India will soon get its first taste of Sharia-compliant banking when the Saudi Arabia-based Islamic Development Bank (IDB) launches operations in Prime Minister Narendra Modi’s home state Gujarat.
The Jeddah-based IDB is in final stages of opening a branch in the country. The move will usher Islamic finance for homegrown startups and fund Indian exports to African and central Asian Muslim nations.
The IDB, a multilateral lender with an authorised capital of $100 billion, counts 56 Muslim nations as its shareholders. The UAE was its fifth biggest shareholder as of last October and Saudi Arabia holds roughly a quarter of the bank’s shares.
Zafar Sareshwala, a prominent Muslim businessman from Gujarat whom the Modi government appointed chancellor of the Maulana Azad National Urdu University soon after assuming office, will lead the IDB’s Gujarat operations.
During Prime Minister Narendra Modi’s UAE visit in April, India’s EXIM Bank had signed a memorandum of understanding with IDB for a $100 million (about Rs 670 crore) line-of-credit to facilitate exports to IDB’s member countries.
The bank will be based in Ahmedabad, and like other Islamic banks, the IDB will not charge interest on loans or pay interest on deposits. Following a code of ethical financing, it will refrain from investing in industries that are considered harmful in Islam. These include businesses involving liquor, pornography or gambling.
Marking the entry of the so-called Islamic banking, the IDB will also offer interest-free capital to business startups, including small and medium enterprises within India.
The IDB has also pledged to provide 350 fully-equipped medical vans (mobile clinics) to India, 30 of which will be received for the tribal areas of Chhota Udepur, Narmada and Bharuch in Gujarat, in the first phase.
Abdur Raqeeb, general secretary of the Indian Centre for Islamic Finance, a Delhi-based non-profit that promotes Islamic banking, said India needs investment from outside, and there are many Islamic countries that are willing to invest here but that would like a Sharia-compliant way to do it.
For nearly a decade now, the RBI has been considering Islamic banking’s entry into India. In December, an RBI committee tasked to study financial inclusion in India recommended that Islamic banks should be allowed to operate.
India’s Muslims, the committee said, might be more inclined to access “formal finance” if interest-free avenues of banking were open to them.
“Globally, interest-free banking, also known as Islamic banking, has witnessed a significant increase, especially in the wake of the  financial crisis,” it said.
Agriculture expert and economist M S Swaminathan had said Islamic banking could break the cycle of high debt and interest payments in which small entrepreneurs, farmers and artisans often find themselves.