RBI Says NO To Islamic Banking

Islamic banking not possible: Subbarao

KOCHI: Islamic banking won't be possible in the country due to legal problems, RBI Governor D Subbarao has clarified. 

Kerala is the only state that has been pursuing the possibility of Islamic banking in the country, Subbarao told reporters in Kochi on Thursday. "It is possible that other states (may) have approached RBI, but Kerala has been rather actively pursuing it. We have written to the government of India regarding what necessary amendments are needed, or indeed there must be a separate law for Islamic banking," he said. 

"While chief minister Oommen Chandy met me last time, he said that there are lots of non-resident Keralites living outside the country, especially in the Middle East, who want to contribute to the development of Kerala. There should be some channel of that money into Kerala and the model suggested by the state government was Islamic finance. We appreciate the objective behind that interest, but there are some legal problems in the RBI allowing Islamic banking, which has a prohibition against charging interest rates," Subbarao said.

"However, the restriction on Islamic banking could be got around not through banking but through other models, which we have suggested to the Kerala government. So Islamic banking is not possible, but there are other vehicles which follow Islamic banking principles through which money can be channelled from outside," Subbarao said. 

Two years ago, the issue of granting Islamic banking licences was revived with prime minister Manmohan Singh stating in Malaysia that he would ask RBI to examine the demand. A few months later in February 2011, a division bench of the Kerala High Court dismissed a petition by Janata Party president Subramaniam Swamy against the government's sanction to an Islamicfinance company promoted by the Kerala State Industrial Development Corporation on the grounds that it went against secular principles. 

In June this year, the National Commission for Minorities made a case for introducing interest-free Islamic Banking in India, which resulted in the government again referring the matter to RBI. 

In his monetary policy in October, Subbarao had said that Islamic banking was not possible since the concept of interest payment was ingrained in present regulations. "RBI charges interest on the liquidity support it provides to banks and also pays interest on funds that banks deposit with us," he had said.

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