Monday, September 9, 2013

TMR: Licence for Kerala Islamic finance

By Kazi Mahmood

In a landmark ruling, the Kerala government has been given the go ahead by the Reserve Bank of India (RBI) to launch an Islamic financial institution (IFI), which will be a joint venture between the Al Barakah Financial Services Ltd and the Kerala State Industrial Development Corp (KSIDC), according to media reports.

Kerala will get its first Islamic non-banking finance company Al Barakah in India, after the dismissal of petitions filed by Subramaniam Swamy and RV Babu in the High Court, paving way for a unique partnership in a bid to raise funds for industrial and infrastructure projects.

Kerala Industries Minister Elamaram Kareem said the licence was granted due to the great interest by Gulf nations to invest in Indian infrastructure projects.

“There is enormous interest among Gulf-based NRIs (nonresident Indians) on investing in Kerala through the Shariah route. There has been an offer to bring in Rs10,000 crore (RM6.74 billion) from Oman alone, through the initiative of Muscat-based Keralite businessman, P Mohamed Ali,” the minister said, as reported by

The interest in the proposed NBFC (non-banking financial companies) is so strong, that immediately after it was floated, a large corporate with interest in multiple domains sought 74% stake in it, and the Doha Bank expressed desire to pick up a 46% equity, Kareem said.

The project will be floated by the Cheraman Financial Services Ltd (CFSL) for the KSIDC. A formal announcement on CFSL, the latest incarnation of Al Baraka Financial Services, was made for the purpose of officially registering RBI’s support for the project.

Counting on the state’s traditional Gulf links, a previous government in Kerala had hoped to raise Rs40,000 crore.

The issue of Islamic banking and finance is that India made the headlines earlier this year with the RBI declining to grant Islamic banking licence, citing the incompatibility of the Indian financial laws that did not allow banks and finance houses to operate without charging interest.

Al Barakah will be an unique company with an authorised share capital of Rs1,000 crores and will operate on the principles of Islamic financial institutions, much like a venture capital or an investment firm.

“Al Barakah will not operate as a bank and extend loans but make direct investments in infrastructure projects not linked with pork, alcohol and other non-halal products, after which profits would be shared in the form of dividends and not as an interest. KSIDC has a 11% stake and the rest would be raised by NRIs and state Muslim population,” reported.

Kerala, with a 56% Hindu population, is seen as a cosmopolitan society where tolerance among the people is high and it is said to be the perfect example where Islamic finance could be enrolled for large projects. The state has a 24% Muslim population with 19% Christians.

After the introduction of Shariah index in Bombay Stock Exchange (BSE), it is a second serious attempt to include the Indian Muslim in the mainstream financial setup and certainly will be a milestone to achieve the inclusive growth vision of the country, the report added.

Meanwhile, Indian Centre for Islamic Finance secretary general Abdur Raqeeb, who is responsible for the campaign to establish interest free banking in India, said the need to bring the Muslim population into the mainstream banking system, with Islamic banking, is a must as India will benefit from such a move.

He said the size and purchasing power of Indian middle class is increasing year-on-year, creating wider scope for consumer finance on Islamic finance principles.

“The savings of the 200 million Muslims of India, mostly whom are currently unbanked, will provide ample opportunity for IFIs of Malaysia,” Raqeeb said.

The fact that major chunk of India’s growth is driven by domestic demand makes investment in India more attractive and sustainable vis-avis investment in China or other growing economies.” he said, adding that Malaysian and Gulf nations should be interested in infrastructure investment in India.

Islamic banking and finance is the largest alternative financial system in the world. It is approximately a US$2 trillion (RM6.55 trillion) industry present in over 75 countries including Australia, France, the UK, Hong Kong, Singapore, Luxembourg, South Africa, Sri Lanka and Malaysia.