According to the International Monetary Fund (IMF), the current framework governing Islamic Banking contains many gaps that need to be closed through the development of a more comprehensive enabling environment. In a recently adopted staff paper “Ensuring Financial Stability in Countries with Islamic Banking”, the IMF calls for further strengthening of the legal and regulatory environment and institutional framework in countries that have Islamic banking. The study notes that Islamic banking has established a presence in more than 60 countries and has become systemically important in 14 jurisdictions. International guidance is needed to address the limited progress that has been achieved in developing financial safety net frameworks. Country practices have diverged on several important fronts. The emergence of hybrid financial products in Islamic Banking that replicate aspects of conventional finance in an Islamic Banking context has raised financial stability concerns. The IMF has been providing technical advice to member countries for the past 20 years and plans even more involvement in policy advice and capacity development.
Before handing over his charge to present Reserve Bank of India (RBI) Governor Urjit Patel, former Governor Raghuram Rajan had proposed working with the Government to introduce Islamic Banking. Most recently, Union Finance Ministry said that Islamic banking was not relevant any more as the Government has already introduced several programmes for all citizens towards financial inclusion. Finance Minister Santosh Kumar Gangwar said various legal changes are needed if even limited products were to be introduced under Islamic banking. It is estimated that 180 million Muslims in India are unable to access Islamic banking because of non-availability of interest free banking. RBI in its report had said it would explore to introduce interest-free banking products in consultation with the government, but before the consultation could be held, the Government of India derailed this whole process.
Deputy Governor Reserve Bank of India, Mr. H. R. Khan emphasizes the importance of bringing unbanked and unreached people into the formal financial system by leveraging technology, especially the mobile phone technology. Various studies have revealed the absence of Islamic financial system in the country as one of the major reasons of backwardness of Muslims in India. These studies revealed that Muslims in India have worst credit-deposit ratio due to unavailability of interest free loans which are compatible to the Islamic principles. With 97% workers engaged in unorganized sector, the Indian Muslims need interest free loans to improve their labour output ratio and value additions to foster inclusive growth.
Investors’ antennas had gone up in the investment markets when SBI Mutual Fund announced first official launch of a stock fund structured in line with Islamic rules (Shariah Equity Fund) in the first week of December. But this mutual fund arm of India’s largest bank, State Bank of India, took no time to defer the launch of SBI Shariah-compliant fund on the pretext of its ‘restructuring in a better and more attractive format’ is not digestible. This is a statement which makes even an ordinary mind to believe that the reason for deferring the offering could be political. Meanwhile, the two actively-managed Shariah mutual funds in the market have outperformed the Sensex recently.