Archive for ‘India Islmaic Banking and Finance’

October 27, 2008

Islamic Banking Opertunities knoking Indian Subcontinet


Islamic finance in India is slowly beginning to take off, but it will be some time before Islamic banks are really able to make their mark in the booming economy as Mike Gallagher reports
The Middle East has long had trade links with India. Indian Muslims make up 13.4 per cent of the country’s 1.3 billion population and many of these have been going on pilgrimages to Mecca for centuries, so it is no surprise that Islamic banks have been eyeing India for quite some time, although none has a presence there.
This is easy to understand at a practical level. The central bank of India has had a tough time trying to keep up with the pace of the economic boom. It is fully aware of the economic benefits of Islamic finance from an institutional and retail point of view and knows that a number of regulatory changes need to be made, but is often hamstrung by corrupt or recalcitrant regional governments and political infighting amongst the various parties in the coalition government. The banking system is in dire need of reform, but this is unlikely to take place until at least after the general election which is due to take place. However, Islamic finance does exist in various states across India, but it tends to be through cooperative banks or Islamic finance companies such as The Amanath Cooperative Bank, Pune-based Muslim Cooperative Bank, Baitun Nasr Urban Cooperative Society in Mumbai, Al Ameen Islamic Financial & Investment and Al-Falah Investment. Many of these cooperative banks and Islamic finance institutions tend to operate in rural areas such as Kerala.
Islamic finance at a retail level has not been successful in India. Its development has largely been hampered by a lack of adequate central bank rules which would allow it to function alongside conventional banks, such as in the UK or the Middle East.
Islamic banks cannot fully participate in the banking system in India because in order to receive banking licences, they need to comply with central bank rules on capital adequacy ratios and statutory liquidity ratios. These rules mean that all banks have to maintain and deposit 8.5 per cent of their total cash reserves at the central bank.
They then receive interest on 5.5 per cent while 3 per cent does not receive any interest. This immediately puts them at odds with Shari’ah. The fact that they do not and cannot operate under central bank regulations means that the central bank cannot act as a lender of last resort, should the worst come to the worst. Hence the reason for their small scale and the difficulty they have to establish a presence in India. This has meant that conventional banks have also had difficulty opening Islamic windows.
The majority of Islamic finance institutions in India are registered under the Non Banking Finance Companies Reserve Bank Directives 1997 RBI (Amendment) Act 1997 which means they are unable to offer the kinds of services that conventional banks can offer such as credit cards or cheque books and subsequently cannot make use of the settlement and clearing system.
Opportunities exist for Islamic finance in India, but they have not yet reached a retail level. Chetan Mehra, regional head of private banking and NRI services (GCC and Africa) of ICICI Bank in Dubai said, “It would be high net worth or institutional investors that will initially be investing in Islamic finance in India and this will be through the fund route. There is also a lot of activity taking place on the Islamic real estate side in India, especially in development.”
A number of Islamic banks from the Middle East have also been looking to expand internationally and India is highly likely to be somewhere they will be looking seriously at. Taib Bank has Islamic mutual funds such as the Taib GCC Islamic Fund and Taib Everest Fund II and others have been offering Islamic mutual funds through deals with Indian banks. At least one company is looking at the Islamic capital markets as India struggles to build its infrastructure. Velcan Energy, a renewable energy company from France is planning to raise $200 million in a Sukuk offering in the first quarter of 2008 to finance the construction of a hydroelectric dam in India, a first for India. The Sukuk will list on the DIFX.
Baader Wertpapierhandelsbank, a trade finance bank from Germany is planning to launch an Islamic fund in India, while 2iCapital from Bangalore started a $250 million Shari’ah compliant infrastructure fund in 2007. Islamic brokerage, Parsoli Corporation is also planning to join forces with Baader to launch an asset management company within the next 18 months.
IJARAH
At the close of 2007 Kuwait-based Khaleej Finance and Investment, in conjunction with ICICI Bank of India, launched a $200 million private equity fund. The fund has minimum subscription of $250,000 for individuals and $1 million for institutions with a targeted internal rate of return of around 25 per cent. The objective of the fund is to invest in unlisted Indian companies that are involved in areas like real estate, telecommunications, IT and infrastructure.
There has been a tremendous amount of activity by private equity companies in India, with an estimated 400 private equity companies thought to be active and there is believed to be room for Islamic private equity to increase its share of the alternative investments arena.
Some banks expect that at least $1 billion will be ploughed into Indian-orientated Islamic funds over the next 12 months. Kotak Mahindra Mutual Fund, which is part of the giant India Kotak Mahindra conglomerate, has recently launched a $300 million Shari’ah compliant fund.
Meanwhile, Kuwait Finance House and HSBC recently joined forces to arrange what they say is the first Ijarah facility ever to originate from India, a $50 million transaction for an Indian company called SREI Infrastructure Finance.
Investors have plenty of choice if they are looking for Shari’ah compliant investments on Indian stock exchanges, according to Dr Shariq Nisar, a Mumbai-based investment consultant. He estimated that between one third and a half of all stocks on Indian stock exchanges could be Shari’ah compliant. He carried out a survey which showed that nearly 240 listed companies on the Bombay Stock Exchange (BSE) met Shari’ah standards, while 335 out of 1000 on the National Stock Exchange (NSE) also met the criteria for Shari’ah compliance. He added that at least 60 per cent of all Indian companies meet Shari’ah compliance standards, compared to 57 per cent in Malaysia, 51 per cent in Pakistan and just 6 per cent in Bahrain. India even has its own Islamic equity exchange. The Parsoli Islamic Equity Index is an Islamic equity benchmark index, which includes 41 stocks from top 100 companies on exchanges from the BSE Sensex and the NSE Nifty Indices.
ECONOMIC DEVELOPMENT
Majeed Zubair, the dean of the Institute of Islamic Banking and Finance in Hyderabad, believes that India could cater both to Malaysian and Middle Eastern investors and the differing Shari’ah standards. He also said that demand for courses in Islamic finance was far outstripping supply as banks anticipate increasing business from institutional investors looking for access to alternative forms of capital, particularly as the country’s infrastructure is being built up.
The biggest development of late featuring a Middle Eastern Islamic investment bank has been the $10 billion deal that Gulf Finance House (GFH) from Bahrain signed with the state of Maharashtra to develop an economic development zone near Mumbai. This deal was singed at the end of December 2007. The 1600-acre development comes a year after GFH had signed a similar agreement with the state for the development of India’s first energy business district, Energy City India.
Al Baraka from Bahrain, which owns 91 per cent of Al Baraka Islamic Bank, plans to expand into Asia with an initial investment of at least $300 million in the next couple of years and has identified India as one place it hopes to establish a presence, alongside Indonesia and Malaysia. ADCB, which has a Takaful and savings programme called ADCB Meethaq has been active in India since the early 1980s and will in all likelihood, be biding its time as the Indian government prepares to push through legislation to allow Islamic banks to operate under the same rules as conventional banks

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