Reserve Bank proposes ‘Islamic window’ in traditional banks for gradual introduction of interest-free banking

November 20, 2016, 5:05 pm
Reserve Bank proposes ‘Islamic window’ in traditional banks for gradual introduction of interest-free banking
BUSINESS NEWS
BUSINESS NEWS
Reserve Bank proposes ‘Islamic window’ in traditional banks for gradual introduction of interest-free banking

Reserve Bank proposes ‘Islamic window’ in traditional banks for gradual introduction of interest-free banking

The Reserve Bank of India (RBI) has proposed opening of ‘Islamic window’ in conventional banks for ‘gradual’ introduction of Sharia-based interest-free banking system in the country.

This proposal was adopted in an attempt to ensure financial inclusion of those sections of the society that remain excluded due to religious reasons, RBI officials said.

Towards mainstreaming these excluded sections, it is proposed to explore the modalities of introducing interest- free banking products in the country in consultation with the government
RBI

In a reply to an RTI query filed by PTI, the Reserve Bank has responded that introduction of full-fledged Islamic banking with profit-loss sharing may be considered at a later stage on the basis of experience gained in course of time.

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
Reserve Bank of India

Islamic 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
RBI 

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. 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.

In 2008, a committee on Financial Sector Reforms, headed by former RBI Governor Raghuram Rajan, had opined the need for a closer look at the issue of interest-free banking in the country.