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Feasibility of Islamic Finance in India

Is change in the Indian regulatory framework inevitable for the development of Islamic Finance? or can there be structures worked around existing laws?

– Qasim Saif I Manager (qasim@vinodkothari.com

Islamic Finance, also referred to as sharia compliant finance or interest-free financing, has always been a topic of discussion in the world of finance. Development of Islamic finance has been viewed as a tool for promotion of inclusive growth by way of financial inclusion as faith plays a major role in inclusive growth.

Islam is the second most followed religion globally, and hence, Islamic finance can stimulate the growth of business sector by proving much needed financing, while also release the untapped sources of capital as some investors may only be willing to invest in products that are permissible under their faith.

Importantly, the application of interest free banking can not be said to be limited to a particular faith. The nuances caused by unchecked interest rates, and the exploitation of the poor by debt trap of the high interest loans has its impact across geographies and religion. As the Islamic finance majorly focuses on asset backed financing and principles of sharing of risk and reward, the same can also be viewed as a solution to the centuries-old problem of exploitation of the poor by way of high interest loans.

In this write-up, after discussing the basics of Islamic finance, we get into the interplay of Islamic finance products with the regulatory framework in India. Towards the end, we discuss a model that can be worked out for the development of Islamic finance products in India.

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