RBI no to Islamic banking, says laws need amendment

The Reserve Bank of India (RBI) on Thursday ruled out the introduction of Islamic banking in the nation saying that it requires amendment in the existing laws. RBI governor D Subbarao said the Kerala government had expressed interest in channelising funds from the non-resident Keralites through Islamic finance.

"We have studied the issue and appreciate the objective, but there are some legal problems for RBI to allow Islamic banking due to prohibition against charging interest. So Islamic banking is not possible but it can be got around through other vehicles in the existing system," he added while speaking at function that declared Ernakulam as the first district in the country with meaningful financial inclusion'.

Interestingly, RBI officials had said a month ago in Pondicherry that it had initiated correspondence with the Centre seeking the possibility of amending the banking regulation act or bringing in new rules, to pave way for establishment of Islamic banking in the country. Currently, there are about 400-500 Islamic banks in the world that are managing close to one trillion dollars and by 2020,it is expected to touch 4 trillion dollars. London and Paris are the leading financial centers of Islamic banks and funds. Islamic teaching encourages trading, investment and charitable giving, but frowns on the giving or receiving of interest, or riba, which it categorizes as usury. Sharia stipulates against earning fixed returns such as interest, warns against excessive speculation and shares the risk of the business.

Subbarao's remarks assume significance as Kerala was the first state to think of utilizing Islamic finance for infrastructure development. Kerala Government was hoping to float an NBFC in the name of Al Barakah Financial Services Company through the state-owned Kerala State Industrial Development Corporation (KSIDC) in association with entrepreneurs who are averse to an interest-based system. The promoters were also hoping to turn the NBFC into a bank into a global Islamic bank as soon as the RBI accommodates it.

Regarding financial inclusion, Subbarao said that having bank accounts alone does not guarantee inclusion. "Active use of the account and access to credit is also very important Even in big cities individuals with access to bank credit is low and most of the people depend on the unorganized sector for their short-term loan needs," he said. He also said that RBI planned to include financial literacy in the curriculum of primary schools and has prepared study materials for teaching the subject.

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