Frame new law for Islamic banking: RBI
Oct 30 2012 , Mumbai
The governor was answering a question on Islamic banking in a press conference after announcing the second quarter review of the Monetary policy 2012 on Tuesday.
“The current Banking Regulation Act does not permit Islamic banking as the interest component here (in India) is an important one. We cannot allow banks to take risk position in a company’s business (which is there in Islamic banking). Also, regulation (of banks) in case of Islamic banking is through a Shariah board, som there are a number of issues...,” said Subbarao.
“Should the government intend to carry Islamic banking, there will have to be a new law for this,” he added.
According to principles of Islamic banking, interest is not allowed under Shariah law as it’s equated with usury. Instead, lenders get a share of any profit made by the borrower, while having to absorb any losses.
H Abdur Raqeeb, convenor, National Committee on Islamic Banking and general secretary, Indian Centre for Islamic Finance, said, “No new law is required for launching Islamic banking in the country. The government, by passing an executive order, can accommodate participatory Islamic banking in the same Banking Regulation Act as done in United Kingdom, Singapore and Japan. However, tax laws would need to be amended.”
“In 2008, a high level committee on financial sector reforms headed by Raghuram Rajan (at present, the chief economic adviser) had said that interest-free finance can be introduced in the country’s banking system without any systemic risks,” added Raqeeb.
The finance ministry had recently written to RBI asking it to examine the possibility of making the interest-free model part of India’s banking system.