simply means they do not pay or receive interest.
In conventional banking system, the banks play role of an intermediary, but in the Islamic banking system they are more than an intermediary.
Islamic banks will be part or partner in the business of the customers. It means they will invest in the business of the customer and share the profit and loss accordingly.
There are some other products where they will charge fees and rentals, and sell the products (trading on cost plus).
In a nutshell, by avoiding interest based transactions these banks opt above mentioned four ways of doing business.
The govt. led by PM Modi is promoting ‘startups’. Do you think Islamic banking will help startups and small businesses?
Yes, of course! When we speak about startups, the first think which comes to mind is the risk of failure. Startup is a type of floating company which has huge risk of failure. How much creative the idea be, the question comes to the ‘financing and funding’ as that is the backbone of every startup.
So who is going to share that risk? In conventional system, banks provide finance but they are not going to share the risk. The risk of success is very low.
In these circumstances, Islamic banking products based on profit and loss sharing model will definitely play a great role.
It will definitely boost the confidence among the promoters who are taking startup initiatives. It will help the young generation; as they are involved in more in startups, and contribute to the entrepreneurial development, business development and the overall development of the Indian economy.
As far as the traders and other investors are concerned, for them some other investment and trade related products are offered where the liquidity arrangements can be done, and asset financing can also be done through Islamic finance modes.
Finally, startups, small traders, and investors could definitely benefit from the Islamic financial services.
RBI will implement Islamic banking as a whole or just a component of it?
Islamic banking and finance as a whole includes Islamic banks, financial institutions, Takaful (insurance), Sukuk (bonds), and capital market.
When RBI is planning to allow Islamic banking, it appears from for recent discussions and reports published by the RBI earlier that it intends to allow Islamic banking window within in the conventional banks. It won’t be a full-fledged Islamic banking system. But this step taken by RBI will definitely pave a way for the whole Islamic banking system in India.
Do you think the Modi government pushed the idea of Islamic banking in India?
The idea of introduction of Islamic banking and finance in India has been under consideration for last two decades.
But the Modi government seems to be very much serious and keen. There is an increased interest in introducing Islamic banking.
It would be a laudable and considered a bold decision if this idea becomes a reality in India. We hope it will become a reality soon.
Assume that RBI gives a final nod to Islamic banking. What career prospects it would offer?
There is a huge potential in terms of career, as the introduction of Islamic banking will definitely increase the requirement of human capital, leading to recruitment of additional resources in the banks to successfully execute and operate the Islamic banking window in India. In that sense, employment will be generated.
Further, due to the inflow of huge investments, availability of the required financial support to new startups, traders, small and medium companies, and industries will push business growth which indirectly means more new jobs.