KINGDOM OF SAUDI ARABIA Ministry of Higher Education KING ABDULAZIZ UNIVERSITY Islamic Economics Research Centre ISLAMIC FINANCIAL INSTITUTIONS OF INDIA PROGRESS, PROBLEMS AND PROSPECTS Mohammad Ghous Ikhtiyaruddin Bagsiraj Scientific Publishing Centre King Abdulaziz University Jeddah, Saudi Arabia ISLAMIC FINANCIAL INSTITUTIONS OF INDIA PROGRESS, PROBLEMS AND PROSPECTS Mohammad Ghous Ikhtiyaruddin Bagsiraj Scientific Publishing Centre King Abdulaziz University P.O. Box 1540, Jeddah 21441 Saudi Arabia FOREWORD The Islamic financial services industry has come of age. According to one estimate there are presently over two hundred Islamic banks and financial institutions all over the globe with total transactions valued at over 120 billion US dollars. A cursory look at these financial institutions and the nature of their operations reveals an interesting aspect of the growth of this sector. There does not seem to be much of a correlation between the number of Islamic financial institutions established in a given region with the size of the market that these institutions can potentially serve. For example, countries like Indonesia and India which together account for over one-third of world Muslim population do not score very high in terms of growth of the Islamic financial services industry. This may be due to a variety of reasons, which are often not rooted in economics. India with a population of over 150 million Muslims particularly lags behind with a near-total absence of organized Islamic banks and financial institutions. As such, the situation merits serious attention of researchers and scholars. The present study by Dr. Mohammad Ghous Ikhtiyaruddin Bagsiraj is an ambitious attempt in this direction. Notwithstanding the scant attention that Islamic banking has received from regulators and policy makers in India, small Muslim communities have taken initiative to establish a fairly large number of tiny and small institutions, often in the cooperative, informal and unorganized sector to serve local needs. The challenges confronting these institutions are many, further compounded by the absence of an appropriate legal and regulatory framework. Dr. Bagsiraj’s study undertakes a complete survey of these institutions that dot the map of India, concentrated in Muslim-populated regions. It provides very useful data and insight into the functioning of such community-initiated institutions. It evaluates their socio-economic performance and identifies their problems and prospects. The Center is pleased to publish this study that would help focus the attention of global Islamic financial community on the great potential that India offers in terms of growth of Islamic banking and finance. Dr Muhammad Najeeb Ghazali Khayat Director Islamic Economics Research Center. v ISLAMIC FINANCIAL INSTITUTIONS OF INDIA: PROGRESS, PROBLEMS AND PROSPECTS ACKNOWLEDGEMENTS I am thankful to Almighty for giving me opportunity to complete this study. It was during a visit to Dr. M.N. Siddiqi at King AbdulAziz University after performing Haj in 1996 that I had conceived this research project. I am thankful to Dr. M.N. Siddiqi for his persistent encouragement during the completion of this project. I am most thankful to King AbdulAziz University’s Islamic Economics Research Centre for the sponsorship of this research Project. I am also thankful to the office bearers and staff of various Islamic Financial Institutions of India who have provided me data and information particularly Mr. I.H. Zaki, promoter and chief executive of Muslim Fund Najibabad and Al-Najib Milli Mutual Benefits Ltd. I am also thankful to all the respondents of the “Awareness Survey” conducted in 25 Indian cities. I am very much thankful to IDB’s IRTI for inviting me as visiting scholar to their esteemed institution and honouring me with the opportunity of discussing my project with scholars like Dr. M. Umer Chapra, Dr. Mabid Ali Al-Jarhi, Dr. M. Fahim Khan, Dr. Munawar Iqbal, Dr. Ausaf Ahmed, Dr. Tariqullah Khan, Dr. Habib Ahmed and others. Two papers based on a part of data collected for the study were written and presented at Loughborough University, UK and Islamiah college, Vaniyambadi to get the feedback from scholars. I am grateful to Dr. Moh. Anas Zarqa, Dr. F.R. Faridi, Dr. M.Y. Suleh Ahmad Gusau, Dr. S.L. Taj-El-Din, Dr. Abdul Aziz, Dr. M.Y. Khan, Dr. Tahir Beg and a host of other experts for their observations and suggestions. My thanks are due to Mr. Usama B. research assistant, Mr. Saquib Patait and Ms. Sana Fatima investigators, for their invaluable assistance in data collection, tabulation, computer typing and proof reading. vii CONTENTS Page No. Foreword iii Acknowledgements iv Contents v Abbreviations vii List of Tables & Charts ix Introduction 1 1. Objectives and approach of the Study 1 2. Scope and Plan of the Study 1 3. Method of the Study 3 4. Field Problems and Adjustments 5 Chapter I. Islamic Financial Institutions of India 9 1.1. Evolution of Islamic Financial Institutions in India 10 1.2. Global Growth of Islamic Banks and Financial Institutions in India 10 1.3. Classification of Islamic Financial Institutions in India 11 1.4. Geographical Spread and Growth of Islamic Financial Institutions 13 Chapter II. Financial Associations of Persons of India 15 2.1. Barkat Association, Belgaum 15 2.2. Shantapuram Islamic Finance Corporation, Pattikadu 17 2.3. Interest-free Society, Pune 19 2.4 Millat Welfare Society, Faizabad 21 2.5 Mutual Benefit Group, Bhatkal 22 Chapter III. Islamic Financial Societies of India 25 3.1 Muslim Fund, Deoband 25 3.2 Muslim Fund, Najibabad 29 3.3 Toor Bait-ul-Maal, Hyderabad 34 3.4 Bait-ul-Maal Tamilnadu, Chennai 42 3.5 Islamic Welfare Society, Bhatkal 50 Chapter IV. Islamic Co-operative Credit Societies of India 57 4.1 Patni Co-operative Credit Society Ltd., Surat 57 4.2 Bait-un-Nas’r Co-operative Credit Society Ltd., Mumbai 61 4.3 Bait-ul-Maal Co-operative Credit Society Ltd., Mumbai 67 4.4 Nehru College Staff Co-operative Credit Society Ltd., Hubli 76 4.5 Al-Ansar Co-operative Credit Society Ltd., Hyderabad 78 Chapter V. Islamic Investment and Financial Companies of India 81 5.1 Barkat Leasing and Financial Services Ltd., Mumbai 82 5.2 Al-Barr / Al-Baraka Finance House Ltd., Mumbai 89 5.3 Al-Ameen Islamic Finance and Investment Corporation Ltd., Bangalore 102 5.4 Seyad Shariat Finance Ltd., Tirunelveli 111 5.5 Al-Najib Milli Mutual Benefits Ltd., Najibabad 122 Chapter VI. Consolidated and Comparative Economic Performance of IFIs of India 131 6.1 Economic Status of IFIs in 1998-99 131 6.2 Consolidated and comparative Mean Economic Performance of IFIs 142 ix Page No. 6.3 Category and Industry-wise Economic Performance of IFIs 156 Chapter VII. Public Perception and Prospects of IFIs of India 161 7.1 Awareness Survey Finding 164 Chapter VIII. Conclusions and Policy Implications 165 Annexures 179 Annexes: 0.1 General Survey Questionnaire 180 0.2 Stratified Sample Survey Questionnaire 183 0.3 Awareness Sample Survey, Interview Schedule 203 Annexes: 1.1 Geographical Distribution of FAPs 204 1.2 Geographical Distribution of IFSs 207 1.3 Geographical Distribution of ICCSs 212 1.4 Geographical Distribution of IIFCs 213 Annexes: 3.1 Branches of Muslim Fund Najibabad 216 Annexes: 4.1 Branches of Bait-un-Nas’r Co-operative Credit Society 217 Annexes: 5.1 Branches of BLFSL 218 5.2 Branches of AFHL 219 5.3 Branches of AIFICL 220 5.4 Branches of SSFL 221 5.5 Branches of AMMBL 222 Bibliography 225 x Abbreviations and Acronyms A.P. : Andhra Pradesh ACCS : Al-Ansar Co-operative Credit Society Ltd. AFHL : Al-Barr / Al-Baraka Finance House Ltd. AIFICL : Al-Ameen Islamic Financial and Investment Corporation Ltd. AMMB : Al-Najib Milli Mutual Benefits Ltd. BAB : Barkat Association Belgaum BCCS : Bait-ul-Maal Co-operative Credit Society Ltd. BLFSL : Barkat Leasing and Financial Services Ltd. BNCCS : Bait-un-Nas’r Co-operative Credit Society Ltd. BTC : Bait-ul-Maal Tamilnadu CCR : Cash Reserve Ratio CRIE : Center for Research in Islamic Economics CRWAR : Capital To Risk Weighted Asset Ratio DAG : Dallah Al-Baraka Group DAIC : Dallah Al-Baraka Investment Company Ltd. DAIDC : Dallah Al-Baraka Investment and Development Company Ltd. ELHPC : Equipment Leasing and Hire Purchase companies FAPs : Financial Associations of Persons FCD : Fully Convertible Debentures FIFO : Federation of Interest Free Organisation IAIBs : International Association of Islamic Banks IBsFIs : Islamic Banks and Financial Institutions ICCSs : Islamic Co-operative Credit Societies ICICI : Industrial Credit and Investment Corporation of India ID : Investment Deposits IDB : Islamic Development Bank IDBI : Industrial Development Bank of India. IFCI : Industrial Finance Corporation of India. IFCs : Islamic Financial Companies IFE : Islamic Financial Engineering IFIs : Islamic Financial Institutions IFMCIs : Interest-Free Micro Credit Institutions IFSP : Interest-Free Society Pune IFSs : Islamic Financial Societies IIFCs : Islamic Investment and Financial Companies IIFIs : Islamic International Financial Institutions INGOs : Islamic Non-Govt. Organisations IRTI : Islamic Research Training Institute. IWSB : Islamic Welfare Society Bhatkal KAU : King Abdulaziz University M.P : Madhya Pradesh MBG : Mutual Benefit Group MCIs : Micro Credit Institutions MF : Muslim Fund MFD : Muslim Fund Deoband MFN : Muslim Fund Najibabad MNCs : Multi-National Corporations MWS : Millat Welfare Society NBFCs : Non Banking Financial Companies xi NBFIs : Non-Banking Financial Institutions NCSCCSL: Nehru College Staff Co-operative