Financial inclusion remains a key challenge for an emerging country like India that boasts of one of world’s most advanced financial systems. According to SME Finance Forum, India has over 3 million women-owned enterprises. About 97.5% of women-owned MSMEs in India are Micro and small enterprises and operate mostly in the informal sector and hence deprived of loans. According to Inclusive Finance India Report 2017, while India is relatively a country of youth, only 42% of adult Indians are active bank account holders. This rate is low compared to other countries.
India has over 180 million Muslims living. In India, Muslims are self-employed, and traditional financial institutions do not adequately fulfill their financing needs. Sachar Committee report 2006 said that Muslims hold 12% of accounts in public sector banks and 11.3% in private sector banks – less than their share of 13.4% of the overall population. So the Muslim population is in need of financial Inclusion and ethical finance and interest-free banking products to satisfy this need. Sachar Committee has also highlighted the necessity of ethical Finance in India.
While these raised some important questions on the existing system, Interest-Free Economy and Alternative Finance (which is also know as Participatory Finance, Ethical Finance or Islamic Finance) provide windows of opportunities and sustainable solutions to the areas where traditional system has been failing. This is a reason why Alternative Finance is getting traction across the globe.
Interest-free Economy prohibits interests in any form, doesn’t allow payment or investment in excessive uncertainty or in businesses like gambling, tobacco, liquor, explosives, and must be based on the principle of shared risk making the lender a partner in business. The concept is very popular in GCC countries (Saudi Arabia, Kuwait, United Arab Emirates, Qatar, Oman and Bahrain), Malaysia and West Asia. Most of the western banks such as Standard Chartered, Deutsche Bank, Citibank and BNP Paribas in these regions are adopting alternative finance products and services.
Because of this and some more ethical features, interest-free economies are more resilient to shocks and financial institutions are more prudent manner. Since they don’t engage in interest-based operations, economies are less affected by interest rates changes elsewhere.
While Interest-Free Economy remains a distant dream in India considering India has world’s second largest Muslim population but a non-Muslim majority country, a discussion is worth. Moreover, Alternative Finance has immense potential and can provide solutions to many challenges.
According to IMF, foreign assets of Gulf Cooperation Council (GCC) alone are over $3 trillion by 2017 and Islamic investment market is over $2 billion. It is growing even faster. India can attract a large section of these funds for development financing especially when India needs foreign capital the most.
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