This action might not be possible to undo. Are you sure you want to continue?
Dr.Aftab Alam Asst.Professor Tirupati Institute of Management ShindeWadi Pune Email- firstname.lastname@example.org Mob. +91-9960265105
During recent years there has been an unprecedented expansion in the range of commercial banking products labelled as ³Shari`ah compliant´ in many countries of the world. With the breakdown of the conventional banking and financial system during current global financial crisis, the world is exploring the new way of doing financial transaction, the Islamic banking and finance is being considered as a best alternative to the present system. According to an IMF working paper on the relative financial stability of the Islamic banks, the small Islamic banks are found to be financially stronger than the small commercial banks.
Islamic Finance involves taking into account of the moral consequences of financial transactions and ensuring that contracts are just and equitable for both the parties involved. Reward should be related to effort, responsibility and risk-sharing. Islamic finance is emerging as one of the fastest growing areas of international finance. Since the inception of Islamic banking about three decades ago, the number and reach of Islamic financial institutions worldwide has risen from one institution in one country in 1975 to over 300 institutions operating in more than 75 countries. The study tries to focus the viability of Islamic banking and finance in India and its possible role in the entrepreneurship development.
org/external/pubs/ft/wp/2008/wp0816. began its operations in Egypt. The Mit Ghamr Savings project became part of Nasr Social Bank which. This was followed by the establishment of the first Islamic commercial bank. Dubai Islamic Bank. as well as an additional 250 mutual funds that comply with Islamic principles.2 This represents approximately 0. followed a short time later by the Bahrain Islamic Bank. a number of Islamic banks.5% of total world estimated assets as of 2005.html accessed 7/03/10 4 Islamic Banking and Finance in Kingdom of Bahrain.cfm?story_id=14859353 accessed 9/03/10 3 http://online. opened its doors in 1975. Since then.com/article/SB116839213664272112. 5 accessed 10/03/10 2 http://www. In fact at outset of world financial crisis the countries in the world especially the western world have started experimenting with the Islamic banking. It is estimated that over US$822 billion worldwide sharia-compliant assets are managed according toThe Economist.economist.4 http://www.wsj. Islamic Banking is growing at a rate of 10-15% per year and with signs of consistent future growth. recognizing the market potential of Islamic finance.imf. investment companies and fund management companies. which was opened in 1975 in the United Arab Emirates. is still in business in Egypt. financial institutions and transactions have emerged all over the world.pdf Islamic Banks and Financial Stability: An Empirical Analysis pg. in 1978.3 Many countries in the world have adopted an Islamic financial system. an increasing number of Western banks and financial institutions have begun providing portfolios. The idea continued to develop theoretically until 1974 when the Islamic Development Bank was established in Jeddah. including the United States through companies such as the Michigan-based University Bank.Introduction: Almost four decades have passed since the first Islamic bank Mit-Ghamr. size and activities of Islamic banks have grown rapidly and the concepts have developed to cover the activities of other types of financial institutions including insurance companies. the number. The first modern commercial Islamic bank.com/world/europe/displaystory.The Bahrain Monetary Agency (BMA) 2002 1 .1 Islamic banks have more than 300 institutions spread over 51 countries. Additionally. till date. transactions and instruments that are essentially non-interest based.
which is taken from the Qur'an and from the example of Prophet Muhammad (peace be upon him). As a matter of faith. or receive money from someone and expect to benefit ± interest (known as riba) is not allowed. invests deposits in a commercial activity that earns each partner an agreed upon portion of the profits of the venture. The responsibilities of the various parties to a Mudarabah contract are given below: The bank provides to the customer or entrepreneur (Mudarib) all the capital to fund a specified enterprise.Islamic Banking and Finance The basis for all Islamic finance lies in the principles of the Sharia. ijarah wa Iqtina. Mudarabah. Even we can have Sukuks as a good alternative to raise funds from the market. or Islamic Law. A Mudarabah is a contract between investors and a financial institution that. A Mudarabah can be entered into for a single investment or on a continuing basis with the financial institution acting as a fiduciary. acting as a silent partner. Commodity Murabaha. Money must be used in a productive way. The Islamic Banks acts as traditional venture capitalist. Mudarabah is a fairly widely used form of finance in Islamic banking and capital markets. The concept of Mudarabah (Profit Sharing Agreement) and Musharaka (Profit Sharing Agreement) is very much relevant in the development of entrepreneur like a venture capitalist firm. The principal means of Islamic finance are based on trading ± it is essential that risk be involved in any trading activity. Any gains relating to the trading are shared between the person providing the capital and the person providing the expertise. Musharaka. Salam and Parallel Salam and Sukuks It would be worth to have a view of Islamic Financial instruments which is pertinent to the entrepreneurship development. a Muslim cannot lend money to. The customer does not contribute capital but contributes management expertise (or . To make money from money is forbidden ± wealth can only be generated through legitimate trade and investment in assets. Islamic Financial Instruments The principal Islamic financial instruments are Murabaha. Central to Islamic finance is the fact that money itself has no intrinsic value. Mudarabah investments may be made for fixed terms and arranged through negotiable instruments (called investment deposit certificates or Mudarabah certificates) and thus may have characteristics similar to those of shares.
The Mudarib fee could be a fixed fee (to cover management expenses) and a Percentage of the profits or a combination of the two. the bank (as the fund provider or rab al maal) has to bear all the losses unless the loss has resulted from negligence on the part of the Mudarib. the customer buys out the bank¶s share over a period of time. which may be different from the proportions of capital contributed. Musharaka is widely used for joint venture investments. The customer and the bank share in the profits according to the agreed proportions. in India the development of Shariah compliant financial institution had started well before the establishment of few most prominent Islamic financial institutions the worldwide. A classical Mudarib fee is based on a percentage of the profits only The balance of the profit of the enterprise is payable to the bank. these institutions could not grow beyond a certain limit and those who grew could 5 Ibid . If the enterprise makes a loss. A Musharaka (Equity Participation) is a partnership between a financial institution and an enterprise in which the financial institution supplies working capital. As a matter of fact. But due to certain legal and other hassles.5 Development of Islamic Banking and Finance in India : Development of Islamic banking in India is a realization of the needs of the public seeking an alternative banking system that is both capable of delivering sound banking/ financial services and compliant with Shariah. The terms and conditions of a musharaka contract are as under: Both the customer and the bank contribute toward the capital of the enterprise Under a "diminishing" musharaka. with the exception that instead of interest the Islamic bank receives a share of the rent of the property. equivalent to a conventional bank mortgage. Any losses of the enterprise will be borne by the customer and the bank according to their capital contributions.Entrepreneurship) The customer is responsible for the day-to-day management of the enterprise and is entitled to deduct its management fee (Mudarib fee) from the enterprise¶s profits. Notes of participation sold to investors provide the funding. It is also used by Islamic banks for the purchase of real estate.
Islamic Finance Companies in India: Islamic financial institutions in the country can be broadly grouped under Islamic finance companies (registered under the Company Act). However. lower regulation and flexibility in registration and functioning. lower capital requirements. Besides being the world¶s second most populous country India is also the world¶s second most populous Muslim country. and Islamic cooperative credit societies (registered under the Cooperative Act). Whereas nonbanking system comprises of financial companies. Finance companies are arguably better option for Islamic finance because of easier entry norms. Banking system consists of commercial. Capital Market is one of the best options as far as current application of Islamic finance is concerned. 50 billion of investible resources with them annually. capital market and insurance sector. regulatory body (SEBI) does not seem to be encouraging to such Islamic finance companies. Muslims are youngest and most urban community in India. Considering their relative economic backwardness even a 15 percent saving rate for Muslims would place over Rs.not sustain themselves at that level for a longer time. we will have to see if any domestic company launches any such products or a foreign player is permitted to launch the same. There are several districts where Muslims constitute a majority and in a number of industries Muslims have traditionally maintained a larger presence. Considering the current developments in Islamic finance it is very surprising that India is still oblivious to the current developments. It has been proven in well documented researches that Indian capital market provides one of the best options for shariah compliant investors. The main reason behind this is the policy of separation between banking and trading. It is Asia¶s third largest and one of world¶s fastest growing economies. cooperative as well as foreign banks. Islamic welfare societies (registered under the Trust Act). . Recently there has been some deregulation and liberalization in insurance sectors which has brightened the prospects of Islamic insurance however. India¶s financial system can broadly be divided into the banking and the non-banking sector. Since the last two decades. Its Muslim population is estimated to be between 160-200 million. Indian banking laws do not prohibit Islamic banking as per se but the banking laws in the country are devised in such a way that automatically puts a full stop on Islamic banking possibility. India has continuously managed an average saving rate of above 20 percent of the GDP.
Syed Shariyat Finance Assalam Finance & Investment Ltd. This effort miserably failed by mid 1980s. Entrepreneurship is linked to creation of jobs. and to economic growth in the country. There are more than 10 million small scale units including registered as well as unregistered units. and improvements of living standards. 1999 In early nineties large-scale policy and institutional changes were brought in the Indian financial system. This was designed as a loose constituent of many small partnership firms engaged in leather trading. Year of Establishment 1983 1986 1989 1989 1990 1990 Source: Shariq Nisar. most of them invest their own funds or borrowed funds mainly from relatives. Small businesses help create new jobs. As per RBI criteria 17. Much less come . There are 46% of the total small scale units which have shortage of working capital (Third Census of SSI). The initial investment of small units comes from within. Some other notable Islamic finance companies established in India since then are mentioned in the following table. Hence the period witnessed large-scale regulatory changes. Small scale industries are the second largest employment generator after agriculture sector in India. introduce new products and provide specialized expertise to large corporations. Baitul Islam Finance Ltd.The first Islamic finance company called Al-Mizan was started in early 1980 at Madras.8% of the small scale units are sick units. Prominent Islamic NBFCs in India S. friends and professional lenders. increases in productivity. No. 1 2 3 4 s5 6 Name of Institution Barkat Investment Group Al-Ameen Islamic Financial & Investment Corporation of India Al-Barr Finance House Ltd. Islamic Finance Companies and Entrepreneurship Development: It is widely agreed that the growth of small businesses contributes greatly to the nation's economic expansion. Regulations governing finance companies were an integral part of these overall policy changes.
The concept of Mudarabah and Musharaka can be very much helpful in helping the small entrepreneurs as the instruments are customer oriented.from banks and government channels. Even when small loans can be raised from government agencies. The small units depend more on their own funds and borrowed funds from no-banking and non-government sectors because of the fact that institutional lenders like banks and government financial corporations are generally reluctant to advance money to these small units. It will also fill the gap of working capital requirement of the large number of small scale units in the country. the procedure is so cumbersome that most of the entrepreneurs hesitate to make use of such facilities. The Structure of the Mudarabah instrument will be as given below: Periodic profits and return of capital Investment /trading activity Entrepreneur (mudarib) Islamic Bank Payment of Mudarabah capital The Musharaka Model will be as below: Islamic Bank Partner (customer) Musharaka .
http://www.html accessed 7/03/10 4.islamic-bank.pdf Islamic Banks and Financial Stability: An Empirical Analysis pg. The only thing required is the government nod to run such an ethical banking which takes care of the needy based on the principles of transparency and accountability. Conclusion: Keeping in view the financial need of the small entrepreneur and their access to the conventional banking & finance.com/article/SB116839213664272112.The above model can suitably be applied for the development of small enterprise in India. http://www. The Government should give green signal to such Venture capitalist or the Islamic Bank offering products like Mudarabah and Musharaka in the country. 5 accessed 10/03/10 2.http://online. Islamic Banking and Finance in Kingdom of Bahrain.economist. Ibid 6. It was found in a study by the IMF working paper that the Small Islamic Bank is more stable than the Small Conventional Bank.com/world/europe/displaystory. The Instruments of Islamic banking especially Mudarabah and Musharaka is best suited for them. The Mudarabah and Musharaka Model will be best suited to this purpose.com/sharia-finance/ accessed 10/03/10 * Paper presented in an International seminar on interest free banking in India held in Poona College on 19 th & 20th March 2010.wsj.cfm?story_id=14859353 accessed 9/03/10 3.imf. At least this will act as a supportive financial institution along with conventional one. References: 1. The Bahrain Monetary Agency (BMA) 2002. http://www. 5.org/external/pubs/ft/wp/2008/wp0816. . This would give a fillip to the entrepreneurial venture in a continuous and sustained basis in the country. the Interest free banking and finance is sure to help and support them in a better way. So the Partnering between the Small Islamic Bank and the Small Business units will be a very good proposition to start with in India.