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Islamic banking set to launch in India amid controversy
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NEW DELHI // India will get its first taste of sharia-compliant banking when the Saudi Arabia-based Islamic Development Bank launches operations in the western state of Gujarat.
No date has yet been announced for the opening of the IDB’s first branch in India, but already complaints have emerged within the ruling Hindu nationalist Bharatiya Janata Party.
The IDB, an international investment organisation based in Jeddah, was established to channel funds into infrastructure in the Islamic world, as well as social and educational development. Though India is not typically seen as being part of the “Islamic world", its 180 million-strong Muslim population makes it an attractive place for the IDB to set up shop.
Like other Islamic banks, the IDB does not charge interest on loans or pay interest on deposits. It also follows a code of ethical financing, refraining from investing in industries that are considered harmful in Islam. These include businesses involving liquor, pornography or gambling.
Prominent BJP politician Subramanian Swamy says Islamic banking goes against India’s principles of secularism, however, and has been vocal about his opposition to the IDB opening a branch in the country.
The Harvard-trained economist and member of the upper house of parliament, the Rajya Sabha, has gone so far as to call for the immediate dismissal of central banker Raghuram Rajan, blaming him for the Reserve Bank of India (RBI)’s decision to allow Islamic banking.
The IDB counts 56 Islamic states as its shareholders. Saudi Arabia holds roughly a quarter of the bank’s shares, while the UAE was its fifth biggest shareholder as of last October.
When prime minister Narendra Modi visited Saudi Arabia in April, his delegation signed an extensive agreement with the bank, which included its launch in India.
Under the agreement, the IDB will establish its first Indian branch in the Gujarat city of Ahmedabad and go on to open more branches in India in the future. Gujarat, Mr Modi’s home state, has six million Muslims, as well as a thriving mercantile community.
It was also agreed that India’s state-owned Exim Bank would extend a US$100 million (Dh367.3m) line of credit to facilitate exports to IDB member countries. In addition, the IDB pledged $55m to provide medical treatment to India’s rural poor. The first 30 of 350 medical vans, donated by the IDB as a social initiative, will be rolled out in Gujarat later this year.
“IDB’s entry into Gujarat and India is likely to boost long-term private finance from its member countries on a large scale," said Zafar Sareshwala, who will lead the IDB’s Gujarat operations.
The RBI has been considering Islamic banking’s entry into India for nearly a decade now. In 2007, a working group appointed by the central bank recommended that India not permit Islamic banks to operate in the country.
But the arguments for Islamic banks were revived in 2012, when the state-appointed National Minorities Commission lobbied India’s finance ministry.
Then, last December, an RBI committee tasked to study financial inclusion in India recommended that Islamic banks should be allowed to operate.
India’s Muslims, the committee said, might be more inclined to access “formal finance" if interest-free avenues of banking were open to them.
“Globally, interest-free banking, also known as Islamic banking, has witnessed a significant increase, especially in the wake of the [2008] financial crisis," it said.
Abdur Raqeeb, general secretary of the Indian Centre for Islamic Finance, a New Delhi-based non-profit that promotes Islamic banking, welcomed the advent of Sharia-compliant banking in the country.
“India needs investment from outside, and there are many Islamic countries that are willing to invest here but that would like a Sharia-compliant way to do it," Mr Raqeeb told The National.
Sharia-compliant banking could offer Indians – both Muslims and non-Muslims – other benefits too.
Agriculture expert and economist M S Swaminathan said Islamic banking could break the cycle of high debt and interest payments in which small entrepreneurs, farmers and artisans often find themselves.
“Zero-interest lending ... could solve the crisis of indebted farmers committing suicide," he said.
Meanwhile, a 2014 study by Ernst and Young found that assets under management by Islamic banks grew at an annual rate of 17 per cent between 2008 and 2012 – three times as fast as those under management by standard commercial banks
None of this seems to be enough to convince BJP politician Dr Swamy, however.
In 2010, after a Kerala government agency permitted a financial services firm to operate in compliance with sharia, Dr Swamy petitioned the high court to revoke the firm’s registration. But the following year, the Kerala high court ruled against him.
If the company wished to conduct its business in accordance with sharia “in addition to complying with the law of this country, this cannot be condemned as either promoting a religion or aiding a religion", the court said in its verdict.
Mr Raqeeb also rejected the notion that sharia-compliant banking only serves to promote Islam and help Muslims.
“This is banking that is based on justice and ethics," he said. “It prizes the basic needs of common people."
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