RBI proposes ‘Islamic window’ to gradually introduce Sharia banking
With the proposal of opening ‘Islamic window’ by the Reserve Bank of India (RBI) in conventional banks for ‘gradual’ introduction of Sharia-compliant banking, both the Centre and RBI are exploring the possibility of introduction of Islamic banking to ensure financial inclusion of those sections of the society that remain excluded due to religious reasons.
“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.
“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,” the RBI has told Finance Ministry in a letter, a copy of which was received in response to an RTI query filed by a media agency.
Interestingly, Islamic or Sharia banking is a finance system based on the principles of not charging interest, which is prohibited under Islam.
“It is also our understanding that interest-free banking for financial inclusion will require a proper process of the product being certified as Sharia compliant will be required both on the asset and liability side and the funds received under the interest-free banking could not be mingled with other funds and therefore, this banking will have to be conducted under a separate window,” it said.
Reportedly, the central bank’s proposal is based on examination of legal, technical and regulatory issues regarding feasibility of introducing Islamic banking in India on the basis of recommendation of the Inter Departmental Group (IDG).
RBI has also prepared a technical analysis report which has been sent to the Finance Ministry. However, RBI has also said if the decision is finalized, it would require to undertake framework etc and work area which include operationalisation of Sharia boards and committees, feasibility of extending deposit insurance to Islamic banking deposits, identifying the financial risk and suggesting appropriate accounting framework for these products,.
The copy of IDG was also sent to FInance Ministry is February this year, which said that RBI also needs to work on finalizing appropriate criteria for Islamic products in addition to what would be determined under Sharia.
In its annual report for 2015-16, the central bank had said that some sections of Indian society have remained financially excluded for religious reasons that preclude them from using banking products with an element of interest. And proposed to explore the modalities of introducing interest- free banking products in the country in consultation with the government.
However, the plan for Sharia bank was opposed by certain political and non-political groups.