Islamic banking in India: Challenges and prospects

Linked with Asghar Ali Engineer – India, the Two, and with Madrasa education myth and reality.

Published on Two, by Syed Burhanur Rahman, 30 January 2009.


Islamic banking is at an incipient stage. The existing legal framework does not permit Islamic Banking. Only selective activities like equity investment is possible, while trade finance aspects like taking title to goods is not possible. A lot of amendments need to be carried out in the prevalent legal set up. Appropriate models need to be selected and implemented to suit society’s diverse financial needs. Islamic Bank of Britain, Islamic banks of Thailand, Singapore and USA may be glaring models for Indian bankers. The reputed domestic and international banks along with the collaboration of RBI should be involved in the process of determining and implementing Islamic Banking products.

The importance and relevance of Islamic banking in India in the context of “Financial Tsunami” that has taken place in recent times further enhances the need of Sharia banking. Also the political parties need economic rationality to convince majority of voters that Islamic banking is not being introduced to please Muslim voters but to genuinely boost faster and inclusive growth for the Indian economy. Obnoxious politics in the name of religion must be avoided. I personally believe to refer ‘Islamic Banking’ as ‘Interest Free Banking’ so that it could be looked through the broad economic kaleidoscope and not a narrow religious prism.

With only minor changes in their practices, Islamic banks can get rid of all their cumbersome and sometimes doubtful forms of financing and offer a clean and efficient interest-free banking. Participatory financing is a unique feature of Islamic banking, and can offer responsible financing to socially and economically relevant development projects. This is an additional service that Islamic banks offer over and above the traditional services provided by conventional commercial banks. Such a system will offer an effective banking system where Muslims in India may invest in pursuant to Islamic principles and the rest may have an alternative to interest bearing conventional banking. Both systems can co-exist. Let the people of the largest democracy decide democratically which one they should bank upon. The young sapling of Islamic banking must be nurtured by the Government so that the country may reap the benefit of its fruit in the coming period. (full long text).

(Syed Burhanur Rahman is a practicing attorney in New Delhi).

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