Last Updated 21 Apr 2020

Potential of Islamic Banking India

Category Banking
Essay type Research
Words 1049 (4 pages)
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The basic principles on which the Islamic banks function are prohibition of Rib I. E. Collection and payment of interest and prohibition of investment in organization involved in unethical and socially harmful activity. He profits earned by a bank from its activities and returns made by a bank to the depositors shall be (a) from sharing of risk In the project and (b) profit-share agreements and not pre-agreed fixed interest payments, which Is considered as prohibited earnings because pre-agreed interest agreement has no sharing of risk of investment of money. In last few decades the Islamic bank has gained huge momentum. It is growing faster than any other subset of world banking; at 15 to 20 per cent a year (see McKinney report (Exhibits) for asset growth of Islamic bank as compared to conventional banks in selected few companies).

The Economist estimates Islamic assets under management Now days the Islamic banking has become major point of discussion In India. Even RIB had appointed a committee to check the feasibility of Islamic banking in India. The India wants to achieve two objectives by offering Shari compliant banking: a) Financial Inclusion of Muslims: Sacra committee report shows that the Muslims are financially exclude and they are not able to get benefited by the recent growth experienced by India. The report says that the condition of Muslims Is similar to that of SC/Set's.

One of the measures of financial loss to Muslims Is Credit/deposit ratio which is much lower than the national average. One such calculation is shown in Exhibit (2). In the state-wise analysis it is found that advances to the Muslims are lower than other minorities (Exhibit 3 shows the graph for few states which has high Muslim population). ) To attract capital from Gulf countries and other Muslims nations. Banks broadly performs two functions: 1) Sourcing of fund Combined effect of these two transactions is profit generation which ensures the growth and sustainability of any bank.

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To analyze the future potential of Islamic bank in India we shall use the above model of banks. We would look whether there are enough sources of funds and possible avenues for investment in India which are Shari compliant. Sources of Fund: The main source of funding for banks will be a) Public deposits b) Special Investments c) a) Public deposits: Though both Muslims and non-Muslims an avail of Shari compliant product, but generally the main target of the Islamic bank will be Muslims because it caters not only to their financial product need but religious need as well.

Muslims Depositor: India boasts of about 154 million Muslims. Diana Standard estimates their total annual household income of $48 billion (Bag. Household Income x Bag. Household size x Population). DRP. Nasal estimates that there are over Indian RSI. 40 billion of funds to invest by Indian Muslims annually. The Muslims till now have been financially excluded. Their condition is described as similar to SC/SST by Sacra committee report.

The lower involvement of Muslims in banking system of country could be because of any or combination of following reasons: Unavailability of Shari compliant product Unwillingness of the Lenders to lend to Muslims (It may be due to dearth of Collateral's available for getting loan) Financial constraints of the Muslims (Poor household Income) Financial illiteracy of the Muslims. If Shari product is made available first problem (a) is completely solved. Second problem (b) partly solved because the Shari finance is basically equity financing which does not seek collateral's.

But it is yet to be found out which factors contribute o what percentage of the financial exclusion. But we can safely assume that Poor Financial condition and poor financial condition plays the major role in their financial exclusion. According to Sacra committee report about 30% of Muslims are PL. Thus large portion of the Muslims are not bankable. Even if we look at the corporate level we can find very few companies which are promoted by Muslims. Non Muslim depositors: India has more than 90 core non- Muslim population.

The only reason why the Non-Muslims will go for the Shari compliant product is better product offering and very good marketing strategy of Islamic bank. Malaysia has shown that even large of Non-Muslim transact in Shari compliant product. It is estimated that 20% customers of Islamic Bank of I-J are Non-Muslim. In Malaysia, 40% of Sucks are taken by non-lilacs Institution and up to 40% of clients are non- Muslim. If product is marketed well the product can find huge market. Indian individuals and corporate are found to be debt averse as compare to their western counterparts..

And in case you are unable to pay the loan there is chance of penalty banking. But Islamic banking is Equity based financing which will reduce the fear of indebtedness. B) Special Investment : Investment of Fund: Islamic bank have many avenues in India where they can invest their fund. Few of the identified areas are : 1) Equity market: Islamic bank can invest in the shares of the company which are Shari compliant. It is found that there are more than 1000 companies belonging to different sectors which are Shari compliant.

Exhibit 4 shows the percentage of Shari compliant stock and their distribution across various sector Home loans: Home loan is other fascinating area where Islamic bank can invest. Statistic of N.B. shows that the home loan as percentage of GAP is growing at very fast rate in India. As against the convention home loan the Islamic bank offers home loan on the basis of lease, where the bank buys the home and sell it to the customer at profit. The bank receives the money from customers some time later (or in Installment). This model can work in India because Indians are scare of debt.

And in case you are unable to pay the loan there is chance of penalty and public shame Other potential investment area: Source: Business Standard Road ahead for Islamic Bank: Offering Shari compliant product is not new thing in India. India had hundreds of NBC which were catering to the Islamic needs. Though successes. These insights will help us in formulating strategy for introducing Islamic banking in India. Indian Islamic NBS were started either out of the need to rescue people from the ruthless moneylenders or out of a concern for the economically backward and downtrodden.

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Potential of Islamic Banking India. (2018, Sep 29). Retrieved from

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