This financial system was resilient to the Global financial crisis of 2007-08, precisely due to the very reasons that make it peculiar and less popular. Islam banking and finance was seen as a model that stayed unaffected until the crisis had penetrated into the real economy, beyond the level where Divya ma’am would ‘quote-unquote’ Vamasi’s ‘Money creates more money’. In short, it had crossed the hot money flows to affect the real output. The highlight of Islamic banking is Sharia Laws’ prohibition of ‘usurious’ (It is evident, DiM is missed!) capital or propagating interest free banking.
My sudden interest in Islamic finance comes after RBI’s first formal attempt to introduce interest free banking in India, as mentioned in their Annual Report 2015-16. As stated in http://www.livemint.com/Industry/gymNR6aiZ4jjbz3Dux6mBP/As-Raghuram-Rajan-departs-RBI-opens-door-to-interestfree-b.html, this is Mr. Rajan’s parting gift to tackle financial exclusion on basis of religion. Previously, Islamic finance was offered through non-bank channels like Investment funds or cooperatives. This would come as a blessing to those 12% of total MSMEs in India run by Muslim community.
What I am not covering in this post, is how Islamic finance works without charging interest, which would explain how it stayed robust in GFC. For that, you need to stretch your lazy muscles and take out the laptop to watch: https://www.youtube.com/watch?v=P_cVuLpD_rs. For the lazy brats, this is a shortcut in Financial Times, https://www.ft.com/content/8c9bc2fc-8845-11df-a4e7-00144feabdc0.
*The post was originally published on FISCUL, LSR’s facebook page