Islamic Banking: State to benefit from RBI move

Published: 05th August 2016 05:32 AM  |   Last Updated: 05th August 2016 05:40 AM   |  A+A-

KOCHI: Finally, there is good news for the State from the Reserve Bank of India (RBI), on the financial front.

Kerala is the only state in India that dared to experiment with the Islamic Finance route, way back in 2000. The Alternative Investments and Credits Limited (AICL), which started operation in Kochi then, is defunct now. The company functioned until April 23, 2012, when the RBI cancelled its certificate of registration.

In August 2013, in another attempt at interest-free banking, the Cheraman Financial Services promoted by the KSIDC and NRIs started operation in Kochi. Now, giving hope to the Islamic Banking concept, the RBI is considering the prospects of introducing a few products similar to conventional banking products through the Islamic window of conventional banks, after the necessary notification by the government.

Though the RBI has not specified any time frame for the launch of the products, the State will clearly have an ‘early-bird’ advantage in the sector.

Experts point out that lease finance, Murabaha (in which an intermediary buys property with free and clear title), infrastructure development fund and venture capital are the products that would be  floated under the Islamic arm of conventional banks.   “The RBI will undertake further work to put in place the operational and regulatory framework to facilitate introduction of Islamic banking products through banks in India,” said the central bank in an RTI reply.

In 2013, the Ministry of Finance had requested the RBI to give its opinion on the feasibility of introducing Islamic Banking in India. Accordingly, an Inter-Departmental Group (IDG) on Islamic Banking was constituted in the RBI, and the report prepared by the IDG was submitted before the government in February 2016. In December 2015, the RBI forwarded a technical analysis report based on the recommendation of the Group to the government.

Welcoming the RBI’s move to allow Islamic financial products through existing banks, AICL former chairman Mohammed Ali termed it a ‘path-breaking’ initiative by the RBI.

“There is space for a parallel banking system in the country, based on the concept of ‘interest-free banking.’ World-over, only one per cent of the total assets is managed by Islamic banks. In India, the products would provide an alternative route to customers to avail of finance,” he said. The case pertaining to cancellation of the AICL’s registration of is currently pending before the Mumbai High Court, with the status ‘admitted’.

66 applications pending

As on June 30, 2016, the total number of applications pending before the RBI for starting NBFCs in India is 66. Of all the applications, 38 are pending at the central office, while the remaining 28 are pending at regional offices. However, the Reserve Bank of India has not received any application to start Islamic NBFCs.


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