Inclusive growth in India through Islamic banking

Indian economy has been growing, but paradoxically the rate of poor people is also on the rise. The State must endeavour to establish an egalitarian society. However, most of the Indian citizens do not have access to credit. The present banking system is not conducive for protecting the interests of all sections of the population. The banking system of Islam, based on Islamic law (Shariah), has been institutionalised in many parts of the world in the last couple of decades. Islamic banking is interest-free banking system based on real asset and risks are shared between lender and borrower under the mechanisms of partnership, joint ownership, lease and sale. Money is considered only as a medium of exchange, unlike the conventional banking, where dealing in interest being a main product, implies that money is traded as a commodity. Islamic banking has the potential to uplift the vulnerable groups such as farmer and Small and Medium Enterprises (SMEs) and can fosters inclusive economic growth. Besides, there is a strong argument that interest-free finance may attract investment from the Gulf region. Finally, it provides impetus to the socialist goal envisaged by the Constitution. There are several studies including Planning Commission Report of 2008, favouring Islamic banking in India. Apart from the objections on theoretical grounds and its working, it is not possible to establish such banking system under the present legal regime. However, it seems that the recent trend in India is to promote religious law for advancing the goal of secular law. In this context, the Kerala High Court has upheld the constitutional validity of Islamic finance in the case of Dr. Subramaniam Swamy vs. State of Kerala & Ors. (decided on 3rd February, 2011). An attempt has been made to demonstrate the viability of Islamic banking.