1. ISLAMIC FINANCE IN INDIA ISSUES AND OBSTACLES AUSAF AHMAD PATNA MAY 27, 2007

2. PRESENT SITUATION OF INDIAN MUSLIMS Total population: 15-20 Crores Total population: 15-20 Crores Distribution of Total Muslim Population in India: Distribution of Total Muslim Population in India: U.P. 22% U.P. 22% West Bengal 14% West Bengal 14% Bihar 12 % Bihar 12 % Note that 48% of total Muslim Population is concentrated in three states, rest is scattered rather evenly through out India. Note that 48% of total Muslim Population is concentrated in three states, rest is scattered rather evenly through out India.

3. Urban Concentration Proportion of Muslims in total Urban population is higher than the proportion of Muslims in total Rural Population. Proportion of Muslims in total Urban population is higher than the proportion of Muslims in total Rural Population. Proportion of Muslims in total local population: Proportion of Muslims in total local population: 75% or more 9 Districts 75% or more 9 Districts 50% - 74.9% 11 Districts 50% - 74.9% 11 Districts 1% - 49.9 % 571 Districts 1% - 49.9 % 571 Districts Regional Distribution provides clues to many dilemmas facing Indian Muslims in Contemporary India.

4. Dominance of Non agriculture Professions Only 36% of rural Muslims obtain their livelihood from Agriculture. This proportion is 44% amongst the Hindus. Only 36% of rural Muslims obtain their livelihood from Agriculture. This proportion is 44% amongst the Hindus. Self employment Self employment Unorganized sector Unorganized sector Proportion of self employment amongst Muslims in urban areas is 53% while this proportion is 40 % amongst Hindus in the urban areas. Proportion of self employment amongst Muslims in urban areas is 53% while this proportion is 40 % amongst Hindus in the urban areas.

5. Incidence of Bank Use Amongst Muslims Total Number of Accounts 3,48,21,120 Total Number of Accounts 3,48,21,120 Accounts held by others 2, 93,13,453 Accounts held by others 2, 93,13,453(84.18%) Muslims 32,54,286 (9.34%) Total number of accounts held by Muslims is less than their share in population.

6. Trends in Disbursement of Loans Share of Different communities in total loan disbursement of public sector banks. Share of Different communities in total loan disbursement of public sector banks. Other communities 88.64 % Other communities 88.64 % All Minorities 11.36 % All Minorities 11.36 % Other Minorities 6.36 % Other Minorities 6.36 % Muslims4.99 Muslims4.99 In 1990-91 total loan disbursed in Saharanpur was 506 million Rupees out of which 66 million was given to minorities. In 1990-91 total loan disbursed in Saharanpur was 506 million Rupees out of which 66 million was given to minorities. i.e. 13% against their share in population 31%. i.e. 13% against their share in population 31%.

7. Explanation of situation Discrimination [ Are genuine applications are rejected?] Discrimination [ Are genuine applications are rejected?] Muslims do not seek loans: Muslims do not seek loans: a. For religious reasons a. For religious reasons b. For strategic reasons….Law of circular causation. b. For strategic reasons….Law of circular causation.

8. Relevance of Islamic Finance Such a large concentration of Muslims can not remain oblivious to most important development in the Islamic world. Such a large concentration of Muslims can not remain oblivious to most important development in the Islamic world. Islamic Finance would help privatization of Finance in India. Islamic Finance would help privatization of Finance in India. It would promote Investment Banking in the country. It would promote Investment Banking in the country. It could bring in Foreign capital and foreign financial institutions. It could bring in Foreign capital and foreign financial institutions.

9. Relevance of Islamic Finance II Islamic Finance could promote micro financing and financing of the poor. Islamic Finance could promote micro financing and financing of the poor. Interest free credit societies could save the poor from the clutches of the loan- sharks. Interest free credit societies could save the poor from the clutches of the loan- sharks.

10. Islamic Financial Institutions in India Money market and Capital market Money market and Capital market Money market: organized and unorganized. Money market: organized and unorganized. Organized Money market: Organized Money market: Total commercial Banks 97 Total commercial Banks 97 Public Sector Banks 32 Public Sector Banks 32 Private Banks 27 Private Banks 27 Foreign Banks 38 Foreign Banks 38

11. Islamic Financial Institutions in India II Market Share: Market Share: Public Sector Banks 83% Public Sector Banks 83% Private Banks 9% Private Banks 9% Foreign Banks 8% Foreign Banks 8%

12. Regulation of Financial Institutions Indian Banking Regulation Act 1949 Indian Banking Regulation Act 1949 Reserve Bank of India Act 1935 Reserve Bank of India Act 1935 Negotiable Instruments Act 1881 Negotiable Instruments Act 1881 Cooperative Societies Act 1861 Cooperative Societies Act 1861 Banking Regulation Act 1969 Banking Regulation Act 1969 Securities and Exchange Board of India (SEBI) Act. Securities and Exchange Board of India (SEBI) Act.

13. ISLAMIC FINANCIAL INSTITUIONS IN INDIA There is no presence of IFI in the organized sector. There is no presence of IFI in the organized sector. Interest Free Credit Societies Interest Free Credit Societies Interest Free Financial Companies Interest Free Financial Companies Investment Funds Investment Funds

14. MAIN FEATURES OF IFIS IN INDIA Mostly concentrated in South India. AP, Karnataka, TN, and Kerala. Mostly concentrated in South India. AP, Karnataka, TN, and Kerala. Religious motivation Religious motivation Registration under different law and different names. Registration under different law and different names. Reliable statistical and economic information not available. Reliable statistical and economic information not available. Differences in practices. Differences in practices.

15. MAIN FEATURES OF IFIS IN INDIA Promoted the concept of interest free finance in a rather hostile atmosphere. Promoted the concept of interest free finance in a rather hostile atmosphere. Less regulated, mismanaged. Less regulated, mismanaged. Prone to cheating and fraud. Prone to cheating and fraud. Less transparent Less transparent RATE: Responsibility, Accountability, Transparency and Efficiency. RATE: Responsibility, Accountability, Transparency and Efficiency. Religious Zeal is no substitute for professional expertise. Religious Zeal is no substitute for professional expertise.

16. ISLAMIC FINANCIAL COMPANIES Al Najeeb Mutual Benfit fund Al Najeeb Mutual Benfit fund Al Ameen Islamic Financial and Investment Corporation (now Defunct). Al Ameen Islamic Financial and Investment Corporation (now Defunct). Spot deposit account and benefit deposit account. Spot deposit account and benefit deposit account. Loan schemes are based on Rahn. Loan schemes are based on Rahn.

17. INVESTMENT FUNDS Growth of investment funds. Growth of investment funds. Fixed deposits and equity investments. Fixed deposits and equity investments. Limitations of Unit Trust of India Limitations of Unit Trust of India Private Mutual Funds Private Mutual Funds Tata Core Sector Equity Fund Tata Core Sector Equity Fund Idafa Investment Private Limited. Idafa Investment Private Limited. Screening of companies and Dow Joans Islamic Index. Application to India. Screening of companies and Dow Joans Islamic Index. Application to India.

18. POSSIBILITIES OF ISLAMIC FINANCE Efforts may continue for establishment of a full scale Islamic bank in the organized sector. Efforts may continue for establishment of a full scale Islamic bank in the organized sector. Lobbying… Three dimensions…Policy makers and bureaucrats, legislators and politicians, general public and opinion makers. Lobbying… Three dimensions…Policy makers and bureaucrats, legislators and politicians, general public and opinion makers. Put the house in order …in the organized sector Put the house in order …in the organized sector

19. POSSIBILITIES OF ISLAMIC FINANCE II Apply: RATE Apply: RATE REGISTRATION AND RESPONSIBILITY REGISTRATION AND RESPONSIBILITY ACCOUNTABILITY ACCOUNTABILITY TRANSPARENCY TRANSPARENCY EFFICIENCY AND PROFESSIONALISM. EFFICIENCY AND PROFESSIONALISM.

20. POSSIBILITIES OF ISLAMIC FINANCE A CORRECT AND FORESIGHTED STRATEGY, PROPERLY IMPLEMENTED, COULD ENSURE A BRIGHER FUTURE FOR Islamic FINANCE IN INDIA. A CORRECT AND FORESIGHTED STRATEGY, PROPERLY IMPLEMENTED, COULD ENSURE A BRIGHER FUTURE FOR Islamic FINANCE IN INDIA. THANK YOU VERY MUCH AND THANK YOU VERY MUCH AND WASSALAM WASSALAM