Islamic Banking - Prospects and Challenges in India - PA Shameel Sajjad - Zirva Institute of Islamic...

8/10/2019 Islamic Banking - Prospects and Challenges in India - PA Shameel Sajjad - Zirva Institute of Islamic Finance

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ISLAMIC BANKING:PROSPECTS &

CHALLENGES

Brennen College Seminar

27 October 2014

PA Shameel SajjadDirectorZirva Institute of Islamic Finance


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Outline The Inherent Problem with Conventional Banking

The Alternative of Islamic Banking

Challenges Posed by the Law in India


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The Inherent Problem with

Conventional Banking


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The Instrument of Interest

The concept of interest presumes the usage of capital as a

factor of production and claiming a reward for the usage like

the other factors of production vis a vis land, labour and

organization.

But in reality capital is not an original factor of production.

It is only a means to acquiring other factors of production.

This is evident from the fact that capital cantgo directly into

production like other factors but will be used only in the

procurement of any of the other factors of production that

can be directly used in the process of production.


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The concept of the right to interest on

capitalcreates the necessity for securing the

capital loaned and the interest thereupon.

Securing this right and ensuring repayment of

capital and payment of interest cantdepend

upon the financialdestiny of the enterprise.

This makes the whole mechanism of

conventional banking collateral based even

for risky enterprises.


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With the existence of collateral as an essential

condition for lending, conventional banking system

can never become inclusive.

Rather it becomes exclusively reserved for thesections of population who are relatively well off

with some asset base (which can be offered as a

collateral).

This reality can be verified in the Indian context from

the statistics issued by the Reserve Bank of India.


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The number of loan accounts constituted only 14 per cent of

adult population - In rural areas, the coverage is 9.5 per cent

against 14 per cent in urban areas.

The extent of exclusion from credit markets can be observed

from a different view point. Out of 203 million households in

India; 89 million are farmer households. 51.4 per cent of farm

households have no access to formal or informal sources of

credit while 73 per cent have no access to formal sources of

credit. However after 1991, the share of non institutional sources has

increased; specifically, the share of moneylenders in the debt

of rural households increased from 17.5 % in 1991 to 29.6% in

2002.


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The financially excluded sections largelycomprise marginal farmers, landless labourers,oral lessees, self employed and unorganisedsector enterprises, urban slum dwellers,

migrants, ethnic minorities and sociallyexcluded groups, senior citizens and women.

Source: Text of speech by Smt. Usha Thorat,Deputy Governor, Reserve Bank of India at theHMT-DFID Financial Inclusion Conference 2007,Whitehall Place, London, UK on June 19, 2007.


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For India, financial inclusion has become a key

policy concern as there are over 600 million

citizens who lack basic banking and financial

services.

In India, financial exclusion has strong linkages

with poverty and is predominantly

concentrated among the vast sections ofdisadvantaged and low income groups.


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One of the important factors behind rising farmer

suicides in the countryside is the lack of access to credit

from banks and institutional sources and the inability to

repay due to loss of crops.

In the early 2000s, India launched a massive drive to

bring most of its population under the formal banking

system.

However, 90% of the 100 million accounts opened underthe plan are unused and close to half of Indias 1.2

billion-strong population still donthave bank accounts.


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The number of the Indian poor constitutes

33% of the global poor, which is pegged at 1.4

billion people.

According to World Bank estimate, India had

456 million people or about 42% of the

population living below poverty according to

the new international poverty line of US$ 1.25per day.


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If the international poverty line is slightlyraised from the US$ 1.25 /day to US$ 2 / daythe scenario is further disheartening.

Based on that measurement, India had 828million people, or 75.6% of the populationliving below the poverty line surpassing thesub Saharan Africa, considered the worldspoorest region with 72.2% people withoutUS$ 2 / day.


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Key Facts and Figures

41% of the population in India is unbanked.

40% is unbanked in urban areas.

61% is unbanked in rural areas. Only 14% of the population have loan

accounts.

9.5% in rural areas. 14% in urban areas.


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203 million households in India

147 million households in rural areas

89 million are farmer households.

51.4% of farm households have no access to formal

or informal sources of credit.

73% of farm households have no access to formal

sources of credit. Share of money lenders in debt finance has

increased.


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The Islamic Alternative


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By taking out the interest out of the process of financial

intermediation Islamic baking has strong nexus with actual

production and distribution on the ground.

Money as such doesnt have a right to earn. The right to

positive revenues is an entitlement which is granted by

partaking the risks and uncertainties of productive activities.

When this maxim is established collateral will have no

significant role as far as financing for productive activities are

concerned.

This is because there is no binding responsibility on the

entrepreneur to guarantee the repayment of the capital and

interest. The binding responsibility is to share the revenue /

profit of the venture.


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As soon as this happens the focus shifts to inherent capability

of the venture to generate profits which will depend in turn

on a number of factors like demand for the commodity /

brand, capability of the entrepreneur, quality of management,

sincerity of the entrepreneur etc.

Thus a financial atmosphere is established in which the asset

backing of the clients of the bank will be of little use to the

bank and the rich and the poor will be on a level playing field;

a scenario where the richness of the rich will no longer be aprivilege and the poverty of the poor will no longer be a an

obstacle.


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Thus Islamic banking is a transition from

aristocratic/ feudal / undemocraticbanking to

democraticbanking for the masses.

For the bank its positive returns will be workedout on the basis of the Portfoliotheory. That is

even after the due diligence exercised before

investing in projects if some projects fail they willbe made up by the success of other projects.


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Potential High Impact Areas for

Islamic Banking in India


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Agriculture

"Slow agricultural growth is a concern for policymakersas some two-thirds of Indias people depend on ruralemployment for a living. Current agricultural practicesare neither economically nor environmentally sustainable

and India's yields for many agricultural commodities arelow. Poorly maintained irrigation systems and almostuniversal lack of good extension services are among thefactors responsible. Farmers' access to markets ishampered by poor roads, rudimentary marketinfrastructure, and excessive regulation."

World Bank: "India Country Overview 2008"


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"With a population of just over 1.2 billion, India is the worlds largestdemocracy. In the past decade, the country has witnessed acceleratedeconomic growth, emerged as a global player with the worlds fourthlargest economy in purchasing power parity terms, and made progresstowards achieving most of the Millennium Development Goals. Indiasintegration into the global economy has been accompanied by impressive

economic growth that has brought significant economic and socialbenefits to the country. Nevertheless, disparities in income and humandevelopment are on the rise. Preliminary estimates suggest that in 2009-10 the combined all India poverty rate was 32% compared to 37% in2004-05. Going forward, it will be essential for India to build a productive,competitive, and diversified agricultural sector and facilitate rural, non-farm entrepreneurship and employment. Encouraging policies thatpromote competition in agricultural marketing will ensure that farmersreceive better prices."

World Bank: "India Country Overview 2011


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Share in National Income: The contribution fromagriculture has been continuously falling from 55.1% in1950-51 to 37.6% in 1981-82 & further to 18.5% in 2006-07. But agriculture still continues to be the main sector

because it provides livelihood to majority of the people. Largest Employment Providing Sector:in 1951, 69.5% of

the working population was engaged in agriculture. Thispercentage fell to 66.9% in 1991 and to 56.7% in 2001.

However, with rapid increase in population the absolutenumber of people engaged in agriculture has becomeexceedingly large.


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Islamic Banking Solutions to the

Farming Sector

SalamAdvance Purchase of Crops

MuzaraaShare Cropping

MusaqathCrop Sharing for Maintenance


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Infrastructure

The infrastructural requirement of India is US$ 1trillion.

This cantbe financed by government funding alone.

Islamic banks can issue sukuk to address thisrequirement.

This will not introduce any additional debt burden onthe citizens of India.

We currently have a per capita debt of Rs. 33,000/- The debt repayment for 2014/15 is seen at 1.397

trillion rupees.


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Micro Medium and Small Enterprises

MSMEs are the real growth drivers in anyeconomy.

Overall finance gap in MSME sector is 32.5 trillionrupees (MSME Census, RBI, SIDBI).

MSMEs largely require equity financing.

But the demands of listing and the competitiveconventional equity markets are not easilyaccessible for them.

This vast need can be financed by Islamic bankswhich rely on risk financing which is the essenceof the MSME sector.


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Obstacles for the Introduction of

Islamic Banking in India


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Section 5 (b) and 5 (c) of the Banking Regulation Act,1949 prohibit the banks to invest on Profit Loss Sharingbasis -the very basis of Islamic banking.

Section 8 of the Banking Regulations Act (BR Act, 1949)

reads, Nobanking company shall directly or indirectlydeal in buying or selling or bartering of goods

Section 9 of the Banking Regulations Act prohibits bankto use any sort of immovable property apart from

private usethis is against Ijarah for home finance. Section 21 of the Banking Regulations Act requires

payment of Interest which is against Sharia.


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Operational Issues

SLR Requirements Banks have to invest atleast 25% of their NTDL (Net Demand andTime Liability) in government securities.

CRR Requirements 6.5% of NTDL should bedeposited with RBI on which interest accrues.

Call Money Call Money Rate on Borrowing

from other banks which carries interest. Repo Transactions Banks borrow from the

Central Bank which carries interest.


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Raghuramrajan Committee Report

Chapter 3: Broadening Access to finance Page 35

While interest-free banking is provided in a limited manner through

NBFCs and cooperatives, the Committee recommends that measures be

taken to permit the delivery of interest-free finance on a larger scale,

including through the banking system. This is in consonance with the

objectives of inclusion and growth through innovation. The Committeebelieves that it would be possible, through appropriate measures, to

create a framework for such products without any adverse systemic risk

impact.


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THANK YOU!!

Contact details

[email protected]

+91 9745 812 277


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Learn Islamic Finance with Zirva

Institute of Islamic Finance and Be a

Part of the Transition


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Zirva Institute of Islamic Finance is the go to

place for Islamic finance courses.

We offer students a wide array of courses to

choose from according to their availability of

time, requirements and orientation to the

subject.


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We Offer

MBA in Islamic Economics and Finance(Certificates Issued jointly by Pebble HillsUniversity, USA and Zirva Institute of Islamic

Finance) (10 months) - Fees US$ 2000 Accounting and Auditing Organization for

Islamic Financial Institutions, Bahrain(AAOIFI) - Certified Shariah Adviser and

Auditor - (30 sessions) - Fees 1.5 lakhs


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Chartered Institute of Management

Accountants, London (CIMA) Modules

1. CIMA Certification in Islamic CommercialLaw (15 sessions) - Fees Rs. 50,000/-

2. CIMA Certification in Islamic Banking and

Takaful (15 sessions) - Fees Rs. 50,000/-3. CIMA Certification in Islamic Commercial

Law (15 sessions) - Fees Rs. 50,000/-


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Twinning Programs with National Certifications inFinancial Markets (NCFM) Certifications

1. Certification in Islamic Banking + NCFM Certification

in Commercial Banking (20 sessions) - Fees Rs. 25,000/-

2. Certification in Islamic Insurance + NCFMCertification in Insurance (20 sessions) - Fees Rs.

25,000/-

3. Certifcation in Islamic Capital Markets + NCFMCertification in Capital Markets (20 sessions) - Fees Rs.25,000/-


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One Day & Short Term Certifications in Islamic Finance from ZirvaInstitute of Islamic Finance

One day intensive awreness workshop in Islamic finance (6 hours)Fees - Rs. 1000/-

Short Term Certification in Islamic Banking (4 sessions) - Fees - Rs.

5000/- Short Term Certification in Islamic Islamic Insurance (4 sessions) -

Fees - Rs. 5000/-

Short Term Certification in Islamic Capital Markets (4 sessions) -Fees - Rs. 5000/-

Short Term Certification in Islamic Commercial Law (4 sessions) -Fees - Rs. 5000/-

Diploma in Islamic Banking and Finance (Islamic Commercial Law +Islamic Banking + Islamic Insurance + Islamic Capital Markets) (10sessions) - Fees Rs. 15,000/-


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Our External Services

We undertake onsite training assignments for

organizations in Islamic Finance.

We undertake corporate training assignments inIslamic Finance.

We set up Islamic Banking and Finance courses

and facilities in educational institutions.We take up teaching assignments in educational

institutions for Islamic Finance.


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For all queries related to admissions and

conducting training programmes and teaching

assignments:

Call9745812277

Email: [email protected]


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THANK YOU!!

Contact details

[email protected]

+91 9745 812 277

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