The way we see it, it's another form of venture capital," finance minister Thomas Isaac said in an interview in Thiruvananthapuram, the southern state's main city. "We need long-gestation funds to build airports, high-speed trains and expressways. Islamic finance promises unexplored potential in that context."
Kerala is helping start Al-Barakah Financial Services to sell the rupee-denominated bonds and create investment funds that comply with Shariah law's ban on interest, Isaac said. The venture will tap Indian Muslims and money sent home by workers living in Gulf countries even as a debt crisis in Dubai threatens to shrink the remittances, he said.
Islamic bonds, also known as sukuk, are asset-based securities that pay a profit rate to investors to comply with Shariah's prohibition of interest and speculation. Islamic finance may help India raise the $500 billion it needs to spend on infrastructure by 2014.
Islamic bond sales almost doubled to a record $31 billion in 2007 on Arab oil earnings before plunging last year as the collapse of Lehman Brothers Holdings shuttered credit markets, according to data compiled. Crude oil will climb to $82 a barrel in the first quarter of next year from about $71 now as demand from emerging markets increases, Goldman Sachs Group forecasts.
Islamic bonds, also known as sukuk, are asset-based securities that pay a profit rate to investors to comply with Shariah's prohibition of interest and speculation. "India, if opened up for Islamic banking, is the big prize," Afaq Khan, Dubai-based chief executive officer of Standard Chartereds' Islamic banking unit, said in a telephone interview.
"Its large Muslim population and strong growth promise excellent opportunities for releasing a lot of funds into the documented economy." India's economy expanded 7.9 per cent in the quarter ended Sept. 30, the second-fastest pace of expansion among major economies after China.
Muslims make up approximately a quarter of Kerala's population and 13.4 per cent of India's 1.1 billion people, according to government data. Only Indonesia and Pakistan have more inhabitants who adhere to the religion.
Indonesia's first sale of dollar sukuk in April drew bids for seven times the securities on offer, the head of the country's debt management office said. Dubai, which said Dec. 14 that it got $10 billion from neighboring Abu Dhabi to help state-owned Dubai World meet its obligations, raised $1.93 billion from its first sovereign Islamic bonds in October.
Kerala will hold an 11 per cent stake in Al-Barakah, which aims to start business next year with 10 billion rupees ($214 million) of capital, according to T. Balakrishnan, principal secretary at the state's industries department.
More capital will be raised from a group of investors led by Oman-based Indian businessman P. Mohammed Ali, and foreigners may be invited to buy stakes in the venture in the future, he said.
"We toyed with the idea of Islamic finance for the past few years, but it was when the recent credit crisis shook the foundations of conventional banking that we felt it's really time to get moving with it," Balakrishnan said in an interview.
"Current rules don't permit an Islamic bank yet but they do allow a non-banking firm. We will develop the company into a fully-fledged bank as and when regulations permit."
India is the world's largest recipient of migrant worker remittances, and its 4.5 million citizens living in the Gulf send home more than $10 billion each year, according to the Ministry of External Affairs.
Almost 90 per cent of the 1.9 million people who migrated overseas from Kerala lived in the Gulf countries in 2007, sending home as much as $5 billion, according to the Thiruvananthapuram-based research institute Centre for Development Studies.
"It's quite likely that Dubai will face a severe downturn in the real estate and financial sectors and that will affect jobs and remittances," Isaac said. A panel headed by Raghuram Rajan, a former chief economist of the International Monetary Fund, recommended last year that India introduce interest-free banking to attract more capital into the mainstream financial services industry.
"We are creating an avenue for a lot of people who aren't comfortable with investment opportunities that don't comply with Shariah," Ali, the chairman of Al-Barakah's investors and vice- chairman of Galfar Engineering & Contracting SAOG., said in a phone interview from Muscat, Oman. "We see a lot of untapped potential to raise capital for development projects."
Kerala, where in 1957 a communist government was voted into power for the first time, takes a "very pragmatic" approach to free enterprise instead of allowing ideas to be stymied by politics, said Balakrishnan, citing examples of a state- sponsored lottery and a privately-owned airport.
"We have a large and affluent community of Muslims who may prefer banking that's in accord with their faith," he said in his government office. "Given that, at a time when the ways of traditional finance are being questioned globally, why not look at alternatives?"