PM to seek RBI’s views on Islamic banking

KUALA LUMPUR: Prime Minister Manmohan Singh on Wednesday said that he would ask RBI to take a look at the demand for establishing Islamic banking in India. Mr Singh, who was responding to a query on the subject at a press conference he addressed along with Malaysian Prime Minister Najib Razak, said he would seek the Central bank’s views on the matter. Malaysia has also issued licences to banking institutions to conduct Islamic banking. The statement is significant as it comes in the backdrop of the RBI governor D Subbarao’s statement that Islamic banking cannot be allowed within the current rules of the RBI. “With the present set Banking Regulation Act, Islamic banking just cannot take place as many of the banking principles in place are based on interest payments. However, Islamic banking is possible through a separate legislation,” Mr Subbarao had told reporters.

It must be recalled that the Kerala High Court had recently asked Kerala’s CPM-controlled state government to keep away from a new company that registered under the Sharia laws of banking. Former Union Minister Subramaniam Swamy had petitioned the court against the Kerala State Industrial Development Corporation taking the lead to start an Islamic bank with private players. According to the proposal mooted by the Kerala government, the bank would not pay any interest to customers, while a Sharia board would decide what sort of investments it would make. The proposed bank was supposed to have Sharia-compliant banking products, and profits made out of the investments would be distributed to the shareholders.

In his PIL, Mr Swamy had said that public money was being appropriated for favouring a particular religion in a secular country, as KSIDC, an arm of the state, offered to take 11% stake in the bank.

A section of “liberal” opinion within the country is backing the idea. Jurists like VR Krishna Iyer are of the view that Islamic banking, that prohibits levying of interest, are humanistic in nature.