Islamic finance covers the entire gamut of financial and economic activities – savings, finance, investments, insurance and trade.
It is an alternative financial system that has proved its resilience globally in light of the performance of Islamic financial institutions (IFIs) in the recent economic crisis. It has been seen that IFIs were largely unaffected as they were invested in the real asset-based economy and stayed away from the toxic mix of derivatives, off-balance sheet finance, overleveraging and speculative asset bubbles that were responsible for the crisis.
Islamic banking shuns the very idea of a fixed return through interest rates and rests on participatory norms based on profit and risk sharing. It forbids the business of making money out of money and upholds the belief that wealth and social welfare are both generated through actual trade and investment. For instance, someone buying a home with Islamic bank funds will not borrow from the bank and pay EMIs that include compound interest. Instead, the Islamic bank will purchase the property and sell it back to the customer over a period and charge the customer rental based on their proportional ownership stake and market rates.
Currently, over USD 1 trillion is being managed by over 400 IFIs globally with strong growth forecasts. While Islamic finance has been expanding to new frontiers such as the UK, France, Singapore, Switzerland, Luxembourg, Sri Lanka, Nigeria, South Africa, Hong Kong, Kenya and Australia, we believe India offers perhaps the greatest potential in Islamic finance not just as a means to foster greater financial inclusion for the Muslim community but by also having a beneficial impact for all segments of the population given its foundation on ethics, justice, transparency, profit & risk sharing and social responsibility.
Enhancing financial inclusion is an important goal of regulators and policy makers across the globe. This assumes greater significance in a country like India with its billion plus population that includes a large Muslim population, who have been shown to be relatively more financially excluded in large part due to the lack of shari’a compliant options on the ground. Islamic finance can thus be seen as a strategic tool towards achieving greater financial inclusion in India by bringing in a large section of the excluded population into the formal financial system.
At Infinity, we believe that India presents a unique case as far as Islamic finance is concerned – on one hand there is no express legislation from the government allowing Islamic finance activity, nor are there many pure play IFIs or professionals on the ground who have practical experience of working in IFIs, and on the other hand you have a huge and growing segment of the population that is not just from the Muslim community who want Islamic finance, as greater awareness grows about this alternative interest-free financial system based on ethics, justice and participatory norms.