Allowing the Islamic Development Bank (IDB) to open its first branch in Ahmedabad is a refreshing step. It was part of an MoU signed between IDB and India’s EXIM Bank during Prime Minister Narendra Modi’s visit to United Arab Emirates (UAE) in April 2016. Since the global economic crisis of 2008, triggered by subprime mortgage crisis in US, has exposed the fragility of the capitalistic economic system based on interest and free market, there has been a yearning for an alternative system, which both generates capital as well as takes care of the poor. A viable option is the interest-free Islamic finance and banking. Even the Vatican has offered Islamic finance principles to Western banks as a solution to the worldwide economic crisis.

Globally, interest-free banking has witnessed a significant increase. According to IMF chief Christine Lagarde, the total assets are estimated at around USD 2 trillion, nearly a 10-fold increase from a decade ago, and outperforming the growth of conventional finance in many places.

Not only Muslim countries but modern, secular and industrialised countries like UK, Germany, Japan, Singapore and Brazil have Islamic finance and banking along with the conventional banking. Interestingly, UK has become the hub of Islamic finance by issuing the first sovereign sukuk (Islamic financial paper). World Bank has categorised it as a “priority sector” and IMF has endorsed that it could prove safer than conventional finance.

But what is Islamic banking? It originates from ethical principles, based on risk-sharing investment. Therefore, it gives priority to the production of essential goods such as food, clothing, shelter, health and education. It also encourages and facilitates investment in real and productive economic activity promoting entrepreneurship, trade, commerce and societal welfare and creating employment, while prohibiting investment in reckless businesses such as gambling, alcohol and adult entertainment or risky financial products like derivative contracts of the kind which led to the 2008 sub-prime crisis.

Apart from being a viable alternative to capitalist financial systems prone to extreme risks, the interest-free solutions of Islamic banking could restore equilibrium in Indian society by providing succour to debt-ridden farmers, labourers and other marginalised groups. Hence, Islamic banking has potential as a tool of financial inclusion. Dr MS Swaminathan mentions that it can solve farmers’ suicide crisis in the country. Under the system, the bank cannot wash its hands of by just providing loans to farmers. It will have to guide and be with him at every step of farming, and share risks and profits.

In 2008 a high-level committee on financial sector reforms — CFSR of the Planning Commission — chaired by Dr Raghuram Rajan, recommended that interest-free finance, being in consonance with the objectives of inclusion and growth through innovation, be introduced in the banking sector. In 2009, the Kerala government announced the setting up of a non-banking financial company (NBFC) on shariah principles to tap unutilised funds from NRIs based on a feasibility report by Ernst & Young. Dr Subramanian Swamy challenged its formation but the Kerala high court dismissed his petition. In 2013, RBI had approved this NBFC, named Cheraman Financial Corporation.

Standard & Poor’s document — Will Islamic finance play a key role in funding Asia’s huge infrastructure task? — suggests that the conventional lending markets being jittery, the world is now looking towards alternatives to conventional finance and asset-backed Islamic bond called sukuk is one such alternative and India has to make regulatory modifications to accommodate the same as done in developed countries like UK and Germany and developing countries like Malaysia and Indonesia. It is learnt that the finance ministry is considering sukuk for infrastructure development.

The Securities and Exchange Board of India (SEBI), recently allowed State Bank of India to launch Sharia equity funds through which the bank was expecting to float an initial 1 billion rupees ($16.4 million). Thus the State Bank of India Mutual Fund (SBIMF) was formed as a joint venture between asset manager Amundi of France and the State Bank of India. SBIMF was supposed to offer investment opportunities based on Islamic equity indexes benchmarked to the S&P BSE 500 Shariah Index launched in May 2013.

But curiously this Shariah Mutual Fund was deferred a day before its launch on November 2014, to improve the product and review the structure of the Fund. However, market analysts see political involvement on the deferment. The issue was raised in Parliament and the finance minister has assured that it will be re-launched soon.

During Prime Minister Narendra Modi’s visit to Saudi Arabia there were a wide range of discussions on business and investment in the background of the Kingdom’s $2 trillion Public Investment Fund along with similar huge funds available in Qatar, Bahrain, Kuwait and Dubai. In 2005 RBI constituted a Working Group under Anand Sinha, then Executive Director, RBI, to examine ‘Financial Instruments used in Islamic Banking’ which concluded that if the banks in India are to be allowed to do Islamic banking, appropriate amendments have to be made in the Banking Regulation Act. Ironically, it neither had any Islamic finance expert, nor examined by the standards used by international agencies like Accounting & Auditing Organisation for Islamic Finance Institutions (AAOIFI) or Islamic Financial Services Board (IFSB) or even referred to the regulations adopted by FSA of UK or MAS of Singapore, which accommodated this alternative banking system within the existing framework.

But in December 2015, the Committee on Medium-term Path on Financial Inclusion of RBI, headed by Deepak Mohanty, constituted on the instructions of Prime Minister Narendra Modi to devise a measurable and monitorable action plan for financial inclusion, has one full chapter on interest free banking that recommends “commercial banks in India may be enabled to open specialised interest-free windows with simple products.”

The perception that Islamic finance is only for Muslims is baseless. In fact 40 per cent of the customers of Islamic Banks in Malaysia and around 20 per cent in UK are non-Muslims. Interestingly, in India as well, majority of the investors of the shariah-compliant Tata and Taurus Ethical Funds are from the Jain community. Call it Islamic Finance or Alternative Finance as in UK, or Participatory Finance in Turkey or Interest-free finance as in many countries, the system adhering to ethical values needs to be given a chance.

The author is Convenor, National Committee on Islamic Banking