Frame new law for Islamic banking: RBI

Tags: Banking
Putting an end to the speculation on allowing Islamic banking in the country, the Reserve Bank of India (RBI) governor, D Subbarao on Tuesday said the current Banking Regulation Act does not permit Islamic banking and that the government will have to bring in a new law if it wants to introduce it in the country.

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.

RBI has been so far not in

RBI has been so far not in favour of Islamic Banking. Yesterday RBI Governor following statement published in Times of India Newspaper is appointing those who expect RBI believes in finding optional means and ways to regulate and facilitate banking services.

“The central bank had also received a proposal to consider whether it was possible to permit Islamic banking in India.”Current banking regulation requires interest rates. RBI charges interest on the funds it provides banks under repo and it also pays interest. Also, we do not permit risk financing while Sharia finance takes a position on this. There is the issue of dual regulation by Sharia board and RBI. We have said that should the government want this, they should have a new law" said Subbarao.”

Countering the first excuse, all should know that Section 17 (1) of the Reserve Bank of India Act 1934 states that the bank shall be authorized to accept money on deposit without interest from and the collection of money for the central and state governments, local authorities, banks and other persons.

Countering the second excuse we all are facing trouble today because of risky financed extended by interest based banking and financial system. RBI Governor seems denying the lessons we learned from the global financial crisis and recession thereafter that banking and finance without sound principles has shifted financial risks over others and at last collapsed because no one was to share the risk. Principle behind Islamic banking promotes sharing of risks instead of shifting it upon others. It does not mean Islamic banking finances risk projects. In fact Islamic finance prohibits financing activities involving high speculations and uncertain risks. But one can only discuss and analyze the model if there is any will to do so. One cannot force any monetary regulator by adopt any new model if they are not ready to do so.


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