by admin | May 25, 2021 | Muslim World
Manama : Aligned with its role as advocate of the Islamic Financial Services Industry (IFSI), the General Council for Islamic Banks and Financial Institutions (CIBAFI) – the global umbrella of Islamic financial institutions – on Tuesday submitted its comments to the Basel Committee on Banking Supervision (BCBS) on the Consultative Document on “Simplified alternative to the standardized approach to market risk capital requirements”.
The Consultative Document was issued on June 29 and was open for public consultation until September 27, according to a statement received Thursday from CIBAFI.
CIBAFI thanked the BCBS for giving the opportunity to the IFSI to comment on the Consultative Document before the proposed simplified alternative approach is adopted. CIBAFI has provided collective feedback of its member banks from over 32 jurisdictions, comprising the following key points:
Islamic banks are, for the most part, relatively small by global standards and are mainly based in emerging markets. For that reason alone, they would be likely to take a very little market risk. The fact that they are Islamic, however, means that for Shariah compliance reasons, they will be very restricted in their ability to take short positions or to use derivatives. This is likely to make their market positions simpler still, and those positions are likely to remain simple in the longer term.
Moreover, the design of the reduced sensitivities-based method (R-SbM) is significantly different from the design of the already widely-used Basel II standardized approach. CIBAFI is therefore concerned that the implementation of this method may pose substantial implementing challenges and costs for Islamic banks that already use Basel II approach. In addition, the benefits of implementation are uncertain and yet to be clarified.
Therefore, the view of CIBAFI is to prefer a recalibrated Basel II approach, but of course subject to the details of the way this proposal is developed and its implications for capital.
In its submission to the BCBS, CIBAFI expressed its appreciation of the work that the BCBS does to maintain sound regulatory practices and highlighted the need for the BCBS to align its work recognizing the Islamic financial industry’s considerations.
In addition to policy and regulatory advocacy, CIBAFI continues to support the Islamic Financial Services Industry through various activities and initiatives. These include providing industry stakeholders with a platform to discuss emerging issues, representing the industry at major global financial events, and sharing knowledge through specialized publications and comprehensive training programs.
CIBAFI, an affiliate of the Organization of Islamic Cooperation (OIC), is an international organization headquartered in the Kingdom of Bahrain. It was established in 2001.
—AA/AB/IINA
by admin | May 25, 2021 | Business Summit, Events, Muslim World
Manama : The General Council for Islamic Banks and Financial Institutions (CIBAFI), the umbrella of Islamic financial institutions, in cooperation with S&P Global Ratings and under the patronage of the Central Bank of Bahrain (CBB), launched a Seminar on Credit Ratings: Focus on Islamic Banks and Sukuk Ratings Methodology in Bahrain’s capital Manama on Sunday.
The seminar, which is being supported by Ithmaar Bank and the Bahrain Association of Banks, is aimed at engaging participants in the discussion on different credit rating criteria focusing on sovereign, Islamic banking and sukuk rating methodologies.
Both S&P Global Ratings and the General Council for Islamic Banks and Financial Institutions raised important views on the above topics, during the opening remarks, according to a press statement from the CBB.
In his welcoming address, CIBAFI Secretary General Abdelilah Belatik said: “We are delighted to see our member banks taking this opportunity to learn firsthand about Credit Rating and its impact on Islamic Financial Institutions. We also hope that these two days will help our members to understand in practical terms how Islamic banks and sukuks are rated from rating agency perspective.”
“Our collaboration with S&P Global Ratings is the first in the area of awareness and professional development, we are committed to continuing to bring the latest industry-driven initiatives to our members,” he added.
Commenting on the seminar, Dr. Mohamed Damak, head of Islamic Finance at S&P Global Ratings, said: “S&P Global Ratings is delighted to cooperate with CIBAFI on this training on banks and sukuk ratings. We are committed to providing such training sessions to enhance stakeholders’ understanding of our rating methodologies and promote transparency.”
Delegations from Bahrain, Bangladesh, Sudan, Saudi Arabia, Kuwait and the United Arab Emirates, as well as CIBAFI member institutions and regional regulators will engage in insightful discussions with senior directors from S&P Global Ratings.
The seminar topics have been prepared to cover areas including sovereign rating criteria, bank-specific rating factors, Islamic and conventional banking ratings and sukuk rating methodologies. Participants in the seminar will also discuss the sovereign ratings of the Gulf Cooperation Council (GCC) states, the future outlook for these countries and their banking sectors, as well as the risk assessment of each country, among many other topics.
This seminar is an initiative that is aligned with CIBAFI’s endeavor to enhance capacity building in the Islamic Financial Services Industry (IFSI) and increasing awareness and information sharing through partnerships between industry stakeholders and CIBAFI members, by the creation of a platform for face-to-face dialogue and closed-door discussions. It is also a part of the many initiatives by the S&P Global Ratings to provide market intelligence and develop Islamic financial market and credit ratings.
—AB/IINA
by admin | May 25, 2021 | Islamic Banking, News, Opinions
By:- Syed Zahid Ahmad for Maeeshat
In 2006 the RBI’s Working Group to examine the financial products used in Islamic banking mentioned that ‘as distinct from modern, conventional banking, Islamic banking due to its inextricable influence of religious doctrines has often evoked a sense of mysticism and curiosity’. RBI officials being financial professionals found it worth to analyze the products used under Islamic banking; nevertheless took ten years to make recommendation about Islamic banking for financial inclusion. RBI’s ruling about Islamic banking largely changed after Dr. Raghuram Rajan became RBI Governor. But the way State Finance Minister declined this proposal; one may guess that mysticism is still the roadblock for Islamic banking in India.
Government declared RBI’s proposal of Islamic Banking as irrelevant
On 9th December 2016 replying to a query about RBI’s proposal on Islamic banking, the State Finance Minister Shri Santosh Gangwar stated that on consideration of inter-departmental group report, it is observed that even to introduce limited products, various legal changes would be required. Moreover, the objectives of financial inclusion for which Islamic Banking was explored by RBI has no relevance, as Government has already introduced other means of financial inclusion for all citizens like Pradhan Mantri Jan Dhan Yojna, Pradhan Mantri Suraksha Bima Yojna, Pradhan Mantri Mudra Yojna etc. Earlier it was often asked that if countries like UK, France and Switzerland can adopt Islamic banking, why India can’t go for it? But we forget that unlike these countries India experienced worst communal riots during partition to get independence. Considering the socio – political sensitivity of Islamic banking, after few incidences of religious intolerances in recent past, it was not easy for the Government to approve proposal of Islamic banking.
Islam basically guides the humanity to make fair transactions
Based on level of economic development, the model of banking and finance for particular economy may differ from other. Historically the models of banking and finance have changed drastically. Institution of banking was not found during 7th century. Similarly the so called modern banking may not find place after 2175 because with digitalization of money we are changing way of financial transactions. Had Islam described any banking model in 7th century that would have observed unfit for 21st Century? Since Islam is a Godly defined standard art of living; meant for present and future civilizations; instead of prescribing any particular banking model for a particular economy, Islam through ethical principles guides the humanity to transact fairly at any point of human civilization. According to Islamic teachings accumulation of wealth through interest or by any unethical practice is prohibited; wealth should not be hoarded with misery; nor should circulate among the richer only. Islam also guides the humanity to attain economic growth by inducing need based expenditure. Islam also guides the humanity to provide support (from excess of wealth) to the poor and needy among relatives, neighbours, prisoners and wayfarers. Islamic teachings are so secular that even in practice like Zakat (specific financial prayer) fractional amount is provisioned for support to non Muslims also.
Islam has not guided any particular religious banking model
Islam being a religion for all humanity and not for Muslims only lays principles for all human beings. Since, no banking model is proved to be guided by Quranic Ayats or by practice of Prophet Muhammad ﷺ, or his companions, whosoever claims any particular model as Islamic banking may be attempting to present self defined model of Islamic banking otherwise. That’s why despite holding 32% asset of so called global Islamic banking asset, there is no bank on the name of Islam in Saudi Arabia. The term of Islamic banking is rather used by such bankers who intend to draw surplus capital hold by Muslims out of Saudi. Nevertheless need to access financial services without indulging in interest and other unethical practices is a genuine need for Muslims in India and around the world. With no provision of banking without interest in India, after observing upsurge trend in business of Islamic banking in more than 50 countries, Muslims in India considered it as a solution to get rid of interest. Thus Muslim community with less than one percent representation in the regulatory body (RBI) kept appealing for Islamic banking in India.
It took a decade for RBI to change its rulings about Islamic Banking
The story of Islamic banking in India began way back 2005 when RBI constituted an internal Working Group under Anand Sinha to examine financial instruments used in Islamic Banking. Report of this Working Group came in July 2006. This Working Group instead of interacting with Islamic banking professional, rather based on study of two theological websites concluded that “in the current statutory and regulatory framework it would not be feasible for banks in India to undertake Islamic banking activities in India or for branches of Indian banks abroad to undertake Islamic banking outside India.” But after Dr. Raghuram Rajan being appointed as RBI Governor, the Ministry of Finance requested RBI to give its considered opinion regarding feasibility of introducing Islamic Banking in India after examining all the legal, technical and regulatory issues relating to the matter. Accordingly, an Inter-Departmental Group (IDG) on Islamic banking was constituted in RBI and the report prepared by the Group was submitted to the Government during February 2016. RBI had also forwarded a Technical Analysis Report to the Government in December, 2015. On the basis of the recommendations of the IDG, it was suggested that a few products similar to conventional banking products may be considered for introducing through Islamic windows in the conventional banks after necessary notification by the Government. Also it was informed to the Government that once decided, RBI would undertake further work to put in place the operational and regulatory framework to facilitate introduction of such products by banks in India.
Calling Interest – free banking as Islamic Banking is a mistake
Considering the socio political fabric of India where Hindus are in majority, it is better to understand that interest is not forbidden for Muslims only, but also for other communities like Christians and Jews etc.. Interest is also not admired in Hindu and Budhist scriptures. Scholar L. C. Jain in his book ‘Indigenous Banking in India’ (published by Macmillan and Company, London in 1929) has written that “from the early Buddhist literature usury was held in contempt, as appears from the special law made against it by Vasishtha – the well-known law-giver of that period. The highest castes were not to be usurers, but the Vaishyas, who were traders, were excluded from the operation of the law. In the Jatakas also, the condemnation of usury can be seen; ‘hypocritical ascetics are accused of practising it”. So ideally Hindus Upper Castes and Buddhists should also refrain from dealing with interest. In short prohibition of interest should not be called as Islamic Banking. It may rather be counted as ethical issue mentioned in almost all religions and not only in Islam.
Banks are not primarily serving the poor and needy class
According to All India Report on Sixth Economic Census, self-finance is major source of finance for 80.1% establishments (46.86 million out of total 58.5 million) in India. It reflects scope for banks to financially support more Indian establishments. On the other data on size of bank credits suggests that not even one percent loan is granted in size between Rs. 2 to 5 lakhs. According to the Report on Fifth Annual Employment – Unemployment Survey 2015-16 whose average monthly income of 66.7% households is not more than Rs. 10,000 can hardly afford to apply for loan over Rs. 5 lakhs. It means banks are not providing one percent loans to 2/3rd of Indian households whose average monthly income is not more than Rs. 10,000. Households are not even drawing one percent bank loans. It is also observed that just 12.3% of total NPAs including write off and structured loans are upon micro industries compared to 55.2% upon medium and large industries. So, if banks want to reduce the NPAs, it is required that Indian banks should shift their focus for credit disbursement from medium and large industries to micro and tiny establishment.
Islam is not against secular fabric of Indian Finance
Indian capital market is largely Shariah compliant without any mystical practices in the stock market. Notably more non Muslims are users of Shariah index compared to Muslims. Similarly if we resolve to design and adopt micro equity products under banking network so as to financially support 50 millions micro and tiny establishments who are otherwise deprived of capital support, we can help India develop one of the best banking products. Besides allowing India to attain a better growth trajectory micro equity products may also create space for religious Muslims to participate in nation’s development. Products like Micro equity finance may allow Indian Muslims along with 50 million micro and tiny sized enterprises may find opportunity to access sought capital in secular manner.
Micro Equity Fund for 50 million Micro and Tiny Enterprises:
Around 50 millions micro and tiny size enterprises in India are deprived of financial scheme. They are too small in size to approach the specified MSE stock exchange. In most cases, the financial need of millions of micro and tiny enterprises (ranges between Rs. 1 to 5 lakhs) is falling below average finance extended by banks and above finance limit for MFIs. So, they are neglected segment in Indian finance. Hope the Government while promoting digital money, may like to support these neglected enterprises. If Government could help them by mode of micro equity finance through available network of banks, MFI and BCs in India, we may see upsurge in registered Udhyog Aadhar in near future. By now only 3.6% establishments are registered under Udhyog Aadhar. Ideally this number should be at least 80% of existing establishments reported by Economic Census.
Two Different modes of Micro Equity Finance:
There could be following two modes to extend Micro Equity Finance –
- Banker may invest fractional share in micro enterprises owned by any entrepreneur with option to buy back investors share periodically. Till the time investor possess unit share in the enterprises, the entrepreneur is supposed to proportionately share the earned profit / loss. This would allow the banker / financier to earn profit through investments along with optional disinvestments on monthly basis or otherwise after expiry of agreement period.
- Any asset (say Shop) be jointly purchased by the entrepreneur and banker; allowing the entrepreneur use the shop after paying monthly rent to the banker against outstanding unit shares in that asset. The entrepreneur should be allowed by the banker to buy back bank’s unit share in the asset at varied price on monthly / weekly basis. The entrepreneur should pay varied amount as rent to the banker according to bank’s outstanding share in the shop at particular month. After selling out all unit shares in the asset, the banker should execute release deed to transfer all legal rights in favour of the entrepreneur; and thereafter the entrepreneur need not require paying any rent to the banker.
Is there any observation report about Micro Equity Finance?
Yes! BASIX Social enterprise group has already taken lead into pilot for Micro Equity Finance in Mewat district of Haryana where actual repayment rate by bank customers are hardly 20%. Contrast to this fact, the repayment rate by customers served through Participatory Micro Finance model in same geography is 99%. BASIX group started the pilot of Participatory Micro Finance in July 2011. They directly finance the livelihood of target customers instead of sanctioning loan on interest. This process involves buying and selling of commodities (after adding profit) to the customers and allow repaying the whole amount in instalments. There were investments in assets by mode of diminishing partnership also. Recently this group initiated pilot project of micro equity in enterprises by mode of diminishing partnership wherein customers are allowed to buy back investors’ share on weekly / monthly basis. Though this pilot is too small and incomplete to cite, interestingly so far the outcome of this pilot is far better than actually projected. Though like any cash driven activity, demonetization has also adversely affected the repayment in this model; nevertheless the retrieved profit is much higher than scheduled profit during June to December 2016.
Micro Equity Finance as innovative product for micro enterprises
The limited scope to introduce Islamic banking product through equity mode in Indian market is in fact a very big opportunity. All we need to explore possible product sub categories for equity financing. This could be explored through portfolio management, mutual funds and equity financing (direct as well as through venture capital). There is scope to develop different need based products in Indian economy. Equity financing could be for listed / unlisted but registered (under MCA) companies. Equity could be simple equity or Diminishing Equity Finance. Even through Diminishing Equity Finance we can provide support to customers to accumulate capital in form of assets / network for companies.
Huge untapped market for Micro Equity Finance
So, there is huge scope for equity financing in India subject to work we do before presenting the prospects of equity financing for Indian economy and banking segment in a secular fabric without calling it Islamic or Shariah banking. The people who like to market it as Shariah banking can do it in their own pockets / markets to grab potential customers. But until Indian economy tastes the fruits of equity financing through banking network, it is very crucial that financial experts proposing equity finance to Indian banking segment should not propagate concept of Islamic Banking. Once the equity finance yields better returns than other asset side products used under conventional banking, the banks would self demand for some more innovative products that could bring better returns.
Challenges for Micro Equity Finance in India
There are still some challenges to propose equity financing in India. The banking segment has very little experience in equity financing and majority of genuinely needful customers are not eligible to approach banks or stock markets for equity finance. Considering the limited to finance less than 30% of paid up capitals through equity investments, it would be a better way to suggest banks to invest in financial institutions or cooperatives having reach to poor and needy customers actually deserving the micro equity finance. Besides limitation to invest less than 30% paid up capital, banks also need to assure better returns with minimum NPAs. Considerably the fact that just 12.3% bank’s NPAs (including write offs and restructured loans) are with micro industries against 55.2% NPAs with medium and large industries; banks may like to reach more micro and tiny establishments through MFI or cooperatives. These institutions may not be constrained through cap of investing less than 30% paid up capital. Banks can reach to maximum unbanked people with better returns and lesser NPAs.
Micro Equity Finance may help creating transparent economy
So, in short we have to propose a new strategic plan to boost financial inclusion for inclusive growth so that more capital should flow to poor and deprived communities. We have to suggest means to reduce banks NPAs and increase returns without exploiting the borrowers. We also need to link equity financing with digital payment where transparency is at par level and does not allow corruptions. We should propose to suggest that x amount of equity promoted y amount of value addition after c amount of consumption and i amount of capital accumulation. Hope we will professionally present our modified concept in Indian economy.
Micro Equity Finance may help India reform domestic economy
Islam is a secular religion based on Godly prescribed guidelines to make a justified economy to live in. Islam has not prescribed any particular model of banking; but set principles to do transactions without exploiting anyone. The financial products based on equity can be introduced as pilot project in India without any legal problem. There is huge untapped market for micro equity finance in India where around 50 millions micro and tiny enterprises are deprived of finance from formal financial sources including banks and stock markets. Micro equity finance may not just enable millions of unorganized sector enterprises, but also enable us to know how much value addition is done through micro equity extended to micro enterprises. Through micro equity finance we may also be able to make better estimate for capital formation in our economy. This product can better support digital monetary transactions and may also be supportive to launch transactional tax in future. At last micro equity finance can not only support the poor workers engaged as own account workers in the unorganized sector, but also enable millions of Muslims deal freely along with maintaining secular fabric of Indian finance.
by admin | May 25, 2021 | Islamic Banking, News, Opinions
In spite of RBI’s green signal, the government says No ?
Dr Raja Muzaffar Bhat
Before handing over his charge to present RBI Governor Urjit Patel, former Governor of Reserve Bank of India Raghuram Rajan had proposed working with the Government to introduce Islamic Banking (interest-free banking) to tackle financial exclusion of a vast Muslim population, who for religious reasons do not go for traditional banking.
RBI in its 2016 annual report had given its clearance for opening Islamic Banking windows across India. The proposal in this regard was seen as a major shift in the stance of Reserve Bank which earlier had said that Islamic finance could be offered through non-banking channels like cooperative societies and other investment models.
Before the RBI recommendations could be discussed by Government of India, Union Finance Ministry recently said that Islamic banking was not relevant any more in achieving the objectives of financial inclusion as the Government has already introduced several programmes for all citizens towards financial inclusion. In his written reply to the Lok Sabha, Union Minister of State (MoS) for Finance Santosh Kumar Gangwar said various legal changes are needed if even limited products were to be introduced under Islamic banking.
“RBI had set up an inter-departmental group on Islamic Banking. Entire exercise was aimed at promoting financial inclusion, accessing huge market potential to attract finance from Gulf countries for infrastructure development. However, on consideration of inter-departmental group report, it is observed that even to introduce limited products, various legal changes would be required” MoS Finance Santosh Gangwar told Lok Sabha in the recently concluded session of parliament. Gangwar further said that objectives of financial inclusion for which Islamic Banking was explored by RBI has no relevance, as Government has already introduced other means of financial inclusion for all citizens like Pradhan Mantri Jan Dhan Yojna, Pradhan Mantri Suraksha Bima Yojna, Pradhan Mantri Jeevan Jyoti Bima Yojna, Pradhan Mantri Mudra Yojna etc. Pertinently RBI’s Deepak Mohanty committee in its report posted on the RBI website on December 29, 2015 had recommended that banks open a separate window offering interest free Sharia compliance (Islamic banking) deposits and advances to address financial exclusion based on faith. Mohanty was fully aware of these programmes and digital banking etc., but he still voiced for Islamic Banking and that should be an eye opener for Modi Government. It is estimated that 180 million Muslims in India are unable to access Islamic banking because of non-availability of interest free banking. RBI in its report had said it would explore to introduce interest-free banking products in consultation with the government, but before the consultation could be held , Government of India derailed this whole process.
What experts say :
Syed Zahid Ahmad, Founder of Economic Initiatives
Syed Zahid Ahmad, Founder of Economic Initiatives a Mumbai based advocacy group on Islamic banking has been networking with several Government and Non Government organisations on adoption of Interest free banking in . In his letter to Mr Santosh Gangwar Minister of State (MoS) Finance Govt of India, Zahid said that as an Indian Muslim he was shocked to know about MoS Finance’s observation on RBI’s proposal to allow Interest-free banking windows in India. “We had been hopeful to get positive support from Government over RBI’s proposal presented for financial inclusion of Indian Muslims. Politically we may differ but as a nation we all are Indians and must protect each other’s interest. I request you to kindly review your observation about interest-free windows after listening our concerns in national interest and through good governance kindly allow us to feel that Sabka Saath Sabka Vikas is really meant to ensure socio-economic justice for all Indians irrespective of the region or religion we belong to” reads Zahid’s letter
Amidst all difficulties caused after demonetization and fear of declined income and employment opportunities in near future, Muslims feel that December 9th, 2016 is a black day for them when BJP led Government ruined their hopes to avail required finance in future through interest-free windows. “It seems Government was already under pressure of Shiv Sena for genuine critics over demonetization. The plea submitted by Shiv Sena M.P. Shri Chandrakant Baburao Khaire during zero hour in the Lok Sabha for not allowing “Islamic window” in the banking system might have added pressure for the Government. Thus on Friday, 9thDecember 2016 when Smt. K. Maragatham from AIADMK raised her queries about Islamic windows in banking sector, you perhaps in a desperate mood ruled out RBI’s proposal of interest-free banking windows in India for financial inclusion” Zahid’s letter further reads
Conclusion:
Sachar Committee in its 2005 report said that Muslims had 7.4% share in saving deposit amounts with Scheduled Commercial Banks (SCBs) against 4.7% share in Priority Sector Advances (PSA) outstanding amounts. Besides other factors, main reason for this loss is that Muslims are not able to get interest-free finance from banks. This huge financial loss is putting Indian Muslims economically far behind other communities. If we really want to achieve inclusive growth, we have to ensure financial inclusion among Muslim community. On one side Modi ji gives slogan of “Sabka Saath Sabka Vikas” but when he has to handhold Muslims for achieving this dream, Government ignores them by disallowing interest free banking in India.
The article first appeared in Greater Kashmir. Courtesy: http://www.greaterkashmir.com/news/opinion/blow-to-islamic-banking-in-india/239549.html
by admin | May 25, 2021 | Islamic Banking, News, Opinions
Dr Shariq Nisar
By Dr Shariq Nisar
Shariah banking, PLS banking, Ethical banking, Interest-free banking are different names used to identify Islamic banking which primarily works without relying on interest mechanism. Interest is strictly prohibited in Islam and therefore many countries especially those where Muslims live in majority have developed an alternate way of banking where profit is earned by banks through trade and investments rather than pure lending. Since early nineties, many developed countries took great interest in this new form of banking to attract investments from energy rich Arab world and also to improve financial inclusion of the domestic population which was hitherto shying of making full use of banking facilities due to religious concerns.
In India, while interest-free institutions can be traced prior to the country’s independence the real effort by Indian Muslims began during first non-congress government in 1970s. Nothing happened as the idea of Islamic banking itself was under formative stage then. Unrestrained proliferation of NBFCs in early 1990s saw the emergence of many community led institutions that claimed to work on Islamic principles of shunning interest and sharing of the risk and rewards with shareholders and depositors. In late nineties, RBI introduced large scale changes in NBFC regulations which eventually led to closure and collapse of hundreds of NBFCs in the country including some prominent Islamic NBFCs. After the new NBFC regulations the only Islamic Finance Company that survived was Kerala based Alternative Investments and Credits Ltd. (AICL). In 2009, Kerala Government tried to copy this model by promoting an Islamic NBFC (Al-Baraka Financial Services Ltd.) that would work without indulging in interest. The idea was to seek investments from public and some rich NRIs and use the funds to develop infrastructure in the state. All those contributing funds would be paid dividend instead of interest. Very soon a PIL was filed against Al-Baraka on the following counts:
- Forming an Islamic finance company was a clear instance of state favoring a particular religion;
- Taking advice from scholars of a particular community (Shariah Scholar) shows the identification of state with a particular religion to the exclusion of other faiths;
- Shariah prohibition of interest, alcohol and others are against the constitutions of India
The lower court ordered immediate stay of the company’s operation but Kerala High Court after hearing the views of Central Government, Reserve Bank of India and several others finally dismissed the petition filed against the company and paved the way for India’s first company promoted by government to do business on Islamic principles.
However, it’s worth noting that RBI stood in support of the petitioner arguing in the court that Islamic banking cannot function under Indian financial regulations. Prior to this RBI in its Working Group Report in 2005 (more popularly known as Anand Sinha Committee Report) had concluded that Islamic banking is not possible within existing Indian finance regulations. The same position was reiterated by the RBI Governor at a public function in 2012.
“The banking act doesn’t conform to Islamic banking because it allows banks to borrow from and deposit money with RBI on Interest” (D Subbarao, Governor RBI, Times of India October 4, 2012).
To prove its position RBI canceled the NBFC license of AICL on the allegation that AICL violated RBI’s prescription of fair interest practice code. This was very surprising as RBI had given license to the company based on the proposal that company would work on the basis of profit and loss sharing instead of interest. The company since has gone to the court where the matter is still pending.
The change in RBI’s leadership in 2013 brought some fresh thinking which probably led RBI to develop a positive impression of the concept. First it was Deepak Mohanty Committee that in December 2015 recommended that;
“commercial banks in India may be enabled to open specialized interest-free windows with simple products like demand deposits, agency and participation securities on their liability side and to offer products based on cost-plus financing and deferred payment, deferred delivery contracts on the asset side”.
And thereafter an RTI query has revealed that RBI has written to the government regarding gradual introduction of Islamic banking in the country. Media went gung-ho in praising this move of RBI as sign of new government’s commitment to “Sabka Saath Sabka Vikas” but soon all euphoria died when the Union Finance Ministry declared that Islamic banking was not relevant any more. The Minister of State for Finance Mr. Santosh Kumar Gangwar replied in the Loksabha that various legal changes would become necessary if even limited products were to be introduced under Islamic banking.
One fails to understand the logic behind not allowing a banking model that is practiced in nearly 75 countries of the world including some of the most secular, democratic and advanced.
| Time Line (Islamic Banking and Finance in India) |
Year |
| RBI appoints Anand Sinha Committee for studying Islamic Financial Products |
2005 |
| Raghuram Rajan Committee recommends Interest-free banking for financial inclusion |
2008 |
| Ministry of Minority Affairs invites bids for reconstruction of National Minority Development Finance Corporation (NMDFC) on shariah Lines |
2008 |
| SEBI permits India’s first shariah compliant Mutual Fund Scheme |
2009 |
| SEBI permits India’s first shariah compliant Venture Capital Fund |
2009 |
| GICRe enters Retakaful (Islamic reinsurance) in the foreign reinsurance market. |
2009 |
| Government of Kerala announces starting of an Islamic NBFC |
2009 |
| BSE and TASIS launch BSE-TASIS Shariah 50 Index |
2010 |
| Kerala High Court dismisses petition filed against Kerala-based Islamic finance company |
2011 |
| RBI cancels license of Islamic NBFC |
2012 |
| RBI Constituted an Inter-Departmental Group (IDG) on Islamic Banking to understand the feasibility of introducing Islamic banking in India |
2013 |
| SBI defers the launch of Shariah Equity Fund |
2014 |
| RBI Recommends Introduction of Interest-free Banking by Indian Commercial Banks |
2015 |
| RBI’s Inter-Departmental Group (IDG) on Islamic Banking submits its Report to the Government of India |
2016 |
