Emerging Trends in Islamic Finance UGC ID : 63975 Impact Factor - 5.

87

Contents
Sl.No. Title of the Articles Page No.

1 Islamic Monetary Policy : Unique Features - Asifa Amen 1-4

2 Islam And Welfare Economics: A Study On Epistemological Evolution 5-8
- Dr. Sabirnavas C.M

3 Effect of Subprime Crisis on Islamic Banking Industry: An Analytical Review 9-13

- Saeeda. Pilathottathil

4 Islamic Banking: A Solution To Indian Banking Crisis - Shahna C.P 14-18

5 Awareness And Perceptions About Islamic Banking In India: A Study With 19-26
Special Reference To Aligarh District - Dr. Abdul Azeez N.P.

6 Building On Social Capital: A Case Study of An Islamic 27-29

Credit System In A College In North Kerala - Dr.Muathasimbillah TP

7 Islamic Banks For Charity And Development-A Case Study With Special 30-33
Reference To Abu Dhabi Islamic Bank - Jumana N.P

8 The Negative Impact of Interest And The Positive Impact of Zakath In The 34-36
Economy - Mohammed Hashimi M A

9 Islamic Banking Products: An Alternative For Conventional Banking Products 37-39

- Noufal P K

10 Islamic Banking Operations And Instruments 40-43

- Hafsath Thavalakuzhiyan

11 Islamic Banking: An Ethical Alternative To The Conventional Financial 44-47

System - Hida Febin K P.

12 Is Interest Free Islamic Banking Viable In India? - Jaseena K B 48-50

13 Islamic Funds Through Microfinance - Ajmal Babu.CH 51-55

14 Islamic Implications of Crypto Currency And Bitcoin: 56-59

Aninterpretation of Blockchain Technology
- Muhmmed Jamsheer.P, Muhsina PV

15 Retail Banking In Compliance With Shari'ah - Nafisa Masooda 60-64

16 Takaful – An Alternative To Conventional Insurance In Indian Context 65-67
- Umaira K.K.

17 Analysis of Qard Hasan And Wadiah In Islamic Banking - Jumaina.N.P 68-71

18 Potential And Prospects of Islamic Bank In Kerala - Shabab .M 72-75

Special Issue November 2018 Page VII

 Emerging Trends in Islamic Finance UGC ID : 63975 Impact Factor - 5.87

AWARENESS AND PERCEPTIONS ABOUT ISLAMIC BANKING IN INDIA:

A STUDY WITH SPECIAL REFERENCE TO ALIGARH DISTRICT

Dr. Abdul Azeez N.P.1

1. Introduction: 2. Objectives of the Study:

Financial sector policies in India have long been a) To examine the efforts taken to introduce Islamic
driven by the objective of increasing financial banking in the India;
inclusion, but the goal of universal inclusion is still b) To understand the level of awareness about
a distant dream. The ‘Sachar Committee Report’ Islamic banking among the respondents;
revealed the nature and degree of Muslim
c) To find the difference between Muslims and non-
backwardness. For Indian Muslims, already suffering
Muslims with regards to the awareness and the
from severe economic backwardness, financial
acceptance level of Islamic bank;
exclusions have been proved to be an act of
economic assassination of Muslims by the so-called d) To find out the relationship between the socio
secular democratic system. The percentage of economic variables and the level of awareness
households availing themselves of banking facilities of Islamic banking among the respondents; and
is much lower in towns and villages where the e) To check perceptions of the respondents towards
Muslim population is high. This is due to a certain the future possibility and viability of Islamic banks
mindset prevailing in the banking sector which has in India.
categorized Muslims and Muslims dominated areas 3) Sources of Data and Methodology:
as ‘Negative Zones’ as documented in Sachar
From the discussion above, we understand that the
report. This exclusion may not be good for our
level of understanding of the concepts of Islamic
economic growth targets. The financially excluded
banking would be the factor that would determine
section reflects poverty and subdues the inclusive
their acceptance of the Islamic banking. However,
growth target.
as a country with majority of Non Muslims and
In late 2008, a committee on Financial Sector minority Muslims, the understanding and
Reforms, headed by former RBI governor Raghuram acceptance of the concepts may differs among these
Rajan, had stressed on the need for a closer look two groups.
at the issue of interest-free banking in the country.
A total of 100 respondents, randomized sample
“Certain faiths prohibit the use of financial
survey were conducted at Aligarh District of Uttar
instruments that pay interest. The non-availability
Pradesh who were required to answer questions in
of interest-free banking products results in some
either Yes, No, or Maybe. Well developed
Indians, including those in the economically
questionnaires were developed for collecting primary
disadvantaged strata of society, not being able to
data.
access banking products and services due to
reasons of faith,” Islamic or Sharia banking is a
finance system based on the principles of not
charging interest, which is prohibited under Islam.
Interest-free Islamic Banking can fill up this gap and
exclusion of Muslim from conventional banking
system.

1
. Assistant Professor, Department of Economics, Aligarh Muslim University, India

Special Issue November 2018 Page 19

 International Journal of Emerging Technologies and Innovative Research ISSN : 2349 - 5162

Table: 1
Profile of Respondents

Age 18- 40 37 100

40-60 36
60-80 27
Level of Education Illiterate 10 100
Primary and Upper Primary 30
UP to Higher Secondary 29
Higher educated 31
Rural/ Urban Rural 30 100
Urban 70
Sex Male 71 100
Female 29
Religion Muslim 50 100
Non- Muslim 50

Table 1 summarizes the basic statistics on religion, age, educational level, rural/urban, and sex of the respondents.
The respondents constitute 50 percent Muslim and non Muslim each. Almost 37 percent of respondents fall in the
range of 18-40 years of age and we believe that customers and depositors within this age group are likely to have
far-reaching influence on the Islamic banking policies. This may be plausible since banks normally regard clients
within this age category as relatively less risky age groups, especially in advancing loans and other financing
transactions.
We assume that several socio-economic factors which lead to reluctant to accept Islamic banking in India. For
determining various factors applied Logit regression model which run by using STATA software. Logit regression is
a useful way of describing the relationship between one or more independent variables and a binary response
variable, expressed as a probability that has only two values, such as dummy dependent variable assuming value
one if a respondent is willing to accept and otherwise zero. For econometric model specification general Logit
model is specified as follows:

π = Willing to Accept IB
1 - π = Unwilling to Accept IB
Reliability Test:
The reliability concerns with the robustness of the questionnaires and whether it will produce consistent findings at
different times and under different conditions. Reliability test for the two constructs are higher than 0.70, hence the
results are reliable

Construct No. of Items Cronbach’s Alpha

Awareness 100 0.781
Perception 100 0.821

The result of calculation using Construct Reliability (CR) formula obtained score were 0.781 for awareness and
0.821 for perception are greater than 0.5. Thus, based on the two formulations, Islamic financial literacy measurement
tool is declared to be reliable.

Special Issue November 2018 Page 20

Emerging Trends in Islamic Finance
4) Efforts of Govt. to Introduce Islamic Bank in
India:
a) Anand Sinha Committee (2005):
In 2005, the Reserve Bank of India constituted the
Anand Sinha Committee to explore the potential for
implementing Islamic finance in Indian markets. After
a year-long inquiry, the committee published a report
that concluded it would be unfeasible to implement
Islamic finance in India because it would require too
many new regulations and amendments to the
Banking Regulation Act.
b) Committee on Financial Sector Reforms (2008):
In August 2007, Govt. of India under the Planning
Commission constituted a high level committee on
Financial Sector reforms (CFSR) under the
chairmanship of Dr. Raghuram Rajan, former chief
economist, IMF along with other eleven members
who are the finest financial and legal minds in the
country. The committee had stressed on the need
for a closer look at the issue of interest-free banking
in the country. “Certain faiths prohibit the use of
financial instruments that pay interest. The non-
availability of interest-free banking products results
in some Indians, including those in the economically
disadvantaged strata of society, not being able to
access banking products and services due to
reasons of faith,”. CFSR submitted its final report in
Sept. 2008 to Prime Minister with the specific
recommendation of interest free banking in the
country:
When it was learnt that RBI is considering
implementing a few recommendations of Dr.
Raghuram Rajan Committee on Financial Sector
Reforms (CFSR), ICIF contacted the Governor RBI
and sought an appointment to plead for the case of
the recommendation of CFSR regarding Interest-free
banking. Accordingly a delegation of ICIF met the
Deputy Governor Dr. K.C Chakrabarty on September
11, 2009 and presented a memorandum along with
the important documents. RBI conveyed that it has
no reservation regarding interest free banking but for
that an amendment in the Banking regulations has
to be passed in the Parliament which can be done
by the Central government.
A memorandum was submitted to FM, Mr. Pranab
Mukherjee to accept the recommendation of CFSR
committee on interest free banking and suitable
legislative amendment. Several meetings and
interactions have taken place with the officials of
the Finance Ministry and RBI in this regard till now.
Special Issue November 2018
UGC ID : 63975 Impact Factor - 5.87
c) Parliamentary Committee:
It was revealed from the report of the Parliamentary
committee set up by Prime Minister, headed by
Mr.Rahman Khan Ex-deputy chairman Rajya Sabha
has recommended to create a Hajj pilgrimage fund
based on Shariah principles. Lack of Shariah
compliant investment opportunities in India has
discouraged Muslims to invest, not only through
banks but also through stock market.
d) SEBI’s Initiatives:
The Securities and Exchange Board of India (SEBI)
has given approval for India’s first official Shariah
compliant mutual fund scheme “Taurus ethical fund”
in 2009. The Taurus Mutual Funds and Parsoli corp.
had applied the fund’s offer document in October
2007, initially SEBI had some reservations on the
fund, as it targeted a particular community
e) Efforts of Wajahat Habibullah:
The national minority commission (NMC), a
constitutional body headed by the former chief
information commissioner of India, Wajahat
Habibullah, in 2012 has sought an amendment to
the banking regulations to open the doors for interest-
free banking in the country.
f) EXIM Bank:
Saudi Arabia’s Islamic Development Bank (IDB) has
decided to open its first branch in India at
Ahmedabad, Gujarat. In this regard, IDB and its
private sector arm, Islamic Corporation for the
Development of the Private Sector (ICD), met with
top officials of the Reserve Bank of India (RBI, EXIM
Bank and India’s other nationalized banks. This
announcement comes as part of MoU signed
between IDB and India’s EXIM Bank during Prime
Minister Narendra Modi visit to United Arab Emirates
(UAE) in April 2016. As part of the MoU a US 100
million dollars line-of-credit (LoC) was to be given to
IDB’s member countries to facilitate exports.
g) Inter-Departmental Group (IDG):
In 2013, on the advice of the Government of India,
an inter departmental Group on islamic banking was
constituted by the RBI to look into the legal, technical
and regulatory issues involved in the introduction of
Islamic banking in inida. The iDG constituted under
the chairmanship of Rajesh Verma, submitted its
report to the RBI on August 19, 2014. The committee
suggested a wide ranging recommendations through
which interest banking can be introduced in India.
Page 21
 International Journal of Emerging Technologies and Innovative Research ISSN : 2349 - 5162

h) Committee on Medium-Term Path for Financial
Inclusion:
RBI appointed a committee on Medium term Path
for Financial Inclusion headed by Mr. Deepak
Mohanty in 2015 to examine the need for interest
free banking to address the problem of faith based
financial inclusion. One of the major
recommendations is permitting ‘Interest Free
Windows’ in existing conventional banks. The
committee observed Commercial banks may be
enabled to open specialized interest-free windows
with simple products like demand deposits, agency
and participation certificates on the liability side and
cost-plus financing and deferred payment, deferred
delivery contracts on the asset side.
i) Islamic Window:
In November 20, 2016 RBI has proposed the opening
of an "Islamic window" in conventional banks for a
gradual introduction of Sharia-compliant or interest-
free banking in India.
“In our considered opinion, given the complexities of
Islamic finance and various regulatory and
supervisory challenges involved in the matter and
also due to the fact that Indian banks have no
experience in this field, Islamic banking may be
introduced in India in a gradual manner. “Initially, a
few simple products which are similar to conventional
banking products may be considered for introduction
through Islamic window of the conventional banks
after necessary notification by the government,”
j) RBI Says ‘No’ to Islamic Bank:
November 13, 2017 replying to an RTI query, RBI
said, “Taking into account the wider and equal
opportunities available to all citizens to access
banking and financial services, it has been decided
not to pursue the proposal further.”
5) Awareness and Perception about Islamic
Banking in India:
The initiatives taken by govt. and other financial
institution for introducing the Islamic banking system
in India having been discussed, it is equally crucial
to have a better understanding about the awareness
and perceptions about acceptability such a system
would have amongst India’s diverse population and
religion. A survey was conducted at the grass root
level to understand level of awareness and perception,
as to how forthcoming the public at large would be,
in a situation where such a banking system is
introduced in India.
a) Level of Awareness about Islamic Banking:
Based on survey finding, it shows that 75%
respondents have heard of Islamic Banking. However,
25% respondents (12.7%) have never heard of Islamic
Banking. The education wise awareness of Islamic
banking show that illiterate are less aware (3.09%),
primary and upper primary is 24.04%, higher
secondary level 33.57% and higher educated is more
aware (39,28%).

Aware Unaware
S.No Statements
Non Non
Muslim Total Muslim Total
Muslim Muslim
1 Idea about new banking system 41 34 75 9 16 25
2 IB products 21 8 29 29 42 71
3 IB is based on Shariah 19 8 27 31 42 73
4 IB is different from CB 19 7 26 31 43 74
5 IB invested in ethical ventures 15 7 22 35 43 78
6 IB involves PLS principle 15 7 22 35 43 78
7 IB not only for Muslims but all 31 20 51 19 30 49
8 IB’s goal is not only to maximize
wealth but enhance welfare of society 28 12 40 22 38 60

Only 29% respondents know that Islamic banking products and services, while, 71 % respondents do not know it.
On the basis of survey it is found that overall level of awareness about Islamic banking is very low, that is only 36
percent aware about Islamic banking and its principles. It also found that Muslims are more aware than non-
muslims, male are more aware than female, urban people are more aware than rural, level of awareness increases
with the increasing level of education and young people are more aware than aged one.

Special Issue November 2018 Page 22

 Emerging Trends in Islamic Finance UGC ID : 63975 Impact Factor - 5.87

Figure : 1
Overall Average level of Awareness about Islamic Banking

Source : Survey

b) Level of Acceptability of Islamic Banking:

The question disclosed the fact that the banking system being spoken about is the Islamic banking system,
which enabled us to ascertain whether acceptability of the banking system was altered accordingly. The most
interesting findings were observed. We noted the maximum change in attitude towards the banking system on
disclosure of it being “Islamic” amongst this age group. While the concept of no-interest banking was one that
the people were intrigued by, on information that this form of banking is based on Islamic ideology, a stark
change in attitude was noted. The numbers in this regard are as described below. 70% of the people who
answered the questions before they knew the banking system in question was Islamic, welcomed the idea and
wanted to know more about it. 12% were may be, and the remaining 18% said they would prefer to stick to the
conventional banking system and didn’t want to explore this new banking system. However, as soon as the
question disclosed that the banking system referred to is based on principles of Sharia law, the acceptability of
the ideology of the Islamic banking system was seen to drop drastically. After disclosing the name Islamic
banking those who initially welcomed the concept, changed their attitude, only 58% still maintained that it was
acceptable. Only 7% were may be, and as much as 35% of the people reluctant to introduce such a concept
in India.

Figure: 2 Figure: 3
Level of Acceptability*: Level of Acceptability:
Prior to Disclosing term 'Islamic After Disclosing term 'Islamic'

Source : Survey

Special Issue November 2018 Page 23

 International Journal of Emerging Technologies and Innovative Research ISSN : 2349 - 5162

c) Logistic Regression Analysis for Willingness to Accept Islamic Banking:

Coefficients Std. Error z P>z [95% Conf. Interval

Awareness 0.736 0.570 3.14 0.002 -2.785517 .8471076

Religion 1.145 2.872 3.67 0.000 -.8515906 2.332533

Sex 0.454 0.060 0.91 0.062 -1.919595 4.653513

Age -0.059 0.047 -0.82 0.115 -3.789082 5.913165

Urban/Rural 0.92 0.039 0.43 0.368 -3.597897 4.736984

Education 2.279 1.740 0.27 0.189 -.6773285 4.431952

Constant 1.045 1.591 1.82 0.069 .5272888 2.275365

Number of obs 100

LR chi2(6) 501.35

Prob> chi2 0.0000

Pseudo R2 0.9041

Log likelihood -26.584189

Dependent Variable : Willingness to Accept Islamic Finance

Source : Calculated from Survey

Some of the estimated regressors (independent variable) are statistically significant at the 0.05 estimated levels.
Table: presents the results on the determinants of willingness to accept Islamic banking. The results are quite
robust and consistent with what is theoretically expected. The total numbers of observations are 100. Also reported
is an overall test of model significance called LR chi2(11) (likelihood chi-square test statistic). The number in the
parenthesis indicates the number of degrees of freedom. In this model, there are six predictors, so there are six
degrees of freedom. Prob> chi2 is the probability of obtaining the chi-square statistic given that the null hypothesis
is true. This is, of course, the p-value, which is compared to a critical value at .05 or .01 to determine if the overall
model is statistically significant. In this case, the model is statistically significant because the p-value is less than
.000. Thus likelihood ratio chi-square of 501.35 with a p-value of 0.0000 tells us that our model as a whole fits
significantly better than an empty model (i.e., a model with no predictors).
The level of awareness, religion, sex, urban and education factors are positively related to willingness to accept
Islamic banking and are highly significant, which indicates that larger these factors, the higher the likelihood that
they will accept Islamic banking. But the factor age is inversely related to willingness to accept showing aged
people are unwilling to accept Islamic banking than youngsters.

d) Viability of Islamic Banking in India:

The question regarding the viability of Islamic banking in India, only 43 percent respondents said that Islamic
banking system is viable in India, but majority of them (51 percent) is responded that it is not viable due to its
legal, political, and other obstacles. Regarding the last question whether RBI should reconsider for introducing
the Islamic banking India, 76 percent argued that ‘Yes’, RBI should reconsider as against 24 percent respondent.
(Figure: )

Special Issue November 2018 Page 24

 Emerging Trends in Islamic Finance UGC ID : 63975 Impact Factor - 5.87

Figure: 4 - Viability of Islamic Banking in India

Viability to Introduce Should RBI Reconsider to

Islamic Banking Introducing IB?

Source : Survey

6) Misconceptions about Islamic Banking in India:

To bring Interest free Islamic Banking, misunderstanding and misinformation among the Muslim masses as
well as non-Muslims have to be removed. The need and necessity of interest free Islamic finance and banking
has to be spread among the Muslims, common people, religious scholars, business men, bankers, politicians,
and other stakeholders. Besides its legal hurdles, the following are the major misconceptions regarding Islamic
Banking in India.
a) Islamic banks are exclusively for Muslims;
b) Islamic and conventional banks are one and the same;
c) Islamic bank is used for spreading Islam to the world;
d) Islamic finance funds terrorism;
e) Islamic finance only focuses on charitable activities;
f) Islamic financing more risky than conventional financing;
g) Their misconceptions and expectations about service quality;
h) Goes against the secular fabric of our country;
i) Increased level of ambivalence, queries and concerns about Islamic banking,
j) Islamic banks are considered as threat, not as an opportunity for economic growth.
7) Conclusion and Suggestions:
An important reason for stopping this banking system from being introduced in India is the fact that people are
ill informed and apprehend the secular nature of the banking model. Spreading awareness on the banking
system, and scrutinizing its merits and demerits must be undertaken by the government as well as the media
so that the population at large, are given an opportunity to make an informed choice. In addition to the large and
untapped Muslim population, Islamic Banking is currently beginning to attract Non-Muslim customers, who are
interested in alternative way of banking. Indeed, a growing number of Non-Muslims are turning to Islamic
Banking as customers spooked by turmoil in the western banking system increasingly see the sector as a
safe and more connected to the real economy. Islamic banking will benefit from this new customers interest
and grow even more quickly than it recently did. Even Vatican has offered Islamic Finance principles to Western
banks as a solution for worldwide economic crisis. For creating awareness & spreading its benefits, new and
more courses should be introduced at educational institutions, conduct various workshop/conferences/ seminar
and through media/ channels/news paper.

Special Issue November 2018 Page 25

 International Journal of Emerging Technologies and Innovative Research
Reference:
1. Ahmad, S.M. (1989), Towards Interest-Free
Banking, Institute of Islamic Culture, Lahore,
Pakistan
2. Ahmad, A. (2000). Economic Development in
Islamic Perspective Revisited. Review of Islamic
Economics, 9, 83-102.
3. Ahmad, Z. (1994), ``Islamic banking: state-of-the-
art’’, Islamic Economic Studies, Vol. 2 No. 1, pp. 1-
34.
4. Dikshit Arushi and Pradhan Gayatri (2015), Islamic
Banking and its Legal Validity in India, Christ
University Law Journal, 4, 2 (2015), 1-18.
5. Ayub, M. (2002) , Islamic Banking and Finance:
Theory and Practice, Lahore : StateBank of Pakistan
6. Barro, J. Robert, (1993), Macro Economics, N.Y. :
John Wiley & Son Inc
7. Chapra, M. U. (2000a). The Future of Economics:
An Islamic Perspective. Leicester: The Islamic
Foundation.
8. Chapra, M. U. (2000b). Why has Islam Prohibited
Interest: Rationale behind the Prohibition of Interest.
Review of Islamic Economics, 9, 5-20.
9. El-Gamal, M. 1998. The survival of Islamic banking:
A micro-evolutionary perspective. Islamic Economic
Studies 5(1,2):1–19.
10. Friedman, Milton, (1956), “The Quantity Theory of
Money: A Restatement, “in Milton Friedman, ed.,
Studies in Quantity Theory of Money, Chicago
University of Chicago Press.
11. Haron, S. (1996). Islamic Banking: A New Vehicle
in Fostering Entrepreneurship.Journal of Islamic
Banking and Finance, 13(3), 28-39.
12. Haron, S., & Ahmad, N. (1999). The Effects of
Conventional Intrest Rates and Rate of Profit on
Funds Deposited with Islamic Banking System in
Malaysia. International Journal of Islamic Financial
Services, 1(4).
Special Issue November 2018
ISSN : 2349 - 5162
13. Modigliani, F. and M.H. Miller (1958), “The Cost of
Capital, Corporate Finance and the Theory of
Investment”, American Economic Review, Vol. 48,
June, pp. 261-297.
14. Khan, Mohsin (1986), “Islamic Interest Free Banking:
A Theoretical Analysis”, IMF Staff Papers Vol.33,
No 1, pp. 1-27.
15. Siddiqi , M. N. Banking without Interest (1997),
pp.185-88.
16. Siddiqi , M. N . Riba, Bank Interest and the
Rationale of its Prohibition, 2004, Jeddah, Islamic
Development Bank, Islamic Research and Training
Institute
17. Siddiqi, M. N. Muslim Economic Thinking: A Survey
of Contemporary Literature. Leicester: The Islamic
Foundation, 1981.
18. Siddiqi, M.N. Economics of Tawarruq: How its
Mafasid Overwhelm the Masalih. Paper presented
at the Tawarruq Seminar organized by the Harvard
Islamic Finance Programme, at London School of
Economics, London, UK on 1 February 2007.
19. Sirageldin, I. “The Elimination of Poverty: Challenges
and Islamic Strategies,” in M. Iqbal (ed.), Islamic
Economic Institutions and the Elimination of Poverty.
Leicester: The Islamic Foundation, 2002.
20. Qureshi, Iqbal (1970), “Islam and the Theory of
Interest”, 2nd ed., Lahore: Ashraf Publication.
21. Qureshi, D.M (1985), “ Islamisation of Financial
Institutions in Pakistan: Achievements, Problems
and Prospects,” in Interest Free Banking in
Pakistan, Institute of Bankers in Pakistan, Karachi,
pp.93-108.
22. “Towards Islamization of Disciplines” (1995), Papers
contributed by several participants, Published by
International Islamic Publishing House, Riyadh S.
A.
Page 26