Ever since its inception, the banking sector has been playing an important role in the development of world economy. However over the past few years the conventional banking practices in most countries of the world has suffered mainly due to global recession. Notably the Islamic Banks i.e. the financial institutions following the Islamic system of financing has remained immune to this downturn.
The main challenge faced by the emerging economies of Asia and Africa has been surging inflation generally called increase in prices of essential commodities. However most of the central banks of these nations have largely failed to contain the inflationary pressure thereby affecting the overall GDP (Gross Domestic Product) growth rate and further escalating the Poverty graph.
At this crucial juncture, the Islamic banking system can prove to be an antidote to the ailing banking sector all over the world.
Islamic banking is the system of banking consistent with Shariah laws, which is against the collection or payment of taxes. According to Islam, interest leads to inflation and accumulation of interest leads to increasing divide among the rich and poor.
In an Islamic mortgage transaction, instead of loaning the buyers money to purchase the item, a bank might buy the item itself from the seller, and re-sell it to the buyer at a profit, while allowing the buyer to pay the bank in installments.
It is noteworthy as how the Islamic nations have largely remained immune to the global recession over the past few years, while as most of the major western economies have suffered to a large extent including bankruptcy.
There are instances of financial bailouts of some multinational companies and even various states of Western Europe by the world governments and alliances.
Islamic banking has a huge market potential in India as it is the 3rd largest Muslim populated country in the world. The induction of Islamic banking can address the long drawn issue of ‘Financial Inclusion’ and can act as a confidence building measure among the minority community.
The introduction of Islamic banking in Indian economic system can reinforce the ties with West Asian nations and also can help in channelizing the foreign exchange to a great extent. The Indian government can attract equity finance from gulf countries for infrastructure development of the country, which in turn can address the fiscal deficit scenario.
Given the double digit growth of Islamic banking in other Asian countries like Singapore, it is definitely a viable option of developing economy of India.
For instance in Malaysia, there are 11 banks operating with full Islamic Banking license have dominated the top ten slots in The Asian Bankers “Top 40 Islamic banks in Asia Pacific” report of 2012.
However there exist significant challenges to materialize the objective of expansion of Islamic banking in India. The foremost challenge is to seek amendment in the Banking regulation Act of 1949. Also Standard Accounting Practices have to be developed for practical implementation of Islamic banking.
In addition to the legal implications, the advent of Islamic banking can be exploited politically by vested interests, therefore needs to be seen in the right light.
One such impediment to the success of Islamic banking is the lack of knowledge among the masses. There is a need to customize and advertize Islamic Banking to make it equally attractive to non-Muslims.
(The author is a Bank Professional