‘Islamic banking has emerged a viable source of financing'

Notwithstanding India's seemingly linear growth as reflected in the GDP year after year, the number of the poor living below poverty line has only increased. Household income has declined while corporate income has consistently headed North. The fruits of growth, in this manner, seem to have favoured the corporate sector more than vast sections of the population. A system that can help in justifiable redistribution of wealth in the society has become the need of the hour, says Mr R. Seetharaman, Chief Executive Officer, Doha Bank. Islamic banking and finance may prove to be a better alternative, he told Business Line in an interview. The core principle of Islamic banking is sharing in profit and loss.

Excerpts:

How can emerging market economies benefit from Sharia-based banking?

Islamic finance and banking is a system where all the financial activity is consistent with the principles of Sharia — no lending or accepting of money on interest and no investment in haram (unlawful) activities, such as alcohol, gambling, and so on.

Islamic finance works on a profit and loss sharing basis.

The importance of Islamic finance has been realised by some big corporates in India. To take an example, Reliance launched Sharia-compliant portfolio management scheme and so has many others. The Reserve Bank is considering starting Islamic NBFCs (non-banking financial companies). In the mutual fund industry, too, a few but big mutual funds have launched Sharia-compliant scheme.

In what ways do you think the concept can be made workable, more appealing and attractive locally?

Islamic banking has to be positioned as professional banking and not religion-based banking.

Islamic finance has emerged as a viable source of financing in a number of modern, secular and industrialised countries such as the UK, Japan, Singapore, France and Hong Kong.

Even in China, Islamic financial institutions have been allowed to operate by incorporating some changes in local banking and tax laws so that they may provide financing on a level playing field with conventional financiers.

How can regulatory issues in this regard be addressed?

I understand that recently a high-level delegation of Indian Centre for Islamic Finance has been in talks with the Secretary (Financial Services), Government of India, under whom the banking sector of the country operates, on the need and relevance of Islamic finance in India.

More such discussions are necessary to highlight the importance and the issues impacting Islamic finance in India to the Reserve Bank and the Government.

Islamic finance is exposed to the economic environment as conventional banking. The economic environment cannot be changed for Islamic finance. However, Islamic finance should work in line with the changing dynamics prevailing in the economic environment.

Do you think it can influence inflow of foreign direct investment?

Definitely it can influence flow of foreign direct investment into a country from those countries where Sharia-based system is in vogue. It will also result in sharing of intellectual knowledge between institutions across cross-borders.

How do corporates stand to benefit?

Corporates have a whole set of funded and non-funded products available under the Islamic umbrella against the conventional banking products. They can evaluate the products in accordance with their needs and may pick and choose. We already have the Nifty Sharia index in which investors can invest.

Does the US downgrade make Sharia-based banking any more relevant for global economy than it already is?

The US downgrade does not increase the relevance of Sharia-based banking than it already is. However, it may impact Islamic Sukuks (bonds) denominated in US dollars. Such Sukuks' price will fall down if yields go up.

Currently, the yields are still down despite the downgrade on account of concerns of slowdown in US economy.

Is there any lesson to be learnt here for countries such as India, which are not entirely de-coupled from markets in developed countries in the West?

With the global economy recovery still under threat, countries such as India and China are having robust growth at the expense of high inflation primarily driven by commodity prices.

Food inflation surged to a four-and-half month high of 9.90 per cent during the week ended July 30, 2011.The recent hawkish move by Reserve Bank of India reveals that India has learnt lessons on how to control inflation.

In the short term, it is better India sacrifices its growth to generate an environment of rapid growth and steady inflation in the medium term.

India's fiscal deficit is expected to be at around 4.7 per cent of GDP in 2011-12, which is above the budgeted level of 4.6 per cent. India still needs to work on its fiscal management to achieve its targets.

What are the major takeaways for the common man from Sharia banking?

The major takeaways for common man include a wide range of products in Islamic retail products and Islamic wealth management products for investors. Should Islamic insurance ( takaful ) be also allowed, customers can benefit from takaful life insurance.

What has been your personal experience?

Well, I had the experience of handling Islamic window along with conventional banking at Doha Bank. This is a unique model which prevails in GCC. Hence I had the exposure to Islamic risk management and governance along with conventional banking.

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