By: M.H. Khatkhatay
The eighties witnessed the start of a new phase in the Islamic finance movement in India. Till then all the practical efforts set up, had concentrated on providing interest-free credit to borrowers by not for-profit institutions, although Islamic finance literature emanating from both within the country as well as abroad, was replete with models of commercial Islamic finance models. Around 1980 some commercial operations were initiated to provide saving and investment options on profit sharing basis but failed to survive beyond a few years. Notable among these were Markaz Investments of Hyderabad and Al-Meezan in Madras.
1983 saw the inception of the Barkat Investment Group, offering investors the opportunity of pooled investments in the stock markets and leasing – and with it the start of commercial Islamic finance in India. By 1988 the primary focus of the Group shifted to real estate, though leasing and share investments continued as other avenues of investment. In 1986 the promoters of the Al Ameen movement of Bangalore established the Al Ameen Islamic Financial and Investment Corporation Ltd. (AIFIC), the country’s first leasing NBFC. This was followed in 1989 by Al Baraka Finance House Ltd., another NBFC and the first to have a foreign equity stake – from the Dallah-Albaraka group of Saudi Arabia. Commercial Islamic finance had truly reached India.
Growth and Debacle
The early nineties were a period when liberalization was the buzz word in India. It was also a period when many new commercial Islamic finance operations were set up, both as NBFCs as well as partnership firms. It was a period of rapid growth and optimism in the Islamic finance sector. The high point of this period was the launch of the Tata Core Sector Equity Fund a mutual fund scheme of Tata Mutual Fund, targeted at shariah compliant investors and promoted throughout the country by Barkat Investment Group.
During the nineties academic interest in Islamic finance increased. The Indian Association for Islamic Economics (IAFIE) was established in 1990 and in 1991 it began publishing the Islamic Economics Bulletin. Aligarh Muslim University (AMU) began offering a paper on Islamic Economics Thought at the Post Graduate level.
This was also the period of relatively lax supervision, when a host of fly-by-night operators in the mainstream NBFC sector, including some from those in Islamic finance sought to take gullible investors for a ride.
The curtain was drawn down on this phase and on the millennium with a spate of drastic policy changes by RBI. These coincided with a severe recession in real estate, a general downturn of the economy and a nosedive of the stock market to make the impact of the changes even more lethal. The policy changes not only led to severe curtailment of the NBFC sector but also drastically reduced elbow room for maneuver by Islamic finance institutions, which needed to comply not only with the law but also Shariah stipulations.
The result was a considerable thinning of the ranks of commercial Islamic finance operations, including the demise of the Barkat Group and AIFIC, as well as some partnership firm based operations.
Islamic Finance Moves into the Mainstream
After the recovery from the recession at the turn of the millennium, we have seen an increasing interest among mainstream financial services operators to tap into the market for Islamic finance saving and investment products. There is also a greater awareness, if not appreciation, of Islamic finance as a genuine alternative financial system.
Among some important specific developments during this period can be listed the launch of two explicitly Shariah compliant mutual fund products: one from Taurus Mutual Fund and the other from Tata Mutual Fund and two real estate venture capital schemes of Secura (India) Real Estate Fund, all four approved by SEBI; Bajaj Allianz Life Insurance offered a pension product structured and advised by a corporate Shariah advisory firm. In 2009 GIC Re, India’s government-owned and only reinsurance company launched a Re-Takaful product to target international Re-Takaful business. In 2010, for the first time Indian investors were offered the option of investing in metals in a shariah compliant paperless manner, by the National Spot Exchange Limited (NSEL).
The Kerala State government through its Kerala State Industrial Development Corporation (KSIDC) and in association with NRIs from the state in the Gulf, has promoted a Shariah compliant NBFC for developing infrastructure in the state, in the process seeing off a legal challenge to its initiative in the Kerala High Court. Another landmark legal battle is shaping up in the Bombay High Court, where Calicut–based Alternative Credit and Investments Limited (AICL), an NBFC with a 12-year history of commercial Islamic finance operations behind it, is challenging RBI’s order revoking its NBFC licence for refusing to deploy its funds only on the basis of fixed returns.
The end of the first decade of the new millennium saw efforts to launch two ambitious initiatives on the multi-state cooperative societies’ platform, under the brands Sahulat and Jan Seva, simultaneously from several locations and centred at Delhi and Mumbai respectively. These initiatives under the liberalized cooperative regime which permits both lending as well as investment operations under the same entity are a recent phenomenon for Islamic finance in India and will be watched with interest.
On the infrastructure front, 2006 witnessed the establishment of India’s first corporate Shariah Advisory firm, Taqwaa Advisory and Shariah Investment Solutions Pvt. Ltd. (TASIS). During this phase, two Shariah indices have been launched for the stock market, by the two leading stock exchanges, National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) in association with S&P and TASIS respectively. The global accounting major KPMG entered into a MoU with TASIS to jointly provide consultancy services. A handful of legal firms also declared their interest in offering their services in the field of Islamic finance. A number of stock broking firms have also appeared across almost all major metros and some tier II cities dedicated to marketing of only shariah compliant products.
National Minorities Development Finance Corporation has announced its intention to restructure its schemes along Shariah lines and invited bids for the assignment. Minister for Minority Affairs has announced the government’s intention of setting up a Haj Fund on the lines of Tabung Haji of Malaysia, which had marked the start of development of Islamic finance in that country.
At the same time there has been increasing discussion in government fora and official advisory and policy-setting bodies, such as the Anand Sinha Study Group on Islamic Banking (RBI; 2005) and Raghuram Rajan Committee on Financial Sector Reforms (Planning Commission; 2009) on the possibility and need of offering Islamic finance options in the country. Even the Prime Minister has spoken of the beneficial impact of the introduction of Islamic Banking in India on the country’s infrastructure development.
On the academic front the 21st century has witnessed considerable proliferation of Islamic finance education. As of date IBF.net is offering good quality online courses, Islamic finance PG Diploma courses are being offered at Aligarh Muslim University (AMU) as well as at Al Jamia Al Islamia, Shantapuram, Kerala, while BSAR University offers MBA (Islamic Finance). BSE Training Institute Ltd (BTIL) run by Bombay Stock Exchange, has conducted 2-day workshops for finance professionals and is currently in the process of putting together online certificate and diploma courses in the discipline.
From the above developments, most of them from leading mainstream non-muslim corporates and business houses, it seems that Islamic finance too is finally moving mainstream.