Potential of Islamic Banking India

The staple fiber principles on which the Muslim seatts function ar prohibition of Rib I. E. show and payment of interest and prohibition of investment in organization tough in unethical and socially harmful activity. He profits pull in by a lingo from its activities and returns do by a banking company to the depositors shall be (a) from sharing of risk In the project and (b) profit-sh ar agreements and non pre-agreed ameliorate interest payments, which Is considered as prohibited earnings because pre-agreed interest agreement has no sharing of risk of investment of money. In last a few(prenominal) decades the Muslim bank has gained huge momentum. It is exploitation faster than any other subset of populace banking at 15 to 20 per cent a year (see McKinney piece (Exhibits) for asset growth of Moslem bank as comp bed to throngal banks in selected few companies).The Economist estimates Moslem assets under management Now days the Islamic banking has become major poi nt of discussion In India. eve RIB had appointed a committee to check the feasibility of Islamic banking in India. The India wants to achieve 2 objectives by offering Shari obedient banking a) financial Inclusion of Muslims Sacra committee report shows that the Muslims ar financially exclude and they are not able to get benefited by the recent growth experient by India. The report says that the condition of Muslims Is similar to that of SC/Sets. iodine of the measures of financial press release to Muslims Is Credit/deposit ratio which is much lower than the national average. One such calculation is shown in Exhibit (2). In the state-wise analysis it is run aground that advances to the Muslims are lower than other minorities (Exhibit 3 shows the graph for few states which has superior Muslim population). ) To attract capital from Gulf countries and other Muslims nations. Banks broadly performs two functions 1) Sourcing of fund Combined effect of these two transactions is pr ofit contemporaries which ensures the growth and sustainability of any bank.To analyze the future potential of Islamic bank in India we shall use the above model of banks. We would control whether there are enough sources of funds and possible avenues for investment in India which are Shari compliant. Sources of fund The main source of funding for banks get out be a) Public deposits b) particular(prenominal) Investments c) a) Public deposits Though both Muslims and non-Muslims an avail of Shari compliant fruit, but in general the main target of the Islamic bank will be Muslims because it caters not only to their financial harvest-time take up but religious need as tumesce.Muslims Depositor India boasts of about 154 million Muslims. Diana Standard estimates their total annual theater income of $48 one thousand thousand (Bag. Household Income x Bag. Household size x Population). DRP. Nasal estimates that there are over Indian RSI. 40 billion of funds to invest by Indian Mu slims annually. The Muslims till now put up been financially excluded. Their condition is described as similar to SC/SST by Sacra committee report.The lower involvement of Muslims in banking system of country could be because of any or combination of following reasons Unavailability of Shari compliant product Unwillingness of the Lenders to lend to Muslims (It may be due to dearth of Collaterals on hand(predicate) for getting loan) financial constraints of the Muslims (Poor household Income) Financial illiteracy of the Muslims. If Shari product is made available first problem (a) is completely solved. Second problem (b) partly solved because the Shari finance is basically equity financing which does not look for collaterals.But it is yet to be found out which factors contribute o what dowry of the financial exclusion. But we tidy sum safely assume that Poor Financial condition and poor financial condition plays the major role in their financial exclusion. According to Sacra c ommittee report about 30% of Muslims are PL. Thus large portion of the Muslims are not bankable. Even if we look at the corporate level we can find very few companies which are promoted by Muslims. Non Muslim depositors India has more than 90 core non- Muslim population.The only reason why the Non-Muslims will go for the Shari compliant product is better product offering and very good marketing schema of Islamic bank. Malaysia has shown that even large of Non-Muslim transact in Shari compliant product. It is estimated that 20% customers of Islamic Bank of I-J are Non-Muslim. In Malaysia, 40% of Sucks are interpreted by non-lilacs Institution and up to 40% of clients are non- Muslim. If product is marketed well the product can find huge market. Indian individuals and corporate are found to be debt averse as compare to their western counterparts..And in case you are unable to pay the loan there is calamity of penalty banking. But Islamic banking is Equity based financing which will reduce the fear of indebtedness. B) Special Investment Investment of Fund Islamic bank have many avenues in India where they can invest their fund. a couple of(prenominal) of the identified areas are 1) Equity market Islamic bank can invest in the shares of the company which are Shari compliant. It is found that there are more than 1000 companies belonging to different sectors which are Shari compliant.Exhibit 4 shows the division of Shari compliant stock and their distribution across various sector category loans Home loan is other fascinating area where Islamic bank can invest. Statistic of N.B. shows that the home loan as percentage of GAP is growing at very fast rate in India. As against the convention home loan the Islamic bank offers home loan on the basis of lease, where the bank buys the home and sell it to the customer at profit. The bank receives the money from customers some time later (or in Installment). This model can work in India because Indians are scare of deb t.And in case you are unable to pay the loan there is chance of penalty and normal shame Other potential investment area Source headache Standard Road ahead for Islamic Bank Offering Shari compliant product is not new thing in India. India had hundreds of NBC which were catering to the Islamic needs. Though successes. These insights will help us in formulating strategy for introducing Islamic banking in India. Indian Islamic NBS were started either out of the need to turn in people from the ruthless moneylenders or out of a concern for the economically backward and downtrodden.