Islamic Banking:Prospects and challenges in India

I would be making a paradoxical statement when I say India has the 3rd largest Muslim population and  that the concept of Islamic Banking seems like an alien concept for India.Even though it has impressive growth rates than conventional banks all over the world,specially in the Middle East,Europe,East Asia and USA and the total tally is approx 75 till date.

In Islamic Banking productive activities which promotes entrepreneurship,trade,commerce and societal development are supported and activities relating to earning without risk sharing,gambling,charging of interest and other unproductive activities are disapproved and strictly prohibited .During the past decade even with many restrains regarding the investment policies the bank has it has been able to have grown at an average rate of 15% At present India Islamic banking has a presence in India in the form of Non-Banking Financial Company (NBFC ),but the business is small and works at a regional level targeting a niche segment.

Recently RBI Governor D Subbarao had recommended introducing Islamic Banking in India and wrote the same to then present Government to amend the law to facilitate the functioning of the Bank. Indian banking sector is governed by Banking Regulation Act,1949,RBI Act,1934 and many such acts and unless these acts are amended Islamic banking cant function.Some of the challenges in front of Islamic Banking are as follows:

1. Payment of Interest on Deposits is mandatory.
2. Prohibition on banks to invest based on profit and loss sharing.
3. No banking company is allowed to directly or indirectly deal in buying or selling or barter of goods.
4. Islamic banks cant borrow from RBI or other banks as it involves interest
5. Expensive Supervision is necessary
6. Lack of Islamic Banking professionals

There is a common belief that Islamic banks are only for Muslims and many people refrain from using its services and facilities.however, a point to be noted is that approx. 40% of customers in the US and UK were Non-Muslims.People shouldn’t forget that it is for the public welfare and it doesn’t differentiate based on religion. India is facing a funding gap of USD 300 Billion or 30%in meeting its infrastructure funding requirement until 2017.India can attract the Middle East’s high invest able surplus through Islamic Banking.It was highlighted that 50% of the Muslim population was financially excluded.This problem can be taken care by introduction of Islamic banking which caters for this particular niche.In comparison to conventional banking products Islamic banking are much safer.

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