Islamic banking’s Indian chief

A bank that doesn’t charge interest. Even 10 years ago, the concept baffled most people. After all, isn’t interest one of the tenets of banking? It isn’t, when it comes to Islamic banking. Set up in accordance with the Shari’a, or Islamic law, Islamic banking is based on the principles of sharing risk and reward, and levying no interest.

The sector had modest beginnings. A decade back, in their book Thirty Years of Islamic Banking: History, Performance and Prospects, Munawar Iqbal and Philip Molyneux wrote: “If the assets of all Islamic banks were pooled, they would still be less than those of any single bank in the top 50 banks in the world, and the assets of the largest Islamic bank are equal to only 1% of the assets of the largest bank in the world.”

But as an idea, it has a unique cachet. In a thought paper released in 2012, Infosys Finacle discussed reasons why India needs Islamic banking. “Islamic finance is all about encouraging and facilitating investment in real economic activity and societal welfare, while prohibiting investment in reckless businesses such as gaming, alcohol, and adult entertainment or risky financial products like derivative contracts of the kind which led to the 2008 sub-prime crisis.”

The paper adds that in 2008, the now-defunct Planning Commission’s high-level committee on financial sector reform, headed by current Reserve Bank of India (RBI) governor Raghuram Rajan, recommended the “introduction of interest-free finance and banking as part of mainstream banking in the interest of inclusive, innovative growth.”

Despite the seeming encouragement, Islamic banking has had little traction in India; in fact, regulations actually prevent such banks from being set up. That is surprising considering the country has more Muslims than every other, save Indonesia. While regulations can be changed, many say the problems in India are more political than financial, thanks to the twin bogeys of faux secularism and Islamophobia.

As a result, Shari’a-compliant financial services have a patchy record here. When the RBI did allow Shari’a-based non-banking finance companies to set up shop in India, there was a lot of resistance. Recently, State Bank of India’s mutual funds business, which had announced the launch of a Shari’a-compliant fund, canned the plans on the eve of the launch; news reports claimed that the government was behind this.

So, here’s the irony of it all. One of the largest Islamic banks in the world, Dubai Islamic Bank, is headed by Adnan Chilwan, an Indian. When the bank was set up, the first of its kind, in 1975, it was dealing with a few hundred thousand dollars. Today, it is an $8.2 billion (Rs 51,799.4 crore) institution by market cap, with $33.7 billion in assets.

Over the past couple of years, Chilwan has overseen sharp growth, with gross revenue for 2014 increasing by 20.4%. Net profit stood at AED 2.8 billion (Rs 4,816 crore), a significant increase of 63% compared with AED 1.7 billion in 2013. But it speaks to the sector’s obscurity that next to nothing is known about the man in a country that is known to gloat over its global stars—notably bankers like the former Deutsche Bank co-CEO Anshu Jain (who recently resigned reacting to suspicion of financial misconduct), and former Citibank CEO Vikram Pandit (who stepped down amid speculation of a board coup).

"I was born in India but brought up in the U.A.E., so this region is home to me,” says Chilwan in an e-mail interview. He is reticent about other questions on his Indian lineage and thwarted several of my attempts to get chatty. He wouldn’t even tell me his age. To the bank of course, his bloodline and antecedents matter little. His business skills are more important, and he has honed them in two decades across conventional and Islamic banks such as HSBC, Dubai Bank, Abu Dhabi Islamic Bank, and Commercial Bank of Qatar. He’s a Ph.D. and has also got a bunch of degrees in marketing and in Islamic finance.

Much of Chilwan’s time, he says, goes in taking on the challenges facing Islamic banking globally. He sees himself as an evangelist for Islamic finance, tweeting regularly with #Make_IF_theNorm, and speaking often in forums around the world. He says the sector’s future hinges on two key things: First, innovation within the sector, which includes products, underwriting policies, procedures, and technology; and second, evolution of regulations across the globe, allowing for expansion across borders. “We have seen markets such as Qatar and Malaysia that have already developed separate regulations from the conventional system. So far, this has worked positively for their economies,” Chilwan argues.

Chilwan is a believer in innovation and says it’s something that he’s “grooming and establishing” in the bank. The banking system as we know it is centuries old, and it’s getting increasingly difficult to innovate in that space. Islamic banking is a relatively new phenomenon, and experimenting is far easier.

Given the nature of the business (no interest, for one) much of the innovation happens in financial products like bonds, rather than consumer banking. The possibility of profitable innovation has lured non-Islamic countries like Britain. A year ago, it became the first western country to issue an Islamic bond. The £200 million Shari’a-compliant debt issue proved popular, and, according to media reports, attracted orders of more than £2.3 billion.

Events like this have helped Islamic finance gain credence globally. The past few years, when fingers have been pointed at the global financial system, have aided momentum. According to consulting firm EY, which brings out the World Islamic Banking Competitiveness Report every year, international Islamic banking assets exceeded $778 billion in 2014, having witnessed an annual rate of growth of 17% in the four years from 2009 to 2013.

Cashing in on the growth, Dubai Islamic Bank is spreading wings in other countries through subsidiaries, including Dubai Islamic Bank Pakistan and the Jordan Dubai Islamic Bank. What about India? Chilwan makes a strong pitch for things to change, and points to traditionally non-Islamic markets, including Britain and Luxembourg, which have created space for the wealthy West Asian investor money to pour in through Shari’a-compliant instruments.

“India has an estimated infrastructure funding deficit of Rs 14.6 trillion for the 12th five-year plan (2012-2017),” he says. “Islamic financial services, banking or non-banking, could serve to mobilise money from oil-rich Gulf estates that could mainly be channelised through an interest-free system. We have seen how non-Islamic markets have successfully adopted the system in a manner that is adaptable to their local economies. These serve as an example that India can follow,” he points out.
Does Dubai Islamic Bank plan on coming to India? There’s no straight answer. “I believe more needs to be done, particularly on the regulatory front and to support infrastructure,” Chilwan says. “Appropriate amendments may need to be introduced to the existing regulations, and a separate set of rules and regulations may also have to be framed to [help] this business model, including re-examination of taxation implications.”

But will he head Dubai Islamic Bank’s entry into his country of origin, I persist. To which I get a long-winded reply that ends with the statement that his bank sees itself “as an ideal partner to any nation or government looking to progress the agenda of Islamic finance and economy”.

While Chilwan considers West Asia home, he says he is very aware of his expat identity. “Being an expat, I do hold myself more accountable as a representative of my ethnic background. It’s a facet I am building on daily,” he says. “I think the most important aspect of my Indian lineage is handling diversity, which needs a high emotional quotient.”