RBI ‘clears deck’ for Islamic banking in India

RBI ‘clears deck’ for Islamic banking in India

By NAVTAN KUMAR | NEW DELHI | 16 January, 2016
An RBI committee has recommended interest free windows in conventional banks to facilitate Islamic banking.
The Indian Centre for Islamic Finance (ICIF) has welcomed the RBI committee’s recommendations on interest-free windows in existing banks.

The Reserve Bank of India (RBI) has almost paved the way for Sharia-compliant, interest-free or Islamic banking in the country. The measure, if implemented, is expected to give a boost to the economy and increase “financial inclusion”. The total Islamic financial assets were estimated at around $2 trillion in 2015, practically a 10-fold increase from a decade ago and outperforming the growth of “conventional finances” in many countries.
An RBI committee on “Medium-Term Path for Financial Inclusion”, headed by Deepak Mohanty, has recommended “interest free windows” in existing conventional banks. It has sought comments on the report from people till 29 January.
“Commercial banks may be enabled to open specialised interest-free windows with simple products like demand deposits, agency and participation certificates on the liability side and cost-plus financing and deferred payment, deferred delivery contracts on the asset side,” the committee has recommended. The committee has also recommended that “in the event that interest-free banking is allowed in India, the extant regulatory guidelines in respect of capital and liquidity as applicable in the case of commercial banks would have to be made applicable to those as well”.
The government, on the other hand, also appears to be keen on implementing the Islamic banking. The government had advised the RBI that before taking a decision, the legal/technical/regulatory issues need to be clarified by the RBI. Following this, an inter-departmental group on Alternative/Islamic Banking was set up within the RBI to examine the issues for introducing Islamic banking. The group has already submitted its report. The central concept in interest-free banking and finance is justice, which is achieved mainly through the sharing of risk. Stakeholders are supposed to share profits and losses and charging of interest is prohibited. This type of banking has four important features — Riba, Haram/Halal, Ghararar/Maysir and Zakat. Riba is the most important aspect of interest-free banking, and means prohibition of interest. Haram/Halal is a strict code of “ethical investments” for interest-free financial activities. Such investment gives priority to the production of essential goods which satisfy the needs of the population such as food, clothing, shelter, health and education. Under Ghrarar/Maysir, gambling in all forms is prohibited. Zakat is an instrument for the redistribution of wealth in the form of a compulsory levy. Another feature condemned under interest-free banking is economic transactions involving elements of speculation.
The Mohanty report says: “One area that has not been adequately addressed is the role of interest-free banking in financial inclusion. Globally, interest-free banking, also known as Islamic banking, has witnessed a significant increase, especially in the wake of the financial crisis.” The report cites a survey saying “the evidence suggests that Muslims are less inclined to access formal finance, in general, although they might be accessing long-term formal finance”.
Interest-free banking has witnessed a lukewarm response in India and now it is time for change. The Committee on Financial Sector Reforms (CFSR) is headed by the chief economist of the International Monetary Fund (IMF). Raghuram Rajan, who is now the RBI governor, had in 2008 talked about the need for a closer look at the issue.
The Indian Centre for Islamic Finance (ICIF) has welcomed the RBI committee’s recommendations on interest-free windows in existing banks. Its general secretary Abdur Raqeeb said it will give a boost to Prime Minister Narendra Modi’s Pradhan Mantri Jan Dhan Yojana. “For the first time, the RBI has come out with a concrete document on Islamic banking. I hope the government will implement the Mohanty committee’s recommendations at the earliest,” Raqeeb said.
 

There are 40 Comments

Why for Muslims only, why not for Hindu an " Interest Free Banking".

Interest is prohibited in Islam. We encourage everyone to go for interest-free banking. interest is an evil regime which is responsible for poverty and most farmer suicides. Congratulations to you if you are thinking of interest free banking.

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Islam Banking is based on a interest free banking system but Islamic banking is open for all communities and benefit all section of the society

Why for Muslims/Hindus..., why not for all human beings who recognise & want to get benefit of it. Becouse, interest free banking is recommended in The Quran & The Quran says " it is guidance for all mankind "--- chapter-2 : verse- 85.

End of BJP starts now after it surrender its ideology for Muslim Votes which it will never get

Another disastrous step by BJP ..... They must focus on those who brought them into power and then try to appease those who would never vote for them

Brother, there is no appeasing in it. Interest is an evil regime which is responsible for poverty and most farmer suicides. you should support such schemes for the sake of humanity. By the way, Monetary policy and financial inclusion are responsibilities of RBI not goverment.

well said

For those who've not read the constitution: PREAMBLE: WE, THE PEOPLE OF INDIA, having solemnly resolved to constitute India into a SOVEREIGN SOCIALIST SECULAR DEMOCRATIC REPUBLIC and to secure to all its citizens: JUSTICE, social, economic and political; LIBERTY of thought, expression, belief, faith and worship; EQUALITY of status and of opportunity;

Today Islamic Banking, Tomorrow Islamic country. It also endorses the thinking that man made laws and constitutions are not applicable and acceptable to some. Our founding fathers might not have thought, what we will make this country some day. Instead of promoting scientific, rational and modern values, we are going back to mediviel times.

Efficiency of Islamic finance has been proved in all circumstances put in front of it when the idea was presented to scholars from biggest educational and business institutes. It is being backed by scientific evidence. Shariah compliant stocks are listed in index of worlds biggest stock markets. That did not ruined their economy nor took away their liberty. Most Indian companies are shariah compliant without even sacrificing any of their modern approaches. Because Indian companies are mostly financed through equity and less debt. Also they dont produce liquor. I hope your statement was not posted without your knowledge regarding economics and islamic fiance. Islamic banking is an option not compulsion. Muslims don't except interest in most cases. Not taking interest only reduces debt and reduces non performing assets in economy which is only beneficial. So relax....Islamic fiance is not going to take over the country. Its just a small option for muslims.....not compulsion to everyone....Indian economy will operate in its normal environment.

this move can lead country into disastrous end not only in terms of economic but as a strong and safe country. Islamic thoughtsand whole ideology must be removed from our NATION.

Dear Raghuram, Financial terms should not be based on religion or not fixed single community as it creates huge imbalance across community where one can do business with zero interest loan and rest people with hefty interest.As we know raising fund for business is not easy task and top of it interest rates are high. Try focus to bring financially deprived people from community. Classic example MUDRA it doesn't have any caste/religion. How will you ensure financial justice?fair business?business ethics? If you really keen to server India well think about other reforms that help entire country citizens not just only Muslim. Today they are the only reason for their pathetic situation.Unless they adapt to present situation neither zero interest scheme nor reservation will uplift them.

Suggestion regarding opening of interest free windows in conventional commercial banks should be seen and understood in perspective of financial inclusion of the citizens of India and not with coloured glass with Islamic phobia Further the facility will and shall be opened to all the citizens irrespective of their faith and belief Also productive use of funds based on participation in the outcome of business I e profit and loss in nearer to finance justice Facility being planned to make available should be welcome Interest Free financial system too should be provided a chance to proov its claim being prone to equity and justice

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I believe this is only to expedite our financial asset remoteness, india has such a huge populations Muslim and Jain as well as some other communities who believe that Interest is not fair distribution to count as profit by which causing the between poor and rich significantly. A lot of interest money is idle with our india banks, turning on more potential asset toward growth in financial market would only lead to country's benefits, henc for those who are infavour of interest based system, will eventually participate actively. It's like win win situation. I beleive having such parallel system like UK, USA, Singapore, Germany, Thailand already introduced, would help Indian people and india's economy to grow. This is very good effort given by Committee and i would say it's an smart move to enhance the financial system in order to bring everyone on board.

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I believe this is only to expedite our financial asset remoteness, india has such a huge populations Muslim and Jain as well as some other communities who believe that Interest is not fair distribution to count as profit by which causing the gap between poor and rich significantly. A lot of interest money is idle with our india banks, turning on more potential asset toward growth in financial market would only lead to country's benefits, henc for those who are infavour of interest based system, will eventually participate actively. It's like win win situation. I beleive having such parallel system like UK, USA, Singapore, Germany, Thailand already introduced, would help Indian people and india's economy to grow. This is very good effort given by Committee and i would say it's an smart move to enhance the financial system in order to bring everyone on board.

Interest free Banking will give a boost to an alternative banking model. Will pressurise the conventional banks to become more moderate and inclusive in dealing. One could comment its merit and demerits only after its implementation.

For human economy is t 2ed bone for each one. So need a proper and gentle with ethically fisable. .thats what int free bank will be able to complete real economy rather than secondary(financial). So can safe from any crisis

BJP again fool to hindus One think clear Modi never gone build ram temple.

Ram Temple was explicity *not* on the BJP agenda for 2014 Lok Sabha elections. Amit Shah has, however, endorsed the building of a Ram Temple by constitutional means.

We cant label any banking system as islamic. It raises communal temperature unnecessarily. If certain things of a religious system make sense, introduce them as an option under a non-religious name say "interest free banking". This will not be opposed by people. Idea is dont give any rational system a religious colour. Similarly remove all irrational religous systems from the country which allows simultaneous multiple wives to a man or divorce of a woman by a man by uttering a few words only.

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Islamic banking means bear loss/profit both. For example, person A has 25 lacs and he borrows 25 lacs from bank under the Islamic banking scheme. When the person A buys and resides in a home of 50lacs, and say the approx value of rent for the 50 lac home is 20,000-/-. Person A has to pay 10,000 rent to bank every month , until the entire principal amount is repaid. There is interest but rent Not sure : ====== If person A repays the principal amount after x years and if the property price falls to 40lacs then the bank should bear the loss of 5 lacs and the person A should bear 5 lacs This scheme is very nice and will benefit both non-Muslims and Muslims, In conventional system the buyer is forced to repay the principal and interest even if the property prices goes down or when there is a global meltdown. If the govt is truly development focused, should introduce this scheme for the benefit of the people.

Islamic finance and banking is more than just an interest free economy. It is concerned with ethical investment and moderation in risk taking. Some people have come to call it ethical finance. Looking forward to what the present day Indian government and RBI have to offer.

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Seems very sensible and a beningn tool from my limited knowledge of finance!

If its implemented properly then its going to be a milestone to achieve for RBI.. interest free banking will help economy to boost and give sanjivani to government.. people from all region will hava an option to choose and to invest in a different domain...

Why has RaghuramRajan allowed this?? Now I am read sure he is a US agent! After getting into IMF by Chicago mafia, he was sent to GOI and then RBI, this is what he is doing now

Any muslim will be ready to accept this system but what if the fund this bank'll get ll send and ll used for exploring terrorism. muslims are not terrorists but all the terrorists are muslims and now they are attracting hindu youngsters too. This banking is owned by Saudi and saudi is a main source of funding terrorists. So muslims and hindus please do not go with this system.

If the world accept and implement Islamic Banking /Interest Free Banking, inflation will stop. Welcome Interest Free Banking in India

If the world accept and implement Islamic Banking /Interest Free Banking, inflation will stop. Welcome Interest Free Banking in India

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This bank is being set up by UAE/Saudi lords. They are known for promoting extremism and funding radical activities across globe. If the decision to set up such back is based on economic laws then this should be ok. However, At this point, it looks like it is just one more vote bank politics.

"Islamic Finance introduction good for Financial Inclusion " urged Prof. Aman Agarwal (Professor of Finance, Indian Institute of Finance, www.iif.edu) September 6th, 2016, IIF Delhi & G-Noida : The RBI’s (Reserve Bank of India) decision to introduce Islamic Finance in India is a Welcome decision said Prof. Aman Agarwal today September 6th, 2016 at 11.00 am at a seminar hosted by Indian Institute of Finance at Greater Noida Campus. Prof. Agarwal urged the RBI to introduce Islamic Banking in the regular commercial banks creating a separate division rather than an half hearted efforts of introducing Islamic Finance in cooperatives and investment funds. Speaking on the occasion Prof. Agarwal also said that introducing Islamic Finance would be a part of Financial Inclusion for Muslims who pursue their religion strictly for their financial dealings and Banking System. This will also result in large amount of funds moving into the Banking from the Muslim Community and informal markets, particularly who are rich traders and others and also facilitating these Muslims to be a part of the Banking system. However the decision of Reserve Bank of India (RBI) to introduce Islamic Finance in cooperative Banks and NBFCs is a half hearted effort. Prof. Agarwal feels that Islamic Finance should be introduced in regular commercial banks where a separate division may be created and the accounts of this division may be worked out and distributed amongst the members of Islamic banking so that separate infrastructure is not needed for this purpose. Muslims in India are a community of about 18 crore (180 million) people in the country, which is the 2nd largest Muslim population in the world. They should have facility of Banking as per their own religious faith. The Model of Islamic Banking used in different Muslim countries can be adopted for running these separate divisions in each of the Commercial Banks. Some of the Non-Muslims are also expected to participate in the Islamic Finance/Banking for sharing of profitability of these divisions of Commercial Banks. Prof. Agarwal said that we at IIF have published an extensive Bibliography on “Islamic Banking & Finance”running into 30 pages in Finance India (The Quarterly refereed journal of Finance) Vol XXVI (26) No 2, June 2012 . Also Available online at http://www.iif.edu/media/pr/2016/20160901pr001.htm

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