RBI pulls up Islamic bank

The Reserve Bank of India has asked the country’s first and only Shariat-based NBFC, the Kozhikode-based Alternative Investments and Credit Limited (AICL), to commit sacrilege.

The NBFC, for which charging interest is ‘haraam’ or forbidden, has now been asked to publish an interest rate structure just like any other conventional banks.

The charge is that the AICL, which has been operational for over a decade, has flouted RBI’s fair practices code under which a financier has to specify the interest structure. The AICL has been given two weeks to respond to the RBI’s directive.

“We have met RBI officials in Mumbai last week and put our points across,” said the AICL managing director, Mr K.M. Abdul Salam.

“Shariat teaches us to abide by the law of the land. But we also have our spiritual commitments,” Mr Abdul added.

The AICL’s immediate challenge is to find a middle-path between Shariat principles and existing banking regulations, which does not recognise interest-free transactions as a banking activity.

Instead of interest, an Islamic bank like AICL takes funding charges, which is the share of profits the borrower has to pay to the lender.

Banks based on Shariat principles function on the basis of a participative finance model. The borrower needs to pay only if he had earned a profit. In case there are unavoidable losses any year, the borrower need not pay any funding charges.