Thursday, February 03, 2011

A step forward for Islamic finance in India

Recently I wrote a post on the potential benefit for Islamic finance in the US (and potentially also the possibility of US municipal sukuk) caused by a courts dismissal of a lawsuit filed against the US government. In that case, the court found that the US government's bailout of AIG which left it with majority ownership of the company, which offers takaful, did not represent the government's encouragement of religion. That would be prohibited under the First Amendment's Establishment Clause.

It appears that a similar court ruling could have the same effect in India. Today, the high court in Kerala dismissed a petition that would have prohibited the state government from participating in promoting an Islamic bank. The court found that "although the institution was based on the principals of a religion, its motive was not to propagate the religion and the state's participation in it was purely based on commercial prospects" according to the Times of India.

This could open up the Indian market somewhat for Islamic finance, which has been slow to develop. There are differences between the US and India. The largest difference is that in the US, the government has been open to allowing Islamic financial institutions to operate under existing financial laws, which are broad enough to accommodate Islamic finance. In India, in contrast, the regulatory climate is much less certain and the Reserve Bank of India, the country's central bank, determined that Islamic banking is not possible under India's existing regulation in an unpublished report.

There are still many things that will need to be worked out before India's Islamic finance industry can really begin to grow to serve the large Muslim population (and hopefully non-Muslims as well), but this is a step in the right direction. There have been many setbacks in non-Muslim-majority countries, from the failure of sukuk legislation in South Korea to the decision by the UK government not to issue a sukuk, so it is encouraging to see signs of progress. This is particularly true in countries that have for many years been viewed as being hostile towards Islamic finance.

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