Interest-free banking in India?

Source: CPI Financial

In March this year Minister of State for Finance Namo Narain Meena told the Rajya Sabha (Council of States – the upper house of the Indian Parliament) that he had been informed by the central bank, the Reserve Bank of India, that ‘it is not legally feasible for banks in India to undertake Islamic banking activities’. This was not the first time that the idea of Islamic finance had been knocked back in what is, after all, the country with the world’s third largest Muslim population.

It is, on one level, strange that India has yet to act on the following proposal in the 2009 report by the Committee on Financial Sector Reforms led by economist Raghuram Rajan. Without mentioning ‘Islamic banking’ by name it did suggest the need for the provision of interest-free banking, noting that, “Certain faiths prohibit the use of financial instruments that pay interest. The non-availability of interest-free banking products (where the return to the investor is tied to the bearing of risk, in accordance with the principles of that faith) results in some Indians, including those in the economically disadvantaged strata of society, not being able to access banking products and services due to reasons of faith. This non-availability also denies India access to substantial sources of savings from other countries in the region.”

It would be foolish not to recognise that the provision of faith-based finance in India is a politically-charged issue and yet one in 10 of the world’s Muslims live in India and the country’s Muslim population is forecast to rise to 236.2 million by 2030, 15 per cent of the total population.

Attempts to introduce financial services modelled on Islamic products have failed to take off so far on the twin stumbling blocks of regulatory issues and political opposition.  Indeed, it would seem the Reserve Bank of India itself has a track record of firmly (but politely) rejecting the prospect of Islamic finance every few years.

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