Status and Issues of Islamic Banks in India

1. Islamic banks should implement prudential norms in order to strengthen their standards of functioning, capital adequacy and quality of assets. These aspects should receive focused attention. We have discussed earlier the prudential norms within which an NBFC should operate. The adherence to these norms would substantially ensure that the company is well capitalised and has a diversified asset portfolio. The balance sheet should correctly reflects the state of affairs in general and ensure the sound operations of these companies. This, in itself, would normally be an indirect comfort to the creditors of the NBFC, including depositors. However, the acceptance of deposits from the public at large by a financial intermediary is inherently susceptible to the problem of adverse selection arising out of information asymmetry between the banks and borrowers. This problem could be particularly severe where the entry norms for such financial intermediaries are not very strict and a very large number of such intermediaries exist. In a situation like this, it is necessary to have regulations that limit the risks to the depositors in a more direct manner, while at the same time prescribe suitable disclosure requirements, so as to bridge the information gap.

2. They should mobilise resources on the basis of “Mutual Funds” model and investment should be equity based and partnership — contract based. They should promote inter-Islamic banks trading in “Contracts”. If Islamic banks can make offer to public through capital issues and get listed on stock exchanges then capital would become marketable and liquid. Inter-bank lending can be set up on the profit sharing basis.

3. They should diversify instruments of investment on the lines done in some of the countries.

4. Islamic banks should set up “Risk-Funds” to compensate their shareholders or depositors during the period of losses. They can declare special dividend.

5. They have to enlarge their scale of operation through mergers and should modernise themselves to compete with other institutions.

6. They should set up training institutions on Islamic banking and should impart training to borrowers and other public to increase their clientele.

7. They should earmark some funds to finance poor people and should provide them job training so that they can create employment for themselves. Such experiments are already being done in Tamil Nadu by English Missionaries. But assisting poor people is not the only objective, this is one of the objectives.