Kerala government seeks SEBI nod Islamic law-compliant NBFC

After it failed to push through what was termed as the country's first Islamic bank, after the banking regulator Reserve Bank of India (RBI) rejected the proposal, the state government of Kerala is now planning to launch a non-banking finance company (NBFC), which it says, would offer Shariah-compliant private equity, venture capital, portfolio management services and mutual funds.

T Balakrishnan, additional chief secretary, government of Kerala, said while speaking on the sidelines of a conference organised by the Indo-Arab Chamber of Commerce and Industries that the government was seeking regulatory approvals from the Securities and Exchange Board of India (SEBI), which had the power to grant such licences for capital market products.

''However, we will continue talks with the Reserve Bank of India (RBI) for getting an NBFC licence to offer interest-free lending too,'' he added.

In Islamic Shariah-compliant lending, the NBFC, instead of giving an interest bearing loan to a borrower to acquire an asset, would purchase the asset itself and lease/hire it out to the borrower in return for a rental.

The Kerala government had mooted the idea of establishing such a bank under an entity registered as Al-Baraka Financial Services, in December 2009. The bank would have a body of Islamic scholars to advise whether the principles of Shariah were being complied with.

However, its plans to launch an Islamic bank failed to materialise as the RBI said that present banking laws did not allow setting up of an Islamic bank as Islamic banking was based on the principles of neither receiving interest nor giving interest.