As Raghuram Rajan departs, RBI opens door to Islamic finance

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.

By: Reuters | Mumbai | Published: September 5, 2016 10:04 am
RBI, Islamic Banks, Islamic Banks India, News, Business, Banking, RBI, Raghuram Rajan, Urjit Patel, Islamic Development Bank RBI Governor Raghuram Rajan (File Photo)

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.

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 specialises 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 specialised interest-free window to offer cost-plus financing, deferred payment and deferred delivery contracts, a reference to common sharia-compliant contracts such as murabaha and istisna.

Development of Islamic finance has been slow, however, partly because of strong opposition from bureaucrats and politicians from the ruling BJP.

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.

The Exim Bank’s credit line would support foreign buyers of Indian goods and services, with the Saudi-based Islamic Corporation for the Development of the Private Sector acting as the intermediary.

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  1. G
    Sep 5, 2016 at 11:20 am
    If banking without interest is true Deposit does not get interest nor lending who will pay to run the;br/gt;Real situation may be less deposit and more lending.We cannot follow arab law if lender defaults
    1. J
      Sep 5, 2016 at 6:40 am
      So far whatever RBI did was reported as Rajan's actions. Why is the corrupt media not reporting this as "Rajan introduces Islamic Banking" or "Rajan's proposal to ruin banking system"
      1. A
        Amar Akbar
        Sep 5, 2016 at 9:04 am
        My god this is how you guys treat a customer of your newspaper?
        1. V
          VP Joshi
          Sep 5, 2016 at 6:36 am
          Islamic banking may give interest-free loans, but loan agreements provide for a share in profits and losses of the borrowers. This prevents reckless lending by banks.
          1. J
            John Joseph
            Sep 5, 2016 at 5:10 am
            In a secular country you cannot have Islamic banking. Then where do you stop. Child molestation in the name of marriages be allowed just as prophet Mohammed did with Aisha?
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