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Islamic finance: Idea whose time has come

S V Krishnamachari, Bangalore, Dec 21, 2012, DHNS: 22:13 IST
Even as the Reserve Bank of India (RBI) is driving financial inclusion through a combination of conventional and non-conventional approaches, it’s time to take a fresh look at Islamic finance to expedite finance inclusion, especially within the 170 million Indian Muslim community.

A banking professional with a three-year stint at global banks initially in the US and then at Islamic banks in Kuwait for about five years, Saif Ahmed, who is currently Managing Partner at Infinity Consultants, Bangalore, told Deccan Herald that though Islamic banking in India was ruled out by the RBI Governor D Subbarao last month, there is scope for Islamic finance in many other ways.

“Many people don’t know that Islamic finance has a lot to offer than just interest-free loan, or karz-e-hasan. It has many financial products to offer, ranging from leasing, to equity, venture capitalism and so on. These are doing well in both Islamic and non-Islamic countries and deserve attention.”

According to him, some of the products can be introduced with appropriate tweaking, to make them compliant with the existing laws of India.

Islamic finance is broadly classified in two models, asset-based and equity-based. In asset-based finance, there are two products, murabaha and ijarah. The latter is a form of lease financing and similar to conventional lease finance, but comes with the basic ride that the purpose of the lease should be halal, or Sharia compliant. In case of murabaha, the lender buys an asset on behalf of the borrower and then sells it to be borrower for a profit, the full amount payable in installments.

Another form of financing is besalam, similar to the concept of contract farming; its equivalent for manufacturing activity is called istisna. He said that of the two common models, equity-based ones – musharaka (a form of partnership) and mudaraba ( a kind of venture capitalism) can be explored, within the framework of market regulator Sebi.

Saif said, “Islamic finance is so vast that it is possible in India even within the framework of existing laws. Once its acceptance grows gradually, it can be stand on its own as an alternate system of financing.

Infinity Consultants has advised companies, family businesses and entrepreneurs primarily in the Middle East and India on corporate finance and business solutions. It recently launched India’s first Sharia compliant chit fund, Zayd Chit Funds Pvt Ltd.
“I believe Islamic finance will gain momentum in India when professionals, like bankers, lawyers, accountants, from within the community and outside start taking interest so that they can come up with innovation products that are Sharia-compliant and within the existing the Indian laws. It is this critical mass of human capital that can drive Islamic finance. Academicians do have a role but it is limited.” He said that NRIs working in the Gulf as finance professionals and also those in India need to take the lead.

Globally, Islamic banks have been growing consistently, though return on assets and return on equity continue to be low when compared to conventional banks, according to the latest World Islamic Banking Competitiveness Report 2013, released by global advisory firm Ernst & Young.

Prepared by Ashar Nazim, Partner, Islamic Banking Excellence Center, and Grodon Bennie, Partner, Financial Services Leader, , Ernst & Young, MENA, the report said, “It is however a different story when it comes to profitability. The industry’s average ROE was 12 per cent compared to 15 per cent for conventional in 2011. Islamic banks continue to grapple with multiple challenges relating to sub-scale operation and asset quality.

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