This presentation was made at Govt. Arts and Science College Malappuram and MES Arts and Science College, Kalathode, Chathamangalam, Kozhikode. The presentation was made in the seminars conducted with the sponsorship of Indian Association of Islamic Economics (IAFIE) as a part of its annual agenda for the year 2014 - 2015.
Economic and financial crises a fundamental analysis from Islamic financial paradigms perspective
1. Economic & Financial Crises – A
Fundamental Analysis from
Islamic Financial Paradigms
Perspective
PA Shameel Sajjad
2.
3. Maqasid Al Shariah
• Protection of Life (Nafs)
• Protection of Religion (Deen)
• Protection of Intellect (Aql)
• Protection of Progeny (Nasl)
• Protection of Wealth (Maal)
4. The Definition of Financial Crisis
• A situation in which the value of financial
institutions or assets drops rapidly. A financial crisis
is often associated with a panic or a run on the
banks, in which investors sell off assets or withdraw
money from savings accounts with the expectation
that the value of those assets will drop if they
remain at a financial institution.
• A situation in which the supply of money is outpaced
by the demand for money. This means that liquidity
is quickly evaporated because available money is
withdrawn from banks, forcing banks either to sell
other investments to make up for the shortfall or to
collapse. See also recession.
5. Types of Crises
• Banking Crisis
• Currency Crisis
• Speculative Bubbles and Crashes
• International Financial Crises
• Wider Economic Crises
6. Banking Crisis
• When a bank suffers a sudden rush of withdrawals by
depositors, this is called a bank run.
• Since banks lend out most of the cash they receive, it is
difficult for them to quickly pay back all deposits if these
are suddenly demanded, so a run renders the bank
insolvent, causing customers to lose their deposits, to
the extent that they are not covered by deposit
insurance.
• An event in which bank runs are widespread is called a
systemic banking crisis or banking panic.
• Examples of bank runs include the run on the Bank of
the United States in 1931 and the run on Northern Rock
in 2007.
7. Currency Crisis
• There is no widely accepted definition of a currency crisis, which
is normally considered as part of a financial crisis.
• Kaminsky et al. (1998), for instance, define currency crises as
when a weighted average of monthly percentage depreciations
in the exchange rate and monthly percentage declines in
exchange reserves exceeds its mean by more than three
standard deviations.
• Frankel and Rose (1996) define a currency crisis as a nominal
depreciation of a currency of at least 25% but it is also defined
at least 10% increase in the rate of depreciation.
• In general, a currency crisis can be defined as a situation when
the participants in an exchange market come to recognize that a
pegged exchange rate is about to fail, causing speculation against
the peg that hastens the failure and forces a devaluation or
appreciation.
8. Speculative Bubbles and Crashes
• A speculative bubble exists in the event of large, sustained overpricing of some
class of assets.
• One factor that frequently contributes to a bubble is the presence of buyers
who purchase an asset based solely on the expectation that they can later resell
it at a higher price, rather than calculating the income it will generate in the
future.
• If there is a bubble, there is also a risk of a crash in asset prices: market
participants will go on buying only as long as they expect others to buy, and
when many decide to sell the price will fall.
• However, it is difficult to predict whether an asset's price actually equals its
fundamental value, so it is hard to detect bubbles reliably.
• Some economists insist that bubbles never or almost never occur.
• Well-known examples of bubbles (or purported bubbles) and crashes in stock
prices and other asset prices include the Dutch tulip mania, the Wall Street
Crash of 1929, the Japanese property bubble of the 1980s, the crash of the dot-
com bubble in 2000–2001, and the now-deflating United States housing
bubble. The 2000s sparked a real estate bubble where housing prices were
increasing significantly as an asset good.
9. International Financial Crises
• When a country that maintains a fixed exchange rate is suddenly forced to
devalue its currency due to accruing an unsustainable current account deficit,
this is called a currency crisis or balance of payments crisis.
• When a country fails to pay back its sovereign debt, this is called a sovereign
default.
• While devaluation and default could both be voluntary decisions of the
government, they are often perceived to be the involuntary results of a change
in investor sentiment that leads to a sudden stop in capital inflows or a sudden
increase in capital flight.
• Several currencies that formed part of the European Exchange Rate Mechanism
suffered crises in 1992–93 and were forced to devalue or withdraw from the
mechanism.
• Another round of currency crises took place in Asia in 1997–98.
• Many Latin American countries defaulted on their debt in the early 1980s.
• The 1998 Russian financial crisis resulted in a devaluation of the ruble and
default on Russian government bonds.
10. Wider Economic Crises
• Negative GDP growth lasting two or more quarters is called a recession. An especially
prolonged or severe recession may be called a depression, while a long period of slow
but not necessarily negative growth is sometimes called economic stagnation.
• Some economists argue that many recessions have been caused in large part by financial
crises.
• One important example is the Great Depression, which was preceded in many countries
by bank runs and stock market crashes.
• The subprime mortgage crisis and the bursting of other real estate bubbles around the
world also led to recession in the U.S. and a number of other countries in late 2008 and
2009.
• Some economists argue that financial crises are caused by recessions instead of the other
way around, and that even where a financial crisis is the initial shock that sets off a
recession, other factors may be more important in prolonging the recession.
• In particular, Milton Friedman and Anna Schwartz argued that the initial economic
decline associated with the crash of 1929 and the bank panics of the 1930s would not
have turned into a prolonged depression if it had not been reinforced by monetary policy
mistakes on the part of the Federal Reserve, a position supported by Ben Bernanke.
11. Crisis Cause
1. Swedish Financial Crisis In 1985, Sweden
deregulated its credit
market, leading to a
commercial property
speculation bubble.
Between 1990-94, the
bubble burst, leaving 90%
of the banking sector with
massive losses, including
all of Sweden’s largest
banks.
2. United States Savings and
Loan Crisis (1986-1989)
Interest Rate Policies of the
Govt.
3. Northern Rock Bailout
(Great Britain, 2007)
Asset – Liability Mismatch
12. 4. Tulip Mania (The
Netherlands, 1637)
Futures trading in tulips.
Short selling of futures
contracts.
5. The Japanese asset price
bubble (1986-1990)
Asset Liability Mismatch
14. Leverage
• Leverage refers to use of debt in capital.
• Debt comes at a lower cost than equity and
thus reduces the weighted average cost of
capital.
• Thus the use of debt in capital structure
magnifies profits for shareholders.
• The use of debt magnifies losses at a higher
rate than it magnifies losses.
• This phenomenon is called the “Leverage
Effect” which was first demonstrated by Black.
15. • When debt takes the form of security it
assumes increased capacity to cause
destruction in the financial system.
• Securitization of debt and trading in those
securities has been the basic cause of most of
the crises including the 2008 sub prime crisis.
• The door to such massive destruction has been
closed by Islam through the rule of bai al dayn.
17. • Speculative transactions are carried out mainly through
financial instruments known as derivatives.
• A derivative is a contract between two or more parties whose
value is based on an agreed-upon underlying financial asset,
index or security.
• In practice, while purchasing a derivative only a small portion of
the price of the bundle of stocks as per the derivative contract is
paid by the buyer.
• That is, in effect, the major part of the price and the delivery of
the whole of the subject matter of sale (equities in this case) is
deferred to a future date.
• This amounts to the sale of debt (price) for debt (shares) with
unequal values as the price of shares keeps continuously
changing in the market.
18. • The history of equity derivatives dates back to April
26th, 1973 when Chicago Board Options Exchange
listed equity options for trading.
• 911 contracts traded in 16 different equities.
• Shortly after that Fischer Black and Myron Scholes
published their landmark article “The Pricing of
Options and Corporate Liabilities” in the Journal of
Political Economy, Volume 81 (May / June 1973).
• Another landmark article in 1972 was “Theory of
Rational Option Pricing” by Robert Merton in the
Bell Journal of Economics and Management Science.
19. • Since then Derivatives demonstrated a morbid capacity to effect
and accelerate widespread financial crashes and take those to
unimagined levels.
• Still, they are not undone with in spite of widespread criticism.
• Mr. Warren Buffet; the world famous investor in equities and the
Chief of Berkshire Hathaway termed Derivatives as “weapons of
financial destruction” (Berkshire Hathaway Inc., 2002).
• Derivatives have been associated with a number of high profile
corporate events that roiled the global financial markets.
• Derivatives have played an important role in the near collapses
or bankruptcies of Barings Bank in 1995, Long Term Capital
Management in 1998, Enron in 2001, Lehman Brothers and
American International Group (AIG) in 2008.
20. • Derivatives Allow for Phony Accounting: Derivatives allow firms the option
to record profits today that will supposedly come tomorrow. This way a firm
can put on a good pony show today and get a better stock price. When
tomorrow’s profits don’t arrive as expected because of an unforeseen fiasco a
seemingly healthy firm can suddenly implode as happened with Barings Bank,
Enron and Lehman Brothers.
• Derivatives Obscure the Market: Several derivative contracts can be written
on a single underlying asset, a feature which adds enormous complexity to
financial markets. A derivative contract on one asset might be traded in Asia
and the US, while another contract on the same asset might be traded in
Europe. Add to the problems, a majority of the derivatives are over the counter
(OTC), meaning they are not standardized or traded on public exchanges. So,
the terms of each contract can vary greatly and so the implications and
interconnectedness of this market can be impossible for regulators and traders
to see clearly. When markets melted during the 2007-08 crisis trading halted in
part because market players couldn’t readily discern which firms were on the
brink of collapse and which firms were safe.
21. • Derivatives Concentrate Risk: Four US megabanks – JP
Morgan, Bank of America, Citi and Goldman Sachs – have a
notional amount of $214 trillion in derivatives exposure.
That’s more than 30% of the worldwide amount just in four
US banks. When firms have such concentrated derivatives
exposure, they leave themselves to surprise losses like last
year’s $6 billion London Whale loss at JPMorgan Chase.
• Derivatives Create Notional Value which will never be
Realized: The world derivatives market is worth some $700
trillion. Some opine that it actually runs into quadrillions.
Such unfathomable valuations never get realized in the real
market. These valuations exist only in notions and papers
and suddenly get eroded during crises.
23. • Like leverage screening, liquidity screening is also an integral part of
the Shariah screening of stocks. The application of this screening norm
rests in the command of the prohibition of Riba al fadl which is also
known as riba al hadith as the prohibition is found in the ahadith of the
Prophet (SAW).
• Abu Sa'id al-Khudri (r) reported Allah's Messenger (p) as saying: “Gold
is to be paid for by gold, silver by silver, wheat by wheat, barley by
barley, dates by dates, salt by salt, like by like, payment being made
hand to hand. He who made an addition to it, or asked for an addition,
in fact dealt in riba. The receiver and the giver are equally guilty” (13).
• The consequence of this hukm (rule) is that cash or assets which are
synonymous to cash like trade debts receivable and money market
securities can be transacted only at par value and on spot. Equities
represent assets of a company and assets include fixed assets and
current assets. Cash and cash equivalent assets represent current
assets.
25. • Short sellers bet against the stock. Instead of rooting for stock
prices to go up, they seek an opportunity to make money by
expecting a decline. Short sellers borrow the stock from a
broker, sell it, and wait for the prices to drop so they can
purchase the stock at a cheaper price.
• In 1610, the Dutch market crashed, and Isaac Le Maire, a
prominent merchant, was blamed because he was actively short
selling stocks. He was a major shareholder in the Dutch East
India Company (also known as Vereenigde Oost-Indische
Compagnie or VOC). Le Maire, a former member of the
company's board, and his associates were accused of
manipulating VOC's stocks. They attempted to drive share prices
down by selling large of quantities of shares on the market. The
Dutch government took action and instituted a temporary ban
on short selling.
26. Ibadaat & Muamalaat
• Ibadaat
– The “principle” is everything except what is
prescribed is “PROHIBITED”.
• Muamalaat
– The “principle” is everything except what is
prohibited is “PERMITTED”.
27. The Fundamental Prohibitions in
Muamalaat
Riba (interest / usury)
Gharar (excessive uncertainty, deceit, misrepresentation,
fraud)
Maysir (gambling, unearned income)
29. • The logic of the prohibition on theoretical
ground.
• The evil effects of interest on production.
• The evil effects of interest on distribution.
30. Theoretical Explanation
• On pure theoretical ground, we would like to
focus on two basic issues; firstly on the nature
of money and secondly on the nature of a
loan transaction.
31. Nature of Money
• One of the wrong presumptions on which all theories of interest are based
is that money has been treated as a commodity.
• It is, therefore, argued that just as a merchant can sell his commodity for a
higher price than his cost, he can also sell his money for a higher price
than its face value, or just as he can lease his property and can charge a
rent against it, he can also lend his money and can claim interest
thereupon.
• Islamic principles, however, do not subscribe to this presumption. Money
and commodity have different characteristics and therefore they are
treated differently.
32. Points of Difference between Money
& Commodity
• Money has no intrinsic utility. A commodity, on the other
hand, has intrinsic utility.
• Commodities can be of different qualities while money has no
quality except that it is a measure of value or a medium of
exchange.
• In commodities, the transactions of sale and purchase are
effected on an identified particular commodity. Money, on the
contrary, cannot be pin-pointed in a transaction of exchange.
33. • Based on these basic differences, Islamic Shar'iah has treated
money differently from commodities, especially on two
scores:
• Firstly, money (of the same denomination) is not held to be
the subject-matter of trade, like other commodities.
• Secondly, if for exceptional reasons, money has to be
exchanged for money or it is borrowed the transactions must
be at par.
34. • The commodities are classified into the commodities of first
order which are normally termed as "consumption goods"
and the commodities of the higher order which are called
"productive goods."
• Since money, having no intrinsic utility, could not be included
in "consumption goods."
• Most of the economists had no option but to put it under the
category of "production goods", but it was hardly proved by
sound logical arguments that money is a "production good”.
35. The Nature of Loan
• Another major difference between the secular capitalist system and the
Islamic principles is that under the former system, loans are purely
commercial transactions meant to yield a fixed income to the lenders.
• Islam, on the other hand, does not recognize loans as income-generating
transactions.
• The basic philosophy underlying this scheme is that the one who is
offering his money to another person has to decide whether:
(a) He is lending money to him as a sympathetic act or.
(b) He is lending money to the borrower, so that his principal may be saved or
(c) He is advancing his money to share the profits of the borrower.
36. • In the former two cases (a) and (b) he is not entitled to claim any
additional amount over and above the principal.
• However, if his intention is to share the profits of the borrower,
as in case (c), he shall have to share his loss also, if he suffers a
loss. In this case, his objective cannot be served by a transaction
of loan.
• Once the interest is banned, the role of "loans" in commercial
activities becomes very limited, and the whole financing
structure turns out to be equity-based and backed by real assets.
• In order to limit the use of loans, the Shar'iah has permitted to
borrow money only in cases of dire need, and has discouraged
the practice of incurring debts for living beyond one's means.
37. • Conversely, once the interest is allowed; advancing loans, in itself,
becomes a form of profitable trade.
• The whole economy turns out to be debt-oriented which not only
dominates over the real economic activities and disturbs its natural
functions by creating frequent shocks, but also puts the whole
mankind under the slavery of debt.
• It is no secret that all the nations of the world, including the
developed countries, are drowned in national and foreign debts to
the extent that the amount of payable debts in a large number of
countries exceeds their total income.
• Just to take one example of UK, the household debt in 1963 was
less than 30% of total annual income. In 1997, however, the
percentage of household debt rose up to more than 100% of the
total income.
39. Evil Effects on Allocation of Resources
• Loans in the present banking system are advanced mainly to
those who, on the strength of their wealth, can offer
satisfactory collateral.
• The veracity of this statement can be confirmed by the fact
that according to the statistics issued by the State Bank of
Pakistan in September 1999, 9269 account holders out of
2,184,417 (only 0.4243% of total account holders) have
utilized Rs.438.67 billion which is 64.5% of total advances by
December 1998.
40. • Since in an interest-based system funds are provided on the basis of strong
collateral and the end-use of the funds does not constitute the main criterion
for financing, it encourages people to live beyond their means.
• The rich people do not borrow for productive projects only, but also for
conspicuous consumption.
• Governments borrow money not only for genuine development programs, but
also for their lavish expenditure and for projects motivated by their political
ambitions rather than being based on sound economic assessment.
• Non-project-related borrowings, which were possible only in an interest-based
system have thus helped in nothing but increasing the size of our debts to a
horrible extent.
• According to the budget of 1998/99 in our country 46 percent of the total
government spending is devoted to debt-servicing, while only 18% is allocated
for development which includes education, health and infrastructure.
41. Evil Effects on Distribution
• In the context of modern capitalist system, it is the banks
which advance depositors' money to the industrialists and
traders.
• Almost all the giant business ventures are mostly financed by
the banks and financial institutions.
• If the entrepreneurs having only ten million of their own,
acquire 90 million from the banks and embark on a huge
profitable enterprise, it means that 90% of the projects is
created by the money of the depositors while only 10% was
generated by their own capital.
42. • If these huge projects bring enormous profits, only a small proportion (of
interest which normally ranges between 2% to 10% in different countries)
will go to the depositors whose input in the projects was 90% while all the
rest will be secured by the big entrepreneurs whose real contribution to
the projects was not more than 10%. Even this small proportion given to
the depositors is taken back by these big entrepreneurs, because all the
interest paid by them is included in the cost of their production and comes
back to them through the increased prices. The net result in this case is
that all the profits of the big enterprises is earned by the persons whose
own financial input does not exceed 10% of the total investment, while
the people whose financial contribution was as high as 90% get nothing in
real terms, because the amount of interest given to them is often repaid
by them through the increased prices of the products, and therefore, in a
number of cases the return received by them becomes negative in real
terms.
43. • While this phenomenon is coupled with the fact, already
mentioned, that 64.5% of total advances went only to
0.4243% of total account holders, it means that the profits
generated mostly by the money of millions of people went
almost exclusively to 9,269 borrowers.
• One can imagine how far the interest-based borrowings have
contributed to the horrible inequalities found in our system of
distribution, and how great is the injustice brought by the
modern commercial interest to the whole society as
compared to the interest charged on the old consumption
loans that affected only some individuals.
44. Expansion of Artificial Money and
Inflation
• Since interest-bearing loans have no specific relation with
actual production, and the financier, after securing a strong
collateral, normally has no concern how the funds are used by
the borrower, the money supply effected through banks and
financial institutions has no nexus with the goods and services
actually produced on the ground.
• It creates a serious mismatch between the supply of money
and the production of goods and services.
45. • This is obviously one of the basic factors that create or fuel
inflation.
• This phenomenon is aggravated to a horrible extent by the
well-know characteristic of the modern banks normally
termed as "money creation.
• " Even the introductory books of economics usually explain,
often with complacence, how the banks create money.
• This apparently miraculous function of the banks is
sometimes taken to be one of the factors that boost
production and bring prosperity. But the illusion underlying
this concept, is seldom unveiled by the champions of modern
banking.
46. Year Total Coins & Notes
Issued by the Govt.
(Pound Sterling bn)
Total Money Stock
(Pound Sterling bn)
% of Real Debt Free
Money to the Money
Supply)
1977 8.1 65 12%
1979 10.5 87 12%
1981 12.1 116 10.5%
1983 12.8 7.9%
1985 14.1 205 6.8%
1987 15.5 269 5.8%
1989 17.2 372 4.6%
1991 18.6 485 3.8%
1993 20.0 525 3.8%
1995 22.4 585 3.8%
1997 25.0 680 3.6%
47. • This table shows that the money created by the banks had been
growing at a galloping speed throughout the two decades until it
reached 680 billion pounds in 1997.
• The last column of the table shows the yearly declining percentage
of the real money to the total money supply which fell from 12% in
1977 to 3.6% in 1997.
• This phenomenon unveils two realities.
• Firstly, it shows that 96.4% of the total money supply is debt-ridden
money and only 3.6% is debt-free.
• One can imagine how the whole economy is drowned under debt.
• Secondly, it means that 96.4% of the aggregate money circulated in
the country is nothing but numbers created by computers, having
no real thing behind them.
48. Profit & Loss Sharing
• The basic and foremost characteristic of Islamic
financing is that, instead of a fixed rate of interest, it
is based on profit and loss sharing.
• Realizing the evils brought by this system, many
economists, even of the Western world are now
advocating in favour of an equity-based financial
arrangement.
49. • In equity-based banking the depositors are expected
to gain much more than they are receiving today in
the form of interest which often becomes negative in
real terms by the inflation caused mainly by the
expansion of the debt-based money.
• It will divert the flow of wealth towards the common
people and in turn will encourage savings and bring a
gradual and balanced prosperity.
50. Islamic Finance in the World
Currently Islamic finance practices have spread to about 75
countries of the world.
Shariah-compliant assets reached about $400 billion
throughout the world in 2009, according to Standard &
Poor’s Ratings Services, and the potential market is $4
trillion. Iran, Saudi Arabia and Malaysia have the biggest
Sharia-compliant assets
By 2020, a major part of the economy in the Middle East
will become Shariah-compliant.
In 2009 Iranian banks accounted for about 40 percent of
total assets of the world's top 100 Islamic banks.
51. Bank Melli Iran, with assets of $45.5 billion came first,
followed by Saudi Arabia's Al Rajhi Bank, Bank Mellat with
$39.7 billion and Bank Saderat Iran with $39.3 billion.
Iran holds the world's largest level of Islamic finance
assets valued at $235.3bn which is more than double the
next country in the ranking with $92bn.
Six out of ten top Islamic banks in the world are Iranian.
In November 2010, The Banker published its latest
authoritative list of the Top 500 Islamic Finance
Institutions with Iran topping the list. Seven out of ten top
Islamic banks in the world are Iranian according to the list.
52. Conventional banks in the region have either started
Islamic Finance subsidiaries or converted their entire
operations into the shariah-compliant mode.
Even foreign financial institutions in the region are no
exceptions to this trend.
Similarly, in many western countries such as UK, USA,
Switzerland, France and Germany etc. many Islamic
Finance institutions have come up to tap the niche
opportunities.
53. Islamic Finance in Secular Economies
Islamic Finance Institutions in the West
UK
25
US
20
Switzerland
5
France
4
Luxembourg
4
Ireland
3
Germany
3
Cayman Islands
2
Canada
1
Italy
1
54. The Size of Islamic Finance Sector
Islamic Finance
Institutions
Size
(USD billion)
Number
Islamic Banks 750 292
Islamic Bonds 173 732
Islamic Financing for
Projects and
Infrastructure
464 194
Islamic Real Estate Funds 56 102
55. Phases of Islamic Finance in India
Academic (1930-1970)
• Writings started during independence struggle
• Books, researches, models, first generation Islamic economists.
Non-Profit Model (1930-1980)
• Efforts during Nizam’s rule in South India
• Jamiet-e- Ulemae Hind’s poverty alleviation program
• Jamat-e- Islami’s cooperative model
• Entry of professionals
Profit Model (1980-2000)
• Jamat-e-Islami encouraged group
• Professionals entry
• Unscrupulous elements entry
• Crisis of late 1990s
Phase 1
Phase 2
Phase 3
56. Non-Profit Oriented Institutions
Year Institution Type Place
1923 Anjuman Imdad-e-Bahmi
Qardh Bila Sud
Baitul Maal Hyderabad
1934 Patni Co-operative Credit
Society
Cooperative Society Gujarat
1939 Muslim Fund, Tanda Baoli Baitul Maal Rampur, UP
Partition Effect
1966 Toor Baitul Maal Baitul Maal Hyderabad
1969 Muslim Fund Deoband Baitul Maal Saharan Pur
1973 Baitun Nasr Cooperative Society Mumbai
57. Profit Oriented Islamic Finance Companies
Year Institution Type Place
1983 Barkat Investment Group Finance Company Mumbai
1986 Al-Ameen Islamic Financial & Investment
Corporation of India
Finance Company Bangalore
1989 Al-Barr Finance House Ltd. Finance Company Mumbai
1996 Tata Group Launches India’s First Mutual Fund Scheme targeting
minority community (TCSEF)
Mumbai
1997-1999 Non-banking financial Crisis
58. Current Phase of Islamic Finance in India
• 2000-2009
– Since NBFC crisis only one Islamic NBFC could be establish i.e.
Alternative Investments and Credits Ltd (AICL, 2000)
– Riding high on stock market rebounding shariah screening started
in India (2005)
– “India provides maximum number of shariah compliant options”,
Research presented at Harvard forum on Islamic finance 2006.
– Overseas offices of India based institutions started marketing
India’s shariah compliant options.
– Market started turning for positive, India started attracting funds
from overseas
– Establishment of Shariah Advisory Firm TASIS, 2007
59. India’s Official Response to Islamic Finance
Action Year
Establishment of Anand Sinha Committee (RBI) for studying Islamic Financial Products 2005
Raghuramrajan Committee recommends Islamic banking for financial inclusion of
Muslims in India
2008
Ministry of Minority Affairs asking bid for reconstruction of National Minority
Development Finance Corporation (NMDFC) on Shariah Lines
2008
SEBI permitting India’s first shariah compliant Mutual Fund 2009
SEBI permitting India’s first shariah compliant Venture Capital Fund 2009
GIC (Re), a government of India owned company, appoints TASIS for shariah advisory 2009
State Government of Kerala appoints E&Y as consult to recommend appropriate
structure for starting an Islamic finance business in the state
2009
61. Islamic Finance in India: Options
• Legal Issues
• Practical issues
Banks
• Legal Issues
• Practical issues
• Viability Problem
NBFC
• Most Flexible
• Most Liquid
• More Options
• Government Permission
Capital Market
• Legal Issues
• Practical Issues
• Ray of Hope
Insurance
62. The Great Crisis Among Finance Companies
Finance Companies in India
15358
24009
55995
7855
13873
0
10000
20000
30000
40000
50000
60000
1985 1990 1995 1999 2007
Year
Numbers
June 30, 2009: NBFCs No Deposit 834 & 336 (allowed to accept deposit)
64. Islamic Finance Deals in Recent Years
Date Projects Partner
USD
Million
Lead Arranger
December 2007
Economic Development
Zone (EDZ)
Maharashtra State 10,000 Gulf Finance House
November 2007 SREI Projects
SREI Infrastructure
Finance Ltd.
50
HSBC Amananh /
KFH
August 2007
Bearys Global Research
Triangle
Bearys Groups 20 SEDCO
July 2007 Velcan Hydro Electric Dam Velcan Energy Holdings 275
National Bank of
Dubai
October 2006 Energy City of India Maharashtra State 2,000 Gulf Finance House
65. TASIS’ Recent works
Company Product Name Remark
Taurus Asset Management
Company
Taurus Ethical Fund India’s First actively Managed
Shariah Fund
Bajaj Allianz Insurance Co.
Ltd
Pure Stock Pension
Fund
India’s First shariah compliant
scheme in insurance sector
Secura Investment
Management Company
Secura India Real Estate
Fund
India’s first Shariah Compliant
Venture Capital Fund in real
estate sector
GIC Re (Government of
India owned)
ReTakaful Scheme This is also going to be India’s
first scheme of its kind
66. Raghuramrajan Committee Report
Chapter 3: Broadening Access to finance Page 35
• “While interest-free banking is provided in a limited manner through
NBFCs and cooperatives, the Committee recommends that measures be
taken to permit the delivery of interest-free finance on a larger scale,
including through the banking system. This is in consonance with the
objectives of inclusion and growth through innovation. The Committee
believes that it would be possible, through appropriate measures, to
create a framework for such products without any adverse systemic risk
impact.”
