Is the short story "My Son, the Fanatic" by Hanif Kureishi based on an true story or is it a fictional one?

I think that there is much in way of truth in Kurieshi's short story.  I am not entirely certain that one can discount it as fiction.  The reality is that being young, Muslim, and British carries with it a set of preconditions that makes their predicament unique.  The fact that Kurieshi shows Ali to be someone who gravitates to religion in a cosmopolitan and secular setting is reflective of this.  In the view of many sociologists, Ali's generation is uniquely poised in issues of spirituality and how this vision fits into the "Western" vision of progress and modernity:

This pivotal generation is already defying many of the experts. They are not conforming to the theories of secularisation common for 20 years; they are perhaps even more devout than their parents, and are certainly more assertive of their faith and its requirements. According to our poll, half of British Muslims pray five times a day every day, while 80% pray at least once a day; even allowing for some religious guilt inflating the figures, the evidence is of a level of religious practice which is higher than any other community in the UK. The poll showed that they want public accommodation of their faith - time to pray where they work and sharia courts in Britain for civil cases (as long as the penalties do not contravene criminal law). They are not showing much sign of conforming to earlier patterns of migration and cultural assimilation, while the "war on terror" is radicalising them into a wide range of political activity - from human rights campaigning to radical jihadism.

In this configuration, Ali's experiences, Parvez's reaction to them, and the overall lack of clear identity is something quite real, authenticating a voice that is noticeably absent from the discourse.  When Britons, and all Westerners, ask themselves why young men of Muslim faith find themselves committed to radical jihadism, the narrative of Ali is a stunning reminder that there is a need to reach out to this particular group of individuals and validate their experience.  The July 7 attacks in London would only serve as testimony to this.