Abstract ISLAMIC FINANCE-A Tool for Financial Inclusion Smt. Archana H.N, Assistant Professor, Vijayanagara Sri Krishnadevaraya University In this era of liberalization, privatization, globalization, transnationalisation across the world financial inclusion, economic justice, access to finance to all has gained at most importance and is become a benchmark for the country for its sustained growth, also enhancing the access to and the quality of basic financial services such as availability of credit, mobilization of savings, insurance and risk management can facilitate sustainable growth and productivity. Indian Muslims comprise a vast proportion of financially excluded segment. Islamic finance will enable them to conduct their financial activities as per their faith which delivers a win-win situation. Hence, Islamic finance has become the largest global alternative financial system and is now present in many Muslim minority countries across the world. In this backdrop the paper aims to bring about the importance of Islamic finance in India, its role in financial inclusion, Various Islamic instruments available for financing, Islamic financing opportunities and obstacles. Key Words: Financial Inclusion, Islamic Finance, Sustainable growth Introduction A well managed financial system is one which allows transfer of funds from surplus spending units to deficit spending units. The financial system fails if this primary function fails. In this era of liberalization, privatization, globalization, transnationalisation across the world financial inclusion, economic justice, access to finance to all has gained at most importance and is become a benchmark for the country for its sustained growth, also enhancing the access to and the quality of basic financial services such as availability of credit, mobilization of savings, insurance and risk management can facilitate sustainable growth and productivity. In this backdrop the
policy makers of world are debating ways and means to achieve inclusive growth. The global movement/project FI2020 (Financial Inclusion 2020) is been developed for full inclusion which aims at tackling the opportunities and obstacles to Financial Inclusion. Most India s financially-excluded sector consists of small vendors running kiosks, hawkers, entrepreneurs in the unorganized sector etc. Indian Muslims comprise a vast proportion of this segment that are not in the purview of conventional financial system nor have access to bank accounts and fall prey informal and exploitative moneylenders. Indian Muslims are more financially excluded and are plagued with poverty than the rest of the population as given in the Sachar Committee report of 2006 and the real reason for their exclusion is however attributed to they being averse to interest-based products and services as they go against the tenets of their faith - a point raised by the present Chief Economic Advisor to the Government, Dr. Raghuram Rajan back in 2008. Factors of financial exclusion as per RAM Rating agency Malaysia Islamic finance is not just for Muslims, it is allowing them to conduct their financial activities as per their faith which delivers a win-win situation. i.e., will help Muslims gain access through Islamic finance and enables India to achieve true growth. Hence, Islamic finance has become the largest global alternative financial system and is now present in many Muslim minority countries across the world.
The figure below shows the rise in population of Muslims as percentage of the total population since the first official Indian government census in 1961. Islamic Finance and Economic Development The central economic tenant of Islam is to bring about a just and egalitarian society, and fundamental principles of Islam are socio-economic justice and benevolence, they deal with the rules of behavior as they relate to resource allocation, production, exchange, distribution and redistribution; economic implications of the operations of these rules. Islamic banking may be the solution to the farmers suicide crisis Dr. M.S. Swaminathan, Father of green revolution. India has the potential of emerging a significant market for Islamic banking provided there is a favourable change in the regulatory environment and increased awareness among Muslims and India as a whole. Grail Research (2008)
Despite the Indian Government's strong push towards financial inclusion, the unique and growing requirement by Muslims for financial products and services that are in conformity with Islamic law has been missing from discussions and policy initiatives from all the players concerned. Principles of Islamic Finance Need for Islamic Finance In a span of around eight to ten years, there is tremendous potential for growth of Islamic finance and half of the world s savings will be through Islamic financial products and in Islamic banks. From past few decades, many developed countries of the world, such as Germany, UK, USA, France and Singapore have embraced Islamic finance as an alternate system to the conventional system. In India, Muslims represent a largest minority group and areas dominated by them are not adequately serviced by banks, being referred as red zones. To have true financial inclusion in India and meet the objectives, it is very important that Indian Muslim community be considered from their actual needs, aspirations and
religious sensitivities. In order to tap the untapped potential of this segment, there is a need for bringing up a specific approach and this is possible through Islamic finance. Various Islamic instruments available for financing are given below Murabaha is a form of trade credit for asset acquisition that avoids the payment of interest. Instead, the bank buys the item and then sells it on to the customer on a deferred basis at a price that includes an agreed mark-up for profit. The mark-up is fixed in advance and cannot be increased, even if the client does not take the goods within the time agreed in the contract. Payment can be made by instalments. The bank is thus exposed to business risk because if its customer does not take the goods, no increase in the markup is allowed and the goods, belonging to the bank, might fall in value. Ijara is a lease finance agreement whereby the bank buys an item for a customer and then leases it back over a specific period at an agreed amount. Ownership of the asset remains with the lessor bank, which will seek to recover the capital cost of the equipment plus a profit margin out of the rentals payable. Istisna is a transaction in which a person (i.e. the buyer) places an order with a manufacturer (i.e. the seller) to produce, build or manufacture a specified product in exchange for a predetermined price. Once the product is manufactured according to specifications, the buyer will be bound to pay the manufacturer the predetermined price. It should be noted that the manufacturer might appoint or assign others to manufacture the product. The interest-free bank can play either the role of a money supplier or manufacturer on behalf of its clients. Mudaraba is essentially like equity finance in which the bank and the customer share any profits. The bank will provide the capital, and the borrower, using their expertise and knowledge, will invest the capital. Profits will be shared according to the finance agreement, but as with equity finance there is no certainty that there will ever be any profits, nor is there certainty that the capital will ever be recovered. This exposes the bank to considerable investment risk. In practice, most Islamic banks use this is as a
form of investment product on the liability side of their statement of financial position, whereby the investor or customer (as provider of capital) deposits funds with the bank, and it is the bank that acts as an investment manager (managing the funds). Musharaka is a joint venture or investment partnership between two parties. Both parties provide capital towards the financing of projects and both parties share the profits in agreed proportions. This allows both parties to be rewarded for their supply of capital and managerial skills. Losses would normally be shared on the basis of the equity originally contributed to the venture. Because both parties are closely involved with the ongoing project management, banks do not often use Musharaka transactions as they prefer to be more hands off. Sukuk is debt finance. A conventional, non-islamic bond or debenture is a simple debt, and the bondholder s return for providing capital to the bond issuer takes the form of interest. Islamic bonds, or sukuk, cannot bear interest. So that the sukuk are Shariah-compliant, the sukuk holders must have a proprietary interest in the assets which are being financed. The sukuk holders return for providing finance is a share of the income generated by the assets. Most sukuk, are asset-based, not assetbacked, giving investors ownership of the cash flows but not of the assets themselves. Asset-based is obviously more risky than asset backed in the event of a default. Challenges 1. Lack of awareness of Islamic Finance and Shariah rules 2. Drawing attention/marketing of Islamic Products 3. Regulatory framework/corporate governance/supportive Infrastructure There is no historically available framework and hence there is a need to create the infrastructure for Islamic finance and get a cross border framework 4. Lack of professionals dealing in Islamic finance and its products the concept of Islamic Finance is in nascent stage and there is acute shortage of well trained professionals, need for qualified people
5. Consolidation and critical mass this focuses on Mergers within the Islamic Finance Industry, build critical mass in product, people, systems, legality etc. 6. Building accounting standards and auditing for Islamic finance, also concentrates on ratings, benchmarks. 7. Lack of brand image 8. People have a preconceived notion that this system is for Muslims only, Market share is negligible as compare to conventional system, Conflicts in Sharia laws among different school of thoughts, Lack of awareness about Islamic finance and its system. 9. Perceptions and attitudes of people might pose a threat for such systems. Opportunities 1. Population Muslim population is vast and largest minority group in India. 2. Business opportunity in ethical finance 3. An alternate financial system as it is based on profit and loss sharing agreements; People have positive attitudes about Islamic finance as they are based on the principles of shariah equity, just society and ethics 4. Islamic finance has much potential to diversify into new growth areas such as trade and infrastructure financing in Asia and the emerging markets. 5. Islamic finance can seek to meet the increased demand for simpler and more transparent products. Conclusion It is important that all be included in the purview of the financial system for the growth of the economy on the whole. Islamic finance provides India with the opportunity of garnering capital from a large section of population from India and abroad as well. In this context, Islamic finance will help oil the wheels of financial inclusion and financial system. Despite of many challenges, Islamic finance proves to be a good alternate financial system if adopted in India.
References 1. Amit Gupta, Pranjana, Vol 12, A TALK ABOUT THE ISLAMIC BANKING MOVEMENT IN INDIA. 2. Dr Shariq Nisar, CHALLENGES FOR ISLAMIC BANKING IN INDIA 3. Khurram Ajaz khan, Pacific Business Review International, Volume 5 Issue 7, Emerging Islamic Banking: Its Need and Scope in India 4. Achieving financial inclusion for Muslims in India by Ethica institute of Islamic finance. 5. Why India needs Islamic Banking Thought Paper, Infosys 6. Mahmoud Sami Nabi, Role of Islamic Finance in Promoting Inclusive Economic Development.