Islamic Finance in India: Financial Regulations Challenges and Possible Solutions

Background

Islamic finance is not a new concept in India. The researches available on this subject show that the origin of Islamic finance here goes back to the 1890s when an Interest-free loan providing institution was established in southern part of India. But the first formal Interest-free credit society was believed to be established in the year 1923 in Hyderabad (Zamir Iqbal & Abbas Mirakhor, 2011).

Initiated as the small community based institutions scattered in different parts of the nation, the Islamic finance practices have developed considerably in Indian market, especially in the last one decade. The establishment of Alternative Investments and Credits Limited- an asset financing company in Kerala (2000), establishment of Al-Khair Co-operative Credit Society- an interest-free microfinance institution in Bihar (2002), policy level discussions in the Anand Sinha Committee (2006)- a working group formed by RBI to examine the financial instruments used in Islamic banking under the chairmanship of Mr. Anand Sinha, the Raghuram Rajan Committee (2008)- a high level committee on financial sector reforms formed by the GOI under the chairmanship of Dr. Raghuram Rajan, launch of the Secura India Real Estate Fund- an Islamic Venture Capital Fund in Kerala (2009 & 2012), establishment of Sahulat Microfinance- a society established to promote the interest-free microfinance practices in India located in New Delhi (2010), launch of BSE-TASIS 50 Shariah Index- a Shariah Compliant Equity Index developed under the partnership of Bombay Stock Exchange and Taqwaa Advisory & Shariah Investment Solutions in Mumbai (2011), Cheraman Financial Services Private Limited- an NBFC under the partnership of M/s Kerala State Industrial Development Corporation in Kerala (2011) are some of the success stories.