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Islamic Banking hopes quashed by RBI: Why it refused to allow shariah compliant banks in India?

ViewsHeadlines Desk,

New Delhi: Finally the cat is out of hat. Reserve Bank of India (RBI) that had been looking very open to allowing Islamic banking in India has categorically said that it will not allow Islamic banking in the country. The news has come as a rude shock to many.

India’s central bank had looked rather very enthusiastic about the prospect of allowing Islamic banking in the country, given the demand from an increasingly assertive Muslim business community. Besides, Islamic banking made sense as it would have brought millions of Muslims who abhor interest based economy into the mainstream banking making the Indian banks richer by billions of dollars.

In reply to an RTI, the Reserve Bank of India said that it has taken the decision after considering “the wider and equal opportunities” available to all citizens to access banking and financial services.

For the last several years, the Reserve bank of India has been contemplating to allow interest free Islamic banking in India. Earlier this year, India’s bankers’ bank said it was ready to allow setting up of Islamic banks and establishment of branches of Islamic banks in different parts of the word. The latest decision comes as a blot from the blue.

RBI, while replying to the RTI query said, “Taking into account, the wider and equal opportunities available to all citizens to access banking and financial services, it has been decided not to pursue the proposal further”.

The RBI was asked to provide details of steps being taken for the introduction of Islamic or ‘interest-free’ banking in India. Prime Minister Narendra Modi had on August 28, 2014 launched Jan Dhan Yojana, a national mission to bring about comprehensive financial inclusion of all the households in the country. In late 2008, a committee on Financial Sector Reforms, headed by former RBI governor Raghuram Rajan, had stressed on the need for a closer look at the issue of interest-free banking in the country.

Raghuram Rajan led committee had demanded the government and the RBI to allow the Islamic banking in the country. “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,” the committee had said.

It is rather surprising as to how the RBI can ignore all the previous recommendations made by different committees of the central bank. Till a few months ago, it was giving indication that the Islamic banks will be allowed to function in the country, and now it has dashed all such hopes.

RBI had been working on Islamic banking for years. On the instruction of the central government, an inter-departmental group (IDG) set up in the RBI examined the legal, technical and regulatory issues for introducing interest free banking in India and has submitted its report to the government. The RBI had in February last year sent a copy of the IDG report to the finance ministry and recommended an “Islamic window” in conventional banks for gradual introduction of Sharia-compliant banking. “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.


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