Mumbai : India’s central bank has proposed working with the government to introduce interest-free banking to tackle financial exclusion for religious reasons, potentially opening Islamic finance to the largest Muslim minority population in the world.
The Reserve Bank of India (RBI) made the proposal in its annual report last week, as departing Central Bank Governor Raghuram Rajan hands over the reins to close ally Urjit Patel. The proposal marks a shift in stance by the RBI, which has previously said Islamic finance could be offered through non-bank channels such as investment funds or cooperatives, Zawya news reported.
That has meant an estimated 180 million Muslims in India, the country’s second-largest religious group, have been unable to access Islamic banking because of laws that require banking to be based on interest, which is forbidden in Islam. The RBI said it would explore introducing interest-free banking products in consultation with the government, a key detail as this opens the prospects of supportive legislation.
“This is definitely a significant development as it is the first time that the RBI has concretely mentioned that it will now work with the government to introduce Islamic banking,” said Saif Ahmed, managing partner at Bangaluru-based Infinity Consultants, which specializes in Islamic finance. “For Islamic banks to function in India, separate parallel legislation or an amendment needs to be passed by Parliament and that can only happen with the active support of the incumbent government.”
In 2015, a central bank committee recommended opening a specialized interest-free window to offer cost-plus financing, deferred payment and deferred delivery contracts, a reference to common sharia-compliant contracts such as Murabaha. Development of Islamic finance has been slow, however, partly because of strong opposition from bureaucrats and politicians from the ruling Hindu-nationalist Bharatiya Janata Party.
This has long hindered development, although there are signs that India is warming up to Islamic finance. The government’s external lending agency, Exim Bank, said in April it would extend a $100 million credit line to the private sector arm of the Islamic Development Bank.—SM/IINA
Welcome development. Please put it on fast track.
Now, Islamic banking has reached its commercial value.
If India adopts Islamic banking,
Are Indian Muslims going be the Users, Developers, Promoters or Owners?
In order to retain the Islamic value of the system and to serve the mankind. Muslims needs to be skilled. Else we should wait for Fatwas.
There is no basis for the so called “Islamic banking”. Commercial lending is different from personal lending and has to follow the proven and logical system developed by the western countries, which by the way is the systemic basis of Islamic bankers too. All borrowing is not for investment purposes, and for borrowings not of investment type interest is essential. The so called interest charged by the commercial banks has several components like compensation for inflation, time value of money, risk premium, service charge and overheads, profit for the bank and return to the depositor. Even Islamic banking ideologues have acknowledged some or most of these components cannot be ignored. The truth is none of these components can be ignored, or else the Muslim countries themselves would have implemented the Islamic banking in the first place. No Muslim country has taken up Islamic banking as its primary banking system even for name sake. This is despite Islamic banking just disguise the same commercial banking in a religious garb. The ethics of any banking system is to provide easy credit at the lowest interest rates possible, and not to charge higher and claim it is “halal profit”. Recently even the Wahabi Saudi Arabia was flouting the idea of issuing international bonds for Aramco which of course is on fixed return basis. In a well functioning economy the interest rate will be very low, which it is desired to be, but never zero. It depends on primarily the proactive approach of the government in managing its economy, and goes beyond just representing interest as “profit” or “rent” as done by the Islamic bankers. Islamic banking is a ploy developed to attract investments from Muslim community taking advantage of their religious aspirations, evidenced by the usage of Arabic technical terms, which however has retrograded them greatly in financial and investment scenario. That is the reason Islamic bankers are not concerned about “Islamic medicine”, “Islamic engineering” and so on as it offers them no such easy benefits. The Islamic economists should first try to implement their system in Muslim countries first successfully before trying it in other places like India, which by the way is not beneficial for intercommunity relations here too.