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The scope of Islamic finance in entrepreneurship

Javed Ahmad Khan

For an emerging vibrant Indian economy aiming to its full potential growth in the years to come, the ethical-based participatory form of banking and finance can be considered an ideal alternative for of financing for the country which also speaks of profitability with social responsibility. Amid the current global financial crises, it can prove to be the greatest opportunity to unleash some new homegrown ideas for the use of entrepreneurship as antidote to poverty. But how to attract such global capital like sovereign wealth funds, private equity, venture capital to strengthen the idea of financial inclusion. For instance, the rural India’s economic prospect is seen in a new ally in venture capitalists and private equity funds to invest in social projects.

Relevance of Islamic Finance

Islamic banking and finance operating at the global level is more concerned with the social projects, uplifting the human potential with growth in the real sector of the economy. This financial system shuns the very idea of interest rates, and rests on profit-sharing principles. It is based on equity and return to various factors of production. For example, Islamic equity funds are like mutual funds where the savings of small or big savers are pooled together to invest for their mutual benefit and the returns (either profit or loss) distributed proportionately.

Operating since four decades in the oil rich-Gulf States, the Islamic financial institutions received greater attention especially in the year 2008 by displaying their resilience amid the current global financial debacle than their conventional counterparts mainly due to their strong growth. The main reason why current financial crisis has not much affected the Islamic financial Institution is that it is less debt reliant and more dependent on customer deposits for liquidity and in this way limiting their exposure to credit markets.

How this can uplift the Muslims in India?

Muslims in India, with a sizable population are also found to be reluctant in taking loans on interest from the commercial banks or involved in the prevalent interest-based financial transaction because it is prohibited in their religion. In fact, one important factor in the under-development among the Muslim in India is the non-availability of suitable financing for their economic and entrepreneurial progress especially among the lower middle class of population where there is always an urge to improve their economic enterprises.

As per the Sachar Committee report, Muslims in India are economically deprived as 50% of them are financially excluded. The current UPA government’s financial inclusion policy to engage the marginalized communities into the mainstream economic activities can be seen as an ideal one to engage Muslims through Islamic financings and investments. Moreover, with the upsurge in Islamic finance at the global market, there is observed an increasing demand among the Muslims to opt for ethical-based Islamic banking and finance in the country.

In fact, they are proposing that the government on its part must allow some public sector banks to come out with a scheme which, instead of paying interest to its depositors, it can agree to share profits as well loses earned out of actual investment in activities like trading in equities, financing infrastructural projects and other core business activities. In order to facilitate Islamic banking, the Muslims in India are asking the government to at least permit these under the non-banking finance companies (NBFCs) and formulate necessary rules and guidelines by making appropriate changes/additions/amendments in the Banking Regulation Act of 1949. The Kerala government has already announced the plans to set up an Islamic shari’ah-based NBFC, capitalized at Rs 1,000 crore. However, this is yet to be materialized.

But does India sound good for Islamic investment avenues? The reason why Islamic banking and finance in India is so much talked about is also because the other non-Muslim States like U.K, China and Australia are modifying their domestic laws to let this Arab money come even if it comes in the name of Islamic finance. The rise of Islamic banks in the secular countries, for instance in European countries and in East Asian economies, has already started.

With the growing market of such ethical-based participatory financing, India can benefit in attracting global Islamic funds and can also streamline the savings of Muslims who are reluctant to invest in the interest-based commercial banks and investment companies. There is the possibility that current equity markets would be the ideal business venture for Islamic investors.

Scope of Gulf Finance

Considering the Arab Gulf’s ‘Look East Policy’ with regard to the investment in India and other Asian economies especially through the equity financing, some of the Arab Islamic investors are looking at various investments options in India. Various Arab Gulfs’ Islamic banks have shown much interest in the sectors like infrastructure, real estate, financial services, and logistics. For instance, the Abu Dhabi Islamic Bank has mapped out a new business strategy to play important role in India’s infrastructural developments for financing various other projects. There are billion of dollars in the name of Islamic finance knocking at the RBI’s door. The only instrument needed is the will to act.

The main argument put forwarded in favor of Islamic banking and finance in India is that it can engage Muslim artisans, small business communities towards the entrepreneurships. The question is how to make Indian banking more participatory so that million of people especially the lower middle class can come into the fold of the banking and become its customer or partners in the venture creation and in wealth creation.

Although Islamic banking is still a distant dream for the Muslims in India, however in recent years, their hope were much alive when members of a committee constituted by the Reserve Bank of India started to examine the possibility of establishing Islamic banking in the country. However, RBI is still uncertain to work out the proper framework as this system requires sharing of profit and loss with depositors and investors, apart from ensuring that the funds comply with RBI and SEBI rules.

In fact, the Gulf Islamic financial institutions are interested in getting the license to start Islamic banking in collaboration with Indian partners. However, what is promising in this context is that a general consensus is emerging that the private-public partnership, through the participatory finance can lead India towards the strong economic power in the coming decades.

The author is Associate Professor, Center For West Asian Studies, Jamia Millia Islamia, New Delhi. E-mail: