Mumbai: After years of uncertainty and denial, the Reserve Bank of India (RBI) has decided to open its doors to Islamic banking. This is going to bring close to 200 million Indian Muslims into the mainstream banking system.
Islamic banking is a lucrative business across the world and many Middle Eastern, European, Asian and African nations offer Islamic banking services to their customers. Top of the line banks across the world earn hundreds of billions of dollars through the shariah complaint way of banking that is religiously correct for Muslims.
Islam is vehemently opposed to interest. It claims that interest system is inherently oppressive and makes poor poorer. Not just Islam doesn’t allow taking and paying interest, it completely bars banning interest or keeping record of interest.
Thus it is no wonder that many Muslims are opposed to the modern banking and even if they use the banking services they avoid taking the interest amount from their banks. Some theologians have now said that Muslims should take the interest money from banks, but instead of consuming it on them or their family, they should give it in charity.
There are reasons to believe that the Reserve Bank and the government are exploring introduction of interest-free banking, also known as Islamic Banking, to financially include sections of the society that remains excluded due to religious reasons.
In its annual report 2015-16 the RBI said, “Some sections of Indian society have remained financially excluded for religious reasons that preclude them from using banking products with an element of interest. Towards mainstreaming these excluded sections, it is proposed to explore the modalities of introducing interest- free banking products in the country in consultation with the government”.
Islamic or Sharia banking is a finance system based on the principles of not charging interest, which is prohibited under Islam. Earlier this year, Jeddah-based Islamic Development Bank (IDB) had announced it will open its first Indian branch in Ahmedabad. India’s Exim bank had signed an MoU with IDB for a USD 100 million line-of-credit to facilitate exports to IDBs 56 member countries. This plan of Saudi Arabia-based bank was opposed by the Vishwa Hindu Parishad. In past as well, this concept has faced opposition from some political sections.
There is no denying that on international level, Islamic banking has witnessed a significant increase, especially in the wake of the financial crisis. It could be noted that in late 2008, a committee on Financial Sector Reforms, headed by Raghuram Rajan had opined the need for a closer look at the issue of interest-free banking in the country. The committee had said, “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.” “This non-availability also denies the country access to substantial sources of savings from other countries in the region,” the committee had said.
Nonetheless the decision to implement on the ground will be difficult one as saffron organizations have inherently opposed it due to the Islamic tag. Hope Prime Minister Modi is able to convince them that it will be good for them too.
Last December, a committee on ‘Medium-term Path on Financial Inclusion’, headed by RBI’s executive director Deepak Mohanty had also recommended that commercial banks in the country may be enabled to open specialised 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.