RBI proposes ‘Islamic window’ in banks for gradual introduction of Sharia banking

Islamic or Sharia banking is a finance system based on the principles of not charging interest, which is prohibited under Islam.

By: PTI | New Delhi | Published:November 20, 2016 2:23 pm
sharia banking, islamic banking, RBI, reserve bank of india, sharia banking india, interest free banking india, sharia banking for muslims, banking for muslims RBI has also prepared a technical analysis report which has been sent to the Finance Ministry.

The Reserve Bank of India (RBI) has proposed opening of ‘Islamic window’ in conventional banks for ‘gradual’ introduction of Sharia-compliant or interest-free banking in the country. Both the Centre and RBI are exploring the possibility of introduction of Islamic banking for long to ensure financial inclusion of those sections of the society that remain excluded due to religious reasons.

“In our considered opinion, given the complexities of Islamic finance and various regulatory and supervisory challenges involved in the matter and also due to the fact that Indian banks have no experience in this field, Islamic banking may be introduced in India in a gradual manner.

“Initially, a few simple products which are similar to conventional banking products may be considered for introduction through Islamic window of the conventional banks after necessary notification by the government.

“Introduction of full-fledged Islamic banking with profit-loss sharing complex products may be considered at a later stage on the basis of experience gained in course of time,” the RBI has told Finance Ministry in a letter, a copy of which was received in response to an RTI query filed by PTI.

Islamic or Sharia banking is a finance system based on the principles of not charging interest, which is prohibited under Islam.

“It is also our understanding that interest-free banking for financial inclusion will require a proper process of the product being certified as Sharia compliant will be required both on the asset and liability side and the funds received under the interest-free banking could not be mingled with other funds and therefore, this banking will have to be conducted under a separate window,” it said.

The central bank’s proposal is based on examination of legal, technical and regulatory issues regarding feasibility of introducing Islamic banking in India on the basis of recommendation of the Inter Departmental Group (IDG).

RBI has also prepared a technical analysis report which has been sent to the Finance Ministry.

“In case it is decided to introduce Islamic banking product in India as suggested, RBI would require to undertake further work to put in place the operational and regulatory framework to facilitate introduction of such products by banks in India,” the letter said. The work areas include operationalisation of Sharia boards and committees, feasibility of extending deposit insurance to Islamic banking deposits, identifying the financial risk and suggesting appropriate accounting framework for these products, the central bank had said in the letter written in December last year.

The RBI had in February this year also sent a copy of the IDG to the Finance Ministry. It said the RBI also needs to work on formulating suitability and appropriate criteria for Islamic products in addition to what would be determined under Sharia.

In its annual report for 2015-16, the central bank had said that some sections of Indian society have remained financially excluded for religious reasons that preclude them from using banking products with an element of interest.

“Towards mainstreaming these excluded sections, it is proposed to explore the modalities of introducing interest- free banking products in the country in consultation with the government,” it had said.

The plan for Sharia bank was opposed by certain political and non-political groups.

In late 2008, a committee on Financial Sector Reforms, headed by former RBI Governor Raghuram Rajan, had opined the need for a closer look at the issue of interest-free banking in the country.

The committee had said, “Certain faiths prohibit the use of financial instruments that pay interest. The non- availability of interest-free banking products results in some Indians, including those in the economically disadvantaged strata of society, not being able to access banking products and services due to reasons of faith.”

“This non-availability also denies the country access to substantial sources of savings from other countries in the region,” the panel had said.

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  1. I
    Imran
    Nov 21, 2016 at 9:52 am
    Introduce it immediately
    Reply
    1. T
      Tanzil
      Nov 21, 2016 at 3:19 am
      Maybe I can apply for a home loan now...
      Reply
      1. S
        shekhar
        Nov 21, 2016 at 12:04 am
        Communal printer prints after 7 tries against it.
        Reply
        1. S
          shekhar
          Nov 21, 2016 at 12:02 am
          Make sharia law of land ,
          Reply
          1. S
            shekhar
            Nov 21, 2016 at 12:08 am
            stan is right they instill so much fear in this printer they will not utter a word. POOR PRINTER
            Reply
            1. S
              shekhar
              Nov 21, 2016 at 12:05 am
              What fool printer is .-----------
              Reply
              1. J
                Jyoti Mitra
                Nov 20, 2016 at 2:05 pm
                Muslims should not share Indian Bonus Capital but they are highly involved in Land Realization and incur countless counterfeit notes to maintain a stand in Direct Retail. How Unislamic :O [Muslims should be given ONLY Current Account and NIL Term Deposits and as per Islamic Code Advances are seen as a grievous SIN]
                Reply
                1. K
                  khaja
                  Nov 20, 2016 at 1:43 pm
                  Hats off to RBI, well, initiated during Dr.Raghuram Rajan's tenure, now its turn of Mr.Urjit Patel- Govrnr of RBI, to push the Finance Ministry. Definitely India will see a new boom in Banking and Economy, nodoubt this lead us to the Prosperity. Now the Finance Ministry to Wake-up and signal RBI to proceed.
                  Reply
                  1. S
                    syed
                    Nov 20, 2016 at 10:07 am
                    SOME OF THE BENIFITS OF ISLAMIC FINANCE:lt;br/gt;lt;br/gt;It ists in financial inclusion:lt;br/gt;lt;br/gt;The conventional banking system is based on paying interest at a pre-determined rate on deposits of money. As both payment and receipt of interest is prohibited by the Shariah law, Muslims generally abstain from banking. Through Islamic banking, financial inclusion can be promoted and a larger pool of saving s can be brought into the economy.lt;br/gt;lt;br/gt;Reducing the impact of harmful products and practices:lt;br/gt;lt;br/gt;Shariah principles forbid any investment that would support industries or activities that are considered harmful to the people and the society in general. This includes usury, speculation and gambling, irrespective of whether these are legal or not in a given territory.lt;br/gt;lt;br/gt;It promotes the principle of financial justicelt;br/gt;lt;br/gt;Financial justice is a basic requirement for the functioning of Islamic finance products. Western or conventional financing looks forward to profit through interest payments and makes the beneficiary completely liable for any risk. Contrary to this, Islamic financing paves way for the sharing of net profit/loss and the risk involved in a proportional manner between the lender and the beneficiary. Therefore, if a financier is expecting a claim on profits of a project, it is necessary that he/she should also carry a proportional share of the loss of that project.lt;br/gt;lt;br/gt;Encouraging stability in investmentslt;br/gt;lt;br/gt;In Islamic finance, investments are approached with a slower, insightful decision-making process, when compared to conventional finance. Companies whose financial practices and operations are too risky are usually kept away by Islamic financing companies. By performing intensive audits and analyses, Islamic finance promotes the reduction of risk and creates the space for a greater investment stabilitylt;br/gt;lt;br/gt;Accelerating economic developmentlt;br/gt;lt;br/gt;Islamic finance companies certainly have profit creation and growth as their objectives. For which, they choose to invest in businesses based on their potential for growth and success. Thus in the Islamic banking industry, each bank will invest in promising business ventures and attempt to out-perform its compeors, in order to attract more funds from its depositors. This will eventually result in a high return on investments both for the bank and the depositors. This is unlikely in a conventional bank, where depositors redeem returns on their deposits based on a pre-determined interest rate.
                    Reply
                    1. J
                      John Abram
                      Nov 20, 2016 at 9:45 am
                      What, no bhakts here abusing RBI?
                      Reply
                      1. G
                        Gandji
                        Nov 20, 2016 at 9:13 am
                        Excellent go ahead
                        Reply
                        1. N
                          NonRSS
                          Nov 20, 2016 at 2:29 pm
                          This is purely selfish move under Feku's RBI to attract investments from ultra-rich Arabs. Because the Muslims have been totally marginalized. How can they shout for uniform civil code and then introduce Sharia banking?
                          Reply
                          1. S
                            syed ummar
                            Nov 20, 2016 at 9:23 pm
                            Nice...
                            Reply
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