Making a case for Islamic finance in India

Abstract

In light of India’s growing Muslim population, which is projected to become the largest in the world by 2050, and the subsequent need to address their financial integration, this paper argues for the establishment of a comprehensive legal and regulatory framework for Islamic Banking and Finance (IBF) in India. It examines the two major reasons for the need for IBF in India. First, a significant proportion of Indian Muslims are unable to make investments because their investments are not adequately supported by banks and second, this has deepened their financial exclusion. It also identifies the barriers to the growth of IBF in India, which prevents investments from Muslims abroad as well. It also looks at past efforts to incorporate IBF into the financial system. This paper seeks to make certain suggestions for reform in the legal framework so as to accommodate IBF. It examines the two approaches towards the integration of IBF. The first is that of a dual banking system, where IBF operates under a specialised parallel legislation alongside the conventional banking system. The second approach is a piecemeal approach where additions and amendments are made to existing legislation, which also govern the conventional banking system. This paper argues that a dual banking system would be most workable as India’s financial system is otherwise largely drawn on the conventional banking system based on deposits and interest; a specialised system enables better regulation of Islamic Financial Institutions.