IRACST – International Journal of Commerce, Business and Management (IJCBM), ISSN: 2319–2828
Vol. 5, No.5, Sep-Oct 2016
A FEASIBILITY STUDY ON ISLAMIC
BANKING IN INDIA
ABDUL KHADER .J
Assistant Professor
Department of Commerce
SadakathullahAppa College
Tirunelveli – 627 011.
ABSTRACT
Islamic banking seems an alien concept in India’s
conventional banking world. Despite itsimpressive
growth in other parts of world such as the Middle
East, South East Asia (whichprimarily include
Malaysia and Indonesia) and Europe, it is yet to find
favor with the Indian authorities. The search for
alternatives to conventional banking in the aftermath
of the global financial crisis trained the spotlights on
Islamic banking in many parts of the world. The
purpose of this paper is to provide a quick roundup
of the world Islamic bankingscenario and highlight
its potential and need in India as well as the
accompanying challenges.
Keywords: Islamic banking, Riba, Islamic finance,
sharia law.
I. Concept of Islamic banking:
Interest free banking, also known as Islamic
banking or finance, is a banking system, which
promotes profit sharing, but prohibits the charging
and paying of interest. This system is based on the
principles of Sharia Islamic Law, which are
derived from the Holy Quran and the “Hadeeth”, a
compilation of the noted sayings of Prophet
Mohammad. Islamic Banks everywhere follow
these principles in their business.In Islamic
banking, productive activities which promote
entrepreneurship, trade, commerce and societal
development are supported, while those which earn
income sans risk – such as interest (Riba) bearing
transactions – andUnproductive activities like
speculation or gambling are prohibited. Sometimes
Islamic banking may also be known as ethical
banking.The following are some of the principles
of Islamic banking:
• Payment and receipt of interest (known as
Riba) is strictly prohibited.
MOHAMED IDRIS.P
Assistant Professor
Department of Business Administration
KhadirMohideen College
Adirampattinam – 614 701.
• The business is based on profit and loss
sharing.
• Certain industries, such as adult
entertainment, alcohol, and gambling are
“haram” (disallowed by Sharia) and
prohibited for investment.
• Banks may not lease or lend any product
that they do not wholly own.
• Trading in debt is also not allowed, which
is why Banks do not deal in traditional
bonds; rather they have their own version
of such instruments called Sukuk (Islamic
Bond).
• Interest free loans (QardHasan) are
encouraged to spread financial inclusion.
II. Global Scenario of Islamic banking:
Many developed countries of the world, such as
Germany, UK, USA, France and Singapore have
embraced Islamic Banking to take the tally of
countries where this form of banking is
already operational as an alternative system to over
75. The robust performance of the
Islamic Banking and Finance sector during the
recent financial downturn has attracted the
attention of several other nations. Western nations
like the UK are promoting Islamic Finance
following the principle of “no 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.
During the past decade, the assets of Islamic banks
have grown at an average rate of 15%.Estimates of
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 IRACST – International Journal of Commerce, Business and Management (IJCBM), ISSN: 2319–2828
the current size of the Islamic Finance market
range from $1.66 Trillion to $2.1 Trillion with
expectations of market size to be $3.4 Trillion by
end of 2018. Based on $1.66 Trillion, Islamic
Finance assets represented 1% of the global
financial market of $127 Trillion in assets. The
market share of Islamic Banking by assets is 14%
in the Middle East and North African region and
25% in the Gulf. The Compound Annual Growth
Rate of the top 20 Islamic Banks in the Gulf is 20%
as compared to 9% for the region’s conventional
banks.
The following chart explains the growth story of
Islamic banking in the past years.
Ernst &Young, and the Malaysia Islamic Financial
Centre predict the size of the market to hit $3.4
Trillion by end of 2018, whilst
PricewaterhouseCoopers predict a $2.7 trillion
market by 2017.2020 – a compound annual growth
rate of 9.8 per cent annually, which is a
considerably faster rate of loan growth than that in
the conventional banking industry in the UAE.
AarthiChandrasekaran, a senior researcher at NBK
Capital, estimates that banking asset growth in
conventional UAE banks will be in the “high single
Vol. 5, No.5, Sep-Oct 2016
digits”. The UAE’s Islamic banking sector
accounts for 17 per cent of assets and 19 per cent
of consumer deposits in the country, according to
the IMF. Economic headwinds are likely to slow
both Islamic and conventional credit growth in the
Gulf, which is the largest global market for Islamic
finance when considered as a single region.
III. INDIA AND ISLAMIC BANKING:
Our India is a country of unity in diversity.
According to 2011 census report, Islam is the
second largest religion in India, with 14.2% of the
country's population or roughly 172 million people
and India is also having the second largest Muslim
population among the world countries next to
Indonesia. Notably, Indian Muslims are more in
number comparing to many gulf nations. While
Islamic finance originates from religious
principles, it is also a workable model of
investment, based on risk sharing. The nations,
which have adopted Islamic finance, have done so
because it makes business sense. This shows there
is a need and possible market for Islamic banking.
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 practiced
participatory banking by creating cooperative
banks, nonbanking financial institutions and micro
credit programs; the same platform can be used to
introduce Islamic Banking.
In 2008, a high level Committee on Financial
Sector Reform (CFSR) of the Planning
commission of India (2008) headed by Dr.
RaghuramRajan had recommended the
introduction of interest-free finance and banking
as part of mainstream banking in the interest of
inclusive, innovative growth. Aligarh Muslim
University has started a Postgraduate program in
Islamic banking and Finance under the stewardship
of ProfessorNejatUllahSiddiqui, one of the
pioneers of the Islamic banking model. Today,
Islamic banking has a presence in India in the form
of NBFCs and Baitul Mal (Islamic Treasury), but
the business is small. These institutions mostly
work at the regional level, catering to a niche
segment. Many Indian institutions, including some
government-owned ones, have shown interest in
this growing niche opportunity. For example,
Kerala government-owned KSIDC has started Al-
Barakah Financial Services Ltd; GIC of India runs
an Islamic re-assurance scheme; and several
mutual fund schemes invest explicitly in
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compliance with Islamic rules. TASIS, an index on
the Bombay Stock Exchange representing only
Sharia-compliant stocks, is the first of its kind in
India.
An RBI committee on “Medium-Term Path for
Financial Inclusion”, headed by Deepak Mohanty,
has recommended “interest free windows” in
existing conventional banks. “Commercial banks
may be enabled to open specialised interest-free
windows with simple products like demand
deposits, agency and participation certificates on
the liability side and cost-plus financing and
deferred payment, deferred delivery contracts on
the asset side,” the committee has recommended.
The committee has also recommended that “in the
event that interest-free banking is allowed in India,
the extant regulatory guidelines in respect of
capital and liquidity as applicable in the case of
commercial banks would have to be made
applicable to those as well”. The Mohanty report
says: “One area that has not been adequately
addressed is the role of interest-free banking in
financial inclusion. Globally, interest-free banking,
also known as Islamic banking, has witnessed a
significant increase, especially in the wake of the
financial crisis.” The report cites a survey saying
“the evidence suggests that Muslims are less
inclined to access formal finance, in general,
although they might be accessing long-term formal
finance”.Interest-free banking has witnessed a
lukewarm response in India and now it is time for
change. The Committee on Financial Sector
Reforms (CFSR) is headed by the chief economist
of the International Monetary Fund.
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 termbond)
to fund infrastructure and other sectors.
Specifically, India could attract the Middle East’s
high investible surplus through Islamic
banking and finance.
IV. CHALLENGES OF ISLAMIC BANKING
IN INDIA:
Indian banking is governed by the following:
Banking Regulation Act 1949, RBI Act 1934,
Cooperative Societies Act and
NegotiableInstruments Act 1961.Many sections of
the said acts are in opposition to the basic tenetsof
Islamic banking. For instance, payment of interest
Vol. 5, No.5, Sep-Oct 2016
on deposits is mandatory as per section 21 of the
Banking Regulation Act sections 5(b) and 5(c)
specifically prohibit investments based on profit
and loss sharing and section 8 of the Banking
Regulation Act 1949, which reads “No banking
company shall directly or indirectly deal in buying
or selling or bartering of goods.” Directly
contradicts the Murabaha concept of Islamic
banking which allows banks to enter into sale and
purchase agreements.
Commercial banks borrow from other banks or the
RBI to meet their short term fundingrequirements,
but Islamic banks can’t 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.
There is a serious dearth of Islamic banking experts
and trained personnel in India. Althoughthere are a
few training institutes, they are unable to
compensate for the shortage of experienced Islamic
banking professionals.
There is a lack of awareness about Islamic
Banking. Most people mistakenly believe that it is
only meant for Muslims, whereas in Malaysia, UK
and elsewhere, 40% of the customers of Islamic
Banks are Non-Muslims.
V.SUGGESTIONS:
The latest RBI directive is clear that Islamic
banking can’t be adopted in India under thecurrent
legal framework. India needs to follow the UK
example and introduce new laws togovern the
Islamic Banking business. Government and RBI
must play a crucial role in educating the awareness
of Islamic banking. The myth of Islamic banking is
only for Muslims must be dispelled and the term
ethical banking to be pronounced. The huge
potential for Islamic banking in India exists, but it
will need some strong policy decisions to make it a
reality. Islamic banking can provide immense
opportunities to energize the Indian economy with
the participation of previously excluded muslims in
shariah-compliant banking and at the same time
could lead to substantial inward investment to
boost India’s development. It would also help the
poor and backward, allowing small manufacturing,
retail and agricultural enterprise to access finance
as well as providing equity funding for
infrastructure projects such as irrigation, dams,
roads, electricity and communications projects,
which are key to the development of the Indian
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 IRACST – International Journal of Commerce, Business and Management (IJCBM), ISSN: 2319–2828
Vol. 5, No.5, Sep-Oct 2016

economy. Thus, Islamic banking would be another

alternative mode of banking that would strengthen
market efficiencies with innovations and
competitions.

VI.CONCLUSION:
Growth of the Islamic banking is depends upon the
market demand and India’s role in globalising
financial sector. There is an enough demand among
Indian Muslims and moderate non-muslims. By
introducing Islamic finance, India can gather the
capital of muslim population and from Islamic
nations around the world. Islamic banking is
possible in India and it is a right time to recognise
and introduce it.

REFERENCES:
1.www.dnaindia.com/analysis/report_islamicbanki
ng-is-not-for-muslims-alone_1669157
2.twocircles.net/node/181672
3.World Islamic Banking Competitiveness report
2011-12 published in www.ey.com
4.www.atkearney.com/.../Future...Islamic+Banking
5.gulfnews.com/.../banking/innovation-is-key-to-
the-future-of-islamic-banking

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