Islamic Banking: RBI Proposes To Open ‘Islamic Window’ In Conventional Banks

Reserve Bank of India, has reportedly proposed opening of “Islamic window” in conventional banks for “gradual” introduction of Sharia-compliant or interest-free banking in the country.

In a reply to RTI query by PTI, the RBI has responded as follows: “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…Initially, a few simple products which are similar to conventional banking products may be considered for introduction through Islamic window of the conventional banks after necessary notification by the government…. Introduction of full-fledged Islamic banking with profit-loss sharing complex products may be considered at a later stage on the basis of experience gained in course of time.”

In its letter to Finance Ministry, RBI has stated thus: "In case it is decided to introduce Islamic banking product in India as suggested, RBI would require to undertake further work to put in place the operational and regulatory framework to facilitate introduction of such products by banks in India."

What is Islamic Banking?

The Organization of Islamic Conference (OIC) defined Islamic banking as “a financial institution whose statutes, rules and procedures expressly state its commitment to the Principles of Islamic Shariah and to the banning of the receipt and payment of interest on any of its operations “   Read more about Islamic Banking and a discussion about its Constitutionality here.

Kerala High Court on Islamic Banking

In 2011, Dr.Surbahmaniam Swamy had challenged the Kerala Government’s decision to co-promote an Islamic finance institution. The High Court observed that it would be illogical to restrict the commercial interaction of the State even with a religious denomination, on the ground that it is inconsistent with the declaration that the State should be a ‘Secular Republic’. The Court also held that there is no constitutional infirmity in the impugned action of Government of Kerala observing that the Constitution of India does not adopt the doctrine of “Wall of separation”. It was also held that the act of the Government of Kerala is not violative of Article 27 as the intention of the Government is to employ the returns from the business activities for the general welfare of the State of Kerala and not for any religious purposes.

This article has been made possible because of financial support from Independent and Public-Spirited Media Foundation.