RBI urged to open windows for Islamic banking in select banks

Sep 15, 2010 (Mint – McClatchy-Tribune Information Services via COMTEX) —

The Indian Centre for Islamic Finance, a non-profit organization spearheading Islamic banking in the country, has approached the Reserve Bank of India (RBI) to allow a few banks in Mumbai to open interest-free windows on a pilot basis, without amending any of the existing regulations.

Any payment or acceptance of interest is prohibited under Islamic banking, which operates on the theory that the return on investment is a compensation for the risk taken by the investor by providing a fund for commercial activity. Money can be lent on a profit-sharing or a fee-based model.

Earlier attempts by private groups to introduce Islamic banking fell through due to regulatory constraints.

In its 26 August representation to the central bank, a copy of which was reviewed by Mint, the Indian Centre for Islamic Finance said a pilot project for interest-free windows would not require amendments in the Banking Regulations Act, 1949.

“We have met the top Reserve Bank officials with this request (to allow interest-free windows in some banks),” said H. Abdur Raqeeb, convenor, National Committee on Islamic Banking, and general secretary, Indian Centre for Islamic Finance.

He added that countries such as Singapore and Britain have accommodated similar practices in their banking systems within their regulatory frameworks.

“The idea is to allow interest-free windows in some of the conventional banks in the country, where half of the population is still unbanked. There is a lot of scope for it,” he said.

A large section of Muslims, who constitute India’s largest religious minority, is unable to access banking services because of religious injunctions.

Permitting Islamic banking is expected to help tap investments from this segment, said Raqeeb.

An email to RBI seeking its view on the matter remained unanswered.

Islamic banking, which operates under the principles of Shari’a law and is popular in the Arab world, prohibits financial involvement in industries related to gambling, alcohol and adult media, considered haraam, or prohibited, in Islam.

In May, RBI governor D. Subbarao said after a board meeting in Thiruvananthapuram that Islamic banking is not possible as “many of the banking principles in place are based on interest payments”,

He was replying to queries related to a Kerala high court order in April restraining state-run Kerala State Industrial Development Corp. from taking a stake in a proposed non-banking financial company that was conceived to undertake Islamic banking activities.

The government had informed the court that it was not legally feasible for banks in the country or its branches abroad to undertake Islamic banking.

According to Raqeeb, Islamic banks, along with subsidiaries and interest-free windows of conventional banks, control around $1 trillion in assets globally.

The Indian Centre for Islamic Finance says in its proposal to RBI that a few banks from the public, private and foreign sectors should be allowed to offer Shari’a-compliant products like current and savings accounts, custodial services, fixed deposit products, agricultural loans, credit card services, letter of guarantee, investment banking and forex trading.

The centre argues that the definition of banking under Indian law–accepting deposits of money from the public for the purpose of lending or investment–does not require banks either to pay or accept interest.

Countries such as Singapore and Britain, Raqeeb said, have accommodated interest-free finance within existing and conventional regulatory frameworks, thus ensuring neutrality of regulations.

H. Jayesh, founder-partner of Mumbai-based law firm Juris Corp., however, said the focus should be on Islamic finance than Islamic banking as the former does not require any specific regulatory permission. Islamic finance operates as a para-banking facility that includes transactions that are in the nature of financing but may not be lending money or taking deposits.

“In India, we have huge funds waiting to be deployed, primarily in sectors like infrastructure. Islamic finance will be (a) good way of tapping this potential,” Jayesh said.

“Per se, it is possible to structure various financial transactions and make the same Shari’a compliant,” he said, adding that such transactions may be viewed as para-banking activities and need not be performed by a bank.

As for institutionalized Islamic banking, he said it might not happen in India in the near future even in the form of interest-free windows as these would require amendments in the banking laws.


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