India is planning to set up a body to fine-tune and promote Islamic finance before issuing license to start full-fledged banking operations, according to one of the country's senior ministers.
“The formation of the entity is an important step forward. We need to set a framework for rules for different financial products to be offered by these banks or through the Islamic banking windows,” said Rahman Khan, India's minister for minority affairs.
He was talking to Arab News on the sidelines of the international seminar on Interfaith Harmony and Tolerance in Kuala Lumpur organized by the International Islamic University Malaysia (IIUM) in association with Kerala-based Ma'din Academy recently.
“We will introduce a financial product like Tabung Haji which would be a great relief to those who want to undertake the pilgrimage,” said the minister, who has aggressively been pursuing the idea ahead of the general elections two months away.
Tabung Haji, Malaysia’s Haj management system, provides an opportunity for Haj aspirants to systematically invest money that grows and allows the depositor to undertake the pilgrimage to the holy cities of Makkah on its maturity.
The money is reinvested in Shariah-compliant vehicles that give reasonable returns.
“It mainly goes into infrastructure funding. We build roads, bridges and other basic infrastructure using this fund. There are big office complexes and housing projects that it has funded,” said Rajah Mohammed Abdullah, chairman and chief executive officer of the Muslim World Biz, which holds global summit on Islamic finance here every year.
Last year, India's central bank, Reserve Bank of India, decided to give license to non-banking financial companies to offer Shariah-compliant products and Cheraman Financial Services Limited (CFSL), launched by Kerala with the support of prominent expatriate entrepreneurs in the Gulf, was first to get the RBI license.
Khan wrote to the RBI Governor, Raghuram Rajan, saying it was the duty of the State to facilitate every citizen to practice and follow their religion under the Constitution and the governor, while accepting his view, wanted certain amendments to the laws concerned. Khan has urged the ruling party leadership to expedite the process before the elections.
“This is a great development everybody was looking forward. It'll help India attract a lot of foreign and domestic investments in infrastructure development and other core areas,” said Siddeek Ahmed, one of the directors of the CFSL.
India needs huge investments to put its economy back on track and to give the much-needed push to its ambitious infrastructure development plans. The Islamic finance is estimated to be a US$2.1 trillion industry by the end of this year and it is seen as a small but decisive step towards opening up the sector to interest-free banking.
“I personally hope that the proposed Haj fund will ultimately lead to the undesirable practice of government offering subsidy to Hajj pilgrims,” said Ahmed, who heads the Saudi-based ITL-Eram group.
“Cheraman did not to set up such a fund because we found the government funding was not desirable as its sources of income include liquor and gambling”.
Nonresident Indian billionaires based in the Gulf, P Mohammed Ali, PNC Menon and CK Menon, are among other directors of the NBFC that follows Islamic principles in which the state government holds 26 percent equity.
It was not allowed to accept deposits from the public or offer retail banking services, which needs amendments in Indian laws, making it inaccessible to ordinary citizens who want to make small investments.
In fact, Raghuram Rajan, the chairman of the RBI, was serious about banking sector reforms that would pave the way for full-fledged Islamic banks and Islamic banking counters at commercial banks like in many other countries, especially in Europe.
In 2008, a high-level committee on financial sector reforms headed by Rajan recommended interest-free finance and banking in the “interest of inclusive and innovative growth” and suggested taking measures “to permit the delivery of interest-free finance on a larger scale, including through the banking system”.
Islamic banking and finance is now present in over 75 countries including Australia, France, the UK, Hong Kong, Singapore, Luxembourg, South Africa, Sri Lanka and Malaysia, which claims to be its capital.
In India, there are a lot of Muslims who did not claim interest on deposits or give them in charity and, according to a 2009 study there are unclaimed interest worth Rs50bn lying in Kerala banks alone.
Cheraman, named after the king who is believed to have built India’s first mosque in the Kerala town of Kodungallur, plans to offer leasing and equity-finance products under Islamic principles to begin with.
It has already started funding startup companies and infrastructure projects and floated the Rs 2.5bn Cheraman Fund, a private equity fund with a minimum of Rs10 million set by Securities and Exchange Board of India (SEBI) per investor.
It also has a subsidiary Cheraman Infrastructure for “channelizing ethical investments for developing world class industrial, social and residential infrastructure” in Kerala.
This business vertical focuses on infrastructure development activities through Build Operate and Transfer (BOT) and other related modes.
The company targets development of industrial and knowledge parks, standard design modules, logistics parks, special economic zones, electronic parks, roads and urban transportation, social infrastructure like hospitals and educational institutions, housing and shopping malls.