Professional Documents
Culture Documents
Thought Paper
www.infosys.com/finacle
Universal Banking Solution | Systems Integration | Consulting | Business Process Outsourcing
02
Thought Paper
favor, but no discrimination. Former Prime Minister Gordon Brown, who was Finance Minister when Islamic Banking was introduced in the UK, was so confident of the system that he predicted London would become its future gateway. The results today vindicate his predictions. This is why, at a time when other banks are facing closure, the Islamic Bank of Britain is expanding its network in the UK and being asked to do the same in Europe.
According to estimates, global Islamic Banking assets have touched $ 1.1 trillion in 2012 as against $ 826 bn in 2010(5). The market share of Islamic Banking by assets is 14% in the Middle East and North African region and 25% in the Gulf(5). For 2006-10(5), the Compound Annual Growth Rate of the top 20 Islamic Banks in the Gulf is 20% as compared to 9% for the regions conventional banks. In the Gulf region alone, Islamic Banking assets are expected to grow to $990 bn in 2015 from $ 416 bn in 2010(5).
Thought Paper
03
derivative contracts of the kind which led to the 2008 sub-prime crisis. Apart from being a viable alternative to capitalist financial systems prone to extreme risks, the interest-free solutions of Islamic Banking could restore equilibrium in Indian society by providing succour to debt-ridden farmers, labourers and other marginalized groups. Hence, Islamic Banking has potential as a tool of financial inclusion. As per the Pew Research Centre, India was home to nearly 177 million Muslims in 2010, making it the country with the third largest Muslim population in the world. A considerable number of Indian Muslims either invest in non-interest bearing accounts or donate the interest from interest-bearing accounts to charity. There is an opportunity for Islamic banks to attract funds that interest paying conventional banks cannot.
Traditionally, Indians practised participatory banking by creating cooperative banks, nonbanking financial institutions and micro credit programmes; the same platform can be used to introduce Islamic Banking. According to the Planning Commission, India is facing a funding gap of US$ 300 billion or 30% in meeting its infrastructure funding requirement until 2017. Following the example of countries such as Malaysia, Indonesia, UK, France and Germany, India could use Islamic financial products such as Sukuk (long term bond) to fund infrastructure and other sectors. Specifically, India could attract the Middle Easts high investible surplus through Islamic banking and finance.
Support infrastructure
Commercial banks borrow from other banks or the RBI to meet their short term funding requirements, but Islamic banks cant do so because it involves interest. Islamic banks are required to closely monitor their investments in various businesses, as well as ensure that the investee firms are managed properly. This calls for expensive supervisory infrastructure.
Lack of awareness:
There is a lack of awareness about Islamic Banking. Most people mistakenly believe
04
Thought Paper
that it is only meant for Muslims, whereas in Malaysia, UK and elsewhere, 40% of the customers of Islamic Banks are Non-Muslims (4). Banks should educate customers regarding the benefits of Islamic Banking. Admittedly, this is a herculean task, given that Islamic Deposits like Mudarabah Deposit, do not guarantee principal, nor pay a fixed return.
the UK example and introduce new laws to govern the Islamic Banking business. More effort is required in the area of training and education; the State can play a pivotal role in promoting this subject by including it in the curriculum of professional courses. The myth that Islamic banking is only for Muslims must be dispelled, and awareness of Islamic Banking as an alternative, ethical form of banking should be created. Public seminars and discussions are a good way to do this.
Suggestions
The latest RBI directive is clear that Islamic banking cant be adopted in India under the current legal framework. India needs to follow
Conclusion
Growth of Islamic finance depends on two important factors: domestic demand and Indias role in the globalization of the financial sector. By not introducing Islamic finance, India is losing the opportunity of garnering capital from a large section of the Muslim population as well as from Islamic nations in the Middle East and elsewhere. Islamic finance is an idea whose time has come. It is time the Indian Government recognized this significant opportunity.
References
1. www.imf.org 2. TwoCircles.net 3. www.dnaindia.com/analysis/report_islamicbanking-is-not-for-muslims-alone_1669157 4. twocircles.net/node/181672 5. World Islamic Banking Competitiveness report 2011-12 published in www.ey.com 6. http://timesofindia.indiatimes.com
Riaz Akhtar
Senior Consultant, Infosys
Babita Talreja
Principal Consultant, Infosys
Thought Paper
05
About Finacle
Finacle from Infosys partners with banks to transform process, product and customer experience, arming them with accelerated innovation that is key to building tomorrows bank. For more information, contact Finacleweb@infosys.com www.infosys.com/finacle
2012 Infosys Limited, Bangalore, India, Infosys believes the information in this publication is accurate as of its publication date; such information is subject to change without notice. Infosys acknowledges the proprietary rights of the trademarks and product names of other companies mentioned in this document.