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Sunday 21 August 2011

Islamic banking in India: Existing legal provisions have scope to allow Islamic banking

Mirwaiz Umar Farooq has set in a wind of change when he vouched for implementation of Islamic Banking practices in the state. It took no time to bring top line mainstream political leaders into its fold unleashing a debate on the issue. Even as possibility of Islamic Banking practices in the country has been debated for quite some time now, the politicizing of the issue has made it an impossible task. 


The absence of Islamic banking, as pointed out in various studies from time to time, has emerged as one of the major reasons of backwardness of Muslims in India. These studies revealed that Muslims in India have worst credit- deposit ratio due to unavailability of interest free loans. With 97% workers engaged in unorganized sector, the Indian Muslims need interest free loans to improve their labour output ratio and value additions for foster inclusive growth of the country. It’s fervently believed that if Islamic banking practices in India are allowed, the Muslims in unorganised enterprises will translate their liabilities into assets. 

It’s needless to mention that Indian think tank is well aware about the benefits of implementing Islamic banking practices in the country. But the ‘bias’ in the governance practices in the country has confined the scope of Islamic banking in India to debates only and notion is given that these kind banking practices are impossible within the existing legal framework.

Whenever demand for Islamic banking emerged, government lost no time to announce committees and these committees too lost no time to recommend huge scope of Islamic banking. And surprisingly, the Reserve Bank of India with equal pace always shelved these recommendations - hinting that Islamic banking is not possible in the existing legal framework. Sometimes notion has been given that RBI Act has to be amended which is not a small job. 
There was one internal working group of RBI which was supposed to examine the feasibility of Islamic banking business in India. The group concluded that Islamic Banking in India is not possible unless the Banking Regulation Act is amended. Even as implementation of full-fledged Islamic banking needs some amendments in the Act, an objective study would have found scope of recommending at least interest-free banking. There is no need to amend any Act to allow interest-free banking and our prevailing Acts already have provisions for interest free based transactions.

For example, as per the Section 17 (1) Reserve Bank of India Act 1934,  banks are authorized to accept money on deposit without interest from and the collection of money for the central and state governments, local authorities, banks and other persons. As per the Act, RBI has the power to regulate transactions in derivatives, money market instruments, etc. in public interest, or to regulate the financial system of the country to its advantage, determine the policy relating to interest rates or interest rate products and give directions in that behalf to all agencies or any of them, dealing in securities, money market instruments, foreign exchange, derivatives, or other instruments of like nature as the Bank may specify from time to time.
Then there is the Banking Regulation Act 1949. It has empowered the RBI to control advances by banking companies. Sections 21 and 21A of the Act states: “Every banking company shall be bound to comply with any directions given to it under this section. RBI’s policy or bank’s practice of charging interest cannot be pulled to judicial discretion.” 
In view of the above stated legal provisions, as pointed out by various legal experts also, the Reserve Bank of India is in a position to allow the banks to accept deposits without interest and lend money at zero interest. 

So in this context, it is the RBI’s interest policy declared from time to time which is a hindrance to interest-free banking. 

All of us know that the world today faces two major problems - acute poverty and ethical deficit. Both these problems are directly related with our financial system. And it’s the banking system which can very easily remove poverty and minimize inequalities. But the system demands alternative banking mechanism which should be based on interest-free transactions where the financier should also share in the risk so as not to shift the entire burden of losses to the entrepreneur. Besides, an equitable share of financial resources mobilised by banks should become available to the poor to help eliminate poverty, expand employment and self-employment opportunities and, thus, help reduce inequalities of income and wealth.

(Greater Kashmir, 20 Aug 2011)
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KL Conference on Islamic Wealth Management:
http://islamic-wealth-management.net
KL Conference on Islamic Finance :
Alfalah Consulting: http://alfalahconsulting.com

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