ISLAMIC FINANCE IN ISLAMIC FINANCE IN INDIAINDIA

ISSUES AND OBSTACLESISSUES AND OBSTACLES

AUSAF AHMADAUSAF AHMAD

PATNAPATNA

MAY 27, 2007MAY 27, 2007

PRESENT SITUATION OF INDIAN PRESENT SITUATION OF INDIAN MUSLIMSMUSLIMS

Total population: 15-20 CroresTotal population: 15-20 Crores Distribution of Total Muslim Population Distribution of Total Muslim Population

in India:in India: U.P. U.P. 22%22% West Bengal 14%West Bengal 14% Bihar 12 %Bihar 12 % Note that 48% of total Muslim Note that 48% of total Muslim

Population is concentrated in three Population is concentrated in three states, rest is scattered rather evenly states, rest is scattered rather evenly through out India. through out India.

Urban ConcentrationUrban Concentration

Proportion of Muslims in total Urban Proportion of Muslims in total Urban population is higher than the proportion population is higher than the proportion of Muslims in total Rural Population. of Muslims in total Rural Population.

Proportion of Muslims in total local Proportion of Muslims in total local population:population:

75% or more 75% or more 9 Districts9 Districts 50% - 74.9% 11 Districts50% - 74.9% 11 Districts 1% - 49.9 % 1% - 49.9 % 571 Districts 571 Districts

Regional Distribution provides clues to many dilemmas Regional Distribution provides clues to many dilemmas facing Indian Muslims in Contemporary India. facing Indian Muslims in Contemporary India.

Dominance of Non agriculture Dominance of Non agriculture ProfessionsProfessions

Only 36% of rural Muslims obtain their Only 36% of rural Muslims obtain their livelihood from Agriculture. This livelihood from Agriculture. This proportion is 44% amongst the proportion is 44% amongst the Hindus.Hindus.

Self employmentSelf employment Unorganized sectorUnorganized sector Proportion of self employment Proportion of self employment

amongst Muslims in urban areas is amongst Muslims in urban areas is 53% while this proportion is 40 % 53% while this proportion is 40 % amongst Hindus in the urban areas. amongst Hindus in the urban areas.

Incidence of Bank Use Amongst Incidence of Bank Use Amongst MuslimsMuslims

Total Number of Accounts Total Number of Accounts 3,48,21,120 3,48,21,120 Accounts held by others 2, 93,13,453Accounts held by others 2, 93,13,453

(84.18%)(84.18%)

Muslims Muslims 32,54,28632,54,286

(9.34%)(9.34%)

Total number of accounts held by Total number of accounts held by Muslims is less than their share Muslims is less than their share in population. in population.

Trends in Disbursement of LoansTrends in Disbursement of Loans

Share of Different communities in total loan Share of Different communities in total loan disbursement of public sector banks.disbursement of public sector banks.

Other communities 88.64 %Other communities 88.64 % All Minorities All Minorities 11.36 % 11.36 % Other MinoritiesOther Minorities 6.36 % 6.36 % MuslimsMuslims 4.994.99 In 1990-91 total loan disbursed in In 1990-91 total loan disbursed in

Saharanpur was 506 million Rupees out of Saharanpur was 506 million Rupees out of which 66 million was given to minorities. which 66 million was given to minorities.

i.e. 13% against their share in population i.e. 13% against their share in population 31%. 31%.

Explanation of situationExplanation of situation

Discrimination [ Are genuine Discrimination [ Are genuine applications are rejected?]applications are rejected?]

Muslims do not seek loans:Muslims do not seek loans: a. For religious reasonsa. For religious reasons b. For strategic reasons….Law of b. For strategic reasons….Law of

circular causation. circular causation.

Relevance of Islamic FinanceRelevance of Islamic Finance

Such a large concentration of Muslims Such a large concentration of Muslims can not remain oblivious to most can not remain oblivious to most important development in the Islamic important development in the Islamic world.world.

Islamic Finance would help Islamic Finance would help privatization of Finance in India.privatization of Finance in India.

It would promote Investment Banking It would promote Investment Banking in the country.in the country.

It could bring in Foreign capital and It could bring in Foreign capital and foreign financial institutions. foreign financial institutions.

Relevance of Islamic Finance IIRelevance of Islamic Finance II

Islamic Finance could promote micro Islamic Finance could promote micro financing and financing of the poor.financing and financing of the poor.

Interest free credit societies could Interest free credit societies could save the poor from the clutches of save the poor from the clutches of the loan-sharks. the loan-sharks.

Islamic Financial Institutions in Islamic Financial Institutions in IndiaIndia

Money market and Capital marketMoney market and Capital market Money market: organized and Money market: organized and

unorganized.unorganized. Organized Money market:Organized Money market:

Total commercial Banks 97Total commercial Banks 97 Public Sector Banks 32Public Sector Banks 32 Private BanksPrivate Banks 27 27 Foreign BanksForeign Banks 38 38

Islamic Financial Institutions in Islamic Financial Institutions in IndiaIndia

IIII Market Share:Market Share:

Public Sector Banks Public Sector Banks 83%83% Private BanksPrivate Banks 9% 9% Foreign BanksForeign Banks 8% 8%

Regulation of Financial InstitutionsRegulation of Financial Institutions

Indian Banking Regulation Act 1949Indian Banking Regulation Act 1949 Reserve Bank of India Act 1935Reserve Bank of India Act 1935 Negotiable Instruments Act 1881Negotiable Instruments Act 1881 Cooperative Societies Act 1861Cooperative Societies Act 1861 Banking Regulation Act 1969Banking Regulation Act 1969 Securities and Exchange Board of Securities and Exchange Board of

India (SEBI) Act. India (SEBI) Act.

ISLAMIC FINANCIAL ISLAMIC FINANCIAL INSTITUIONS IN INDIAINSTITUIONS IN INDIA

There is no presence of IFI in the There is no presence of IFI in the organized sector.organized sector.

Interest Free Credit SocietiesInterest Free Credit Societies Interest Free Financial CompaniesInterest Free Financial Companies Investment FundsInvestment Funds

MAIN FEATURES OF IFIS IN MAIN FEATURES OF IFIS IN INDIAINDIA

Mostly concentrated in South India. Mostly concentrated in South India. AP, Karnataka, TN, and Kerala. AP, Karnataka, TN, and Kerala.

Religious motivationReligious motivation Registration under different law and Registration under different law and

different names.different names. Reliable statistical and economic Reliable statistical and economic

information not available. information not available. Differences in practices. Differences in practices.

MAIN FEATURES OF IFIS IN MAIN FEATURES OF IFIS IN INDIAINDIA

Promoted the concept of interest free Promoted the concept of interest free finance in a rather hostile atmosphere. finance in a rather hostile atmosphere.

Less regulated, mismanaged.Less regulated, mismanaged. Prone to cheating and fraud.Prone to cheating and fraud. Less transparentLess transparent RATE: Responsibility, Accountability, RATE: Responsibility, Accountability,

Transparency and Efficiency.Transparency and Efficiency. Religious Zeal is no substitute for Religious Zeal is no substitute for

professional expertise. professional expertise.

ISLAMIC FINANCIAL COMPANIESISLAMIC FINANCIAL COMPANIES

Al Najeeb Mutual Benfit fundAl Najeeb Mutual Benfit fund Al Ameen Islamic Financial and Al Ameen Islamic Financial and

Investment Corporation (now Investment Corporation (now Defunct).Defunct).

Spot deposit account and benefit Spot deposit account and benefit deposit account.deposit account.

Loan schemes are based on Rahn.Loan schemes are based on Rahn.

INVESTMENT FUNDSINVESTMENT FUNDS

Growth of investment funds.Growth of investment funds. Fixed deposits and equity investments.Fixed deposits and equity investments. Limitations of Unit Trust of IndiaLimitations of Unit Trust of India Private Mutual FundsPrivate Mutual Funds Tata Core Sector Equity FundTata Core Sector Equity Fund Idafa Investment Private Limited. Idafa Investment Private Limited. Screening of companies and Dow Joans Screening of companies and Dow Joans

Islamic Index. Application to India. Islamic Index. Application to India.

POSSIBILITIES OF ISLAMIC POSSIBILITIES OF ISLAMIC FINANCEFINANCE

Efforts may continue for Efforts may continue for establishment of a full scale Islamic establishment of a full scale Islamic bank in the organized sector.bank in the organized sector.

Lobbying… Three dimensions…Policy Lobbying… Three dimensions…Policy makers and bureaucrats, legislators makers and bureaucrats, legislators and politicians, general public and and politicians, general public and opinion makers. opinion makers.

Put the house in order …in the Put the house in order …in the organized sectororganized sector

POSSIBILITIES OF ISLAMIC POSSIBILITIES OF ISLAMIC FINANCE IIFINANCE II

Apply: RATEApply: RATE REGISTRATION AND RESPONSIBILITYREGISTRATION AND RESPONSIBILITY ACCOUNTABILITYACCOUNTABILITY TRANSPARENCYTRANSPARENCY EFFICIENCY AND PROFESSIONALISM. EFFICIENCY AND PROFESSIONALISM.

POSSIBILITIES OF ISLAMIC POSSIBILITIES OF ISLAMIC FINANCEFINANCE

A CORRECT AND FORESIGHTED A CORRECT AND FORESIGHTED STRATEGY, PROPERLY IMPLEMENTED, STRATEGY, PROPERLY IMPLEMENTED, COULD ENSURE A BRIGHER FUTURE COULD ENSURE A BRIGHER FUTURE FOR Islamic FINANCE IN INDIA.FOR Islamic FINANCE IN INDIA.

THANK YOU VERY MUCH AND THANK YOU VERY MUCH AND

WASSALAM WASSALAM