RBI proposes 'Islamic window' in banks for gradual introduction of Sharia banking

The Reserve Bank of India (RBI) has proposed opening of "Islamic window" in conventional banks for "gradual" introduction of Sharia-compliant or interest-free banking in the country.

The central government has also been exploring the possibility of introduction of Islamic banking for long to ensure financial inclusion of those sections of the society that remain excluded from banking services due to religious reasons.

"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.

"Introduction of full-fledged Islamic banking with profit-loss sharing complex products may be considered at a later stage on the basis of experience gained in course of time," reports quoting an RBI letter to the finance ministry said.

Islamic or Sharia 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," it said.

The RBI proposal is based on the recommendation of the Inter Departmental Group (IDG), which looked into the legal, technical and regulatory issues regarding feasibility of introducing Islamic banking in India.

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," the letter said.

Introduction of Islamic banking would require operationalisation of Sharia boards and committees, study of feasibility of extending deposit insurance to deposits under Islamic banking, identifying financial risks and suggesting appropriate accounting framework for products, RBI had pointed out in the letter to the finance ministry in December.

RBI also said it would have to work on formulating suitability and appropriate criteria for Islamic products in addition to what would be determined under Sharia.

The central bank in its annual report for 2015-16 had said that some sections of Indian society have remained financially excluded because interest is considered taboo for religious reasons.

"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," it had said.

The move for Sharia-compliant banking was opposed by mainstream banks as interest-free lending will sound the end of banking that is based on interest and interest margins.

Earlier, a committee on Financial Sector Reforms, headed by former RBI Governor Raghuram Rajan, set up in late 2008, had pointed to the need for a closer look at the issue of interest-free banking in the country.

The committee had said, "Certain faiths prohibit the use of financial instruments that pay interest. The non- availability of interest-free banking products 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 the country access to substantial sources of savings from other countries in the region," the panel had stated.