India homes world's second largest Muslim population whose socio-economic conditions largely remain underprivileged. Among many other barriers to opportunities, priority in urgency is lack of access to financial services. It can be hypothesized that Islamic finance removes the religious barriers to accessing financial services, by not exploiting this prospect, tremendous prospects of inclusive economic growth are lost in India. Reversal of this policy direction hence offers a win-win opportunity both for the Indian Muslims and overall Indian economy.
The potential role in enhancing financial inclusion, in addition to other special features like asset-backed and risk-sharing nature and stability, have led to the fast growth of Islamic financial industry, not only in Muslim-majority countries but also in many Muslim-minority countries. However, India has not yet taken any practical steps. Towards starting Islamic financial services, and there is no Islamic bank in the emerging economy of India. While many secular states adopted the policy of ""no obstacles, no special favors"" towards Islamic finance, several obstacles exist in front of this industry in India. The increasing demand for Islamic finance is turned down through different excuses like a mimic of the conventional finance. A notion has been created in India that Islamic finance is not possible under the current banking laws and regulations. The efforts to start some Sharia investment funds have been thwarted and some politicians scem to be scared of such institutions.
Based on the globally recognized significance of Islamic finance for financial inclusion and economic empowerment, the purpose of this study is to bring home in the Indian national scene, the potential role of Islamic finance in enhancing financial inclusion and development. There are other opportunities that Islamic finance offers in a wider context it shall promote financial intermediation, in special contexts it shall facilitate long-term financing such as infrastructure project finance and in the context of globalization it shall promote trade and investment flows.
The study comprises of six chapters. The first chapter explains the background of this study. The second chapter scans the research papers of international and regional financial institutions like International Monetary Fund (IMF), World Bank (WB), Asian Development Bank (ADB) and European Central Bank (ECB) on the relevance of Islamic finance, to find out their perception of Islamic finance. The third chapter looks into the development of Islamic finance in secular Muslim-minority countries. The fourth chapter discusses the reasons that make Islamic banking and finance necessary in India, mainly based on the reports of Reserve Bank of India (RBI) and various government committees. The fifth chapter attempts a critical review of the legal and regulatory obstacles mentioned in the RBI working committee report, and also other social, political and economic constraints in front of Islamic finance in India. The sixth chapter gives a summary of the findings and discussions throughout this paper, together with its limitations and recommendations.
The results of this study find that enhancing the financial inclusion has become a priority issue of international, regional and national financial institutions; because the access to financial services is vital for the welfare and development of all individuals, firms and countries. The research studies conducted by such institutions have found. that the religion is one of the important reasons for financial exclusion. They also found that the Islamic banking and financial institutions can play a significant role in eradicating financial exclusion and they are helpful for all people as an alternative or complement to conventional financial institutions. The studies also state that the Islamic Financial Institutions (IFIs) are generally no more stable than Conventional Financial Institutions (CFIs) and they are growing very fast in the world and they can bring growth and development to the nations. This economic value surged many Muslim-minority countries to introduce legal and regulatory amendments in order to remove the obstacles in the way of IFIs. The reports of Indian government committees ensure the role of religion in financial exclusion from interest based conventional institutions, and the importance of interest-free Islamic finance for financial inclusion and investment needs. The so-called legal and regulatory obstacles in India are similar to that in the other countries and there is nothing new. Therefore, all that is missing is only the willingness of politicians and policy makers. The verdict of Kerala High Court mentioned that the Islamic Finance (IF) will not hinder the secular fabric of the nation and every citizen who is interested in it has the right to start such business. The social and political issues and the lack of awareness create other main obstacles in front of IF in India.