Untapped Bounty

The promoters of Islamic banking hope to attract Shariah-compliant Muslims, reports Abhishek Anand

Hefty returns ...but there’s no scope for investing in pure interest-bearing instruments

INDIA MAY soon allow Islamic banking or Shariah-compliant banking in the country. As a first step, the Reserve Bank of India is expected to permit some non-banking financial companies (NBFCs) to offer Shariah finance.
Globally, Islamic banking is growing at a rate of 15 percent to 20 percent, and according to a KPMG report, Shariah-compliant banking assets now stand at around $750 billion. Money raised by Islamic banking is typically invested in activity that is consistent with Shariah rules, which means not investing in companies dealing in liquor, gambling or sex. It also means not investing in pure interest-bearing instruments.
Shariah banking functions on a profit-sharing model, as opposed to the traditional interest-rate governed model. At present, close to 75 countries from Europe, North America and Southeast Asia have adopted the Shariah model that is largely aimed at Muslim investors.
“Some time back, the RBI showed willingness to let Islamic banking take roots in the country. If only on an experimental basis, it is likely to allow some NBFCs to start Shariah finance in the country, and depending upon the experience, it may extend the practice through formal banking channels,” says Hiresh Wadhwani, partner and national director, banking and capital markets, at Ernst & Young. But he adds the central bank will have to formulate regulations that safeguard the interest of customers.
The RBI has been considering the matter for quite some time now. The 2008 Raghu Ram Rajan Committee report on financial sector reforms had advocated introduction of Shariah banking in the country. Muslims constitute close to 13 percent of the country’s total population, but their share in overall deposit and credit stands at 7.5 percent and 0.5 percent, respectively. Shariah banking maybe able to attract much of these untapped resources.

Globally, Islamic banking assets stand at around $750 billion

Already, market regulator SEBI has allowed entry of Shariah-compliant mutual fund schemes in the country. Two companies — Taurus Mutual Fund and Benchmark Mutual Fund — have launched such schemes, providing substantial returns to investors.
“We have managed to provide a hefty return of 120 percent to customers in the last 15 months,” says an upbeat Waqar Naqvi, chief executive officer of Taurus Mutual Fund. During the economic downturn in March 2009, the fund was able to raise Rs 4 crore. But now, says Naqvi, the average assets under management stand at a respectable Rs 25 crore. And the consensus is that things can only get better.
The Kerala government too has allowed Shariahcompliant investment companies to channelise the considerable remittances they get from the Gulf. According to the KPMG report, Kerala receives remittances worth nearly $2.4 billion annually from West Asia. But a major portion of it is either lying in bank accounts or is used for investments in real estate and jewellery.