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Can’t share details of govt response on interest-free Islamic banking: RBI

Tuesday February 28, 2017 12:43 PM, & Agencies

Islamic Banking

New Delhi:
The response given by the Finance Ministry on a Reserve Bank of India (RBI) report about the introduction of Sharia banking in India cannot be disclosed, the central bank has said.

The RBI was asked to give the copy of the letter sent to it by the ministry on the recommendation of its Inter Dept. Group (IDG) regarding Islamic banking.

The central bank had sought response from the Dept. of Financial Services (DFS) under the finance minister whether their letter can be disclosed under RTI.

“In this regard we have been advised by the DFS, Govt of India that the letter is exempt under Section 8 (1) (c),” RBI said in response to an RTI application filed by PTI.

The Section bars disclosure of information “which would cause a breach of privilege of Parliament or the state legislature”.

The Union Finance Ministry had informed the Parliament in December that Islamic banking was not relevant any more in achieving the objectives of financial inclusion as the government has already introduced programmes like Jan Dhan Yojana and Suraksha Bima Yojna for all citizens towards that end.

In a written reply to the Lok Sabha, Minister of State for Finance Santosh Kumar Gangwar also said various legal changes would become necessary if even limited products were to be introduced under Islamic banking.

"Reserve Bank of India (RBI) had set up an inter-departmental group on Islamic Banking. Entire exercise was aimed at promoting financial inclusion, accessing huge market potential to attract finance from Gulf countries for infrastructure development. However, on consideration of inter-departmental group report, it is observed that even to introduce limited products, various legal changes would be required", Gangwar said in the Lok Sabha.

"Moreover", he added, "The objectives of financial inclusion for which Islamic Banking was explored by RBI has no relevance, as Government has already introduced other means of financial inclusion for all citizens like Pradhan Mantri Jan Dhan Yojna, Pradhan Mantri Suraksha Bima Yojna, Pradhan Mantri Jeevan Jyoti Bima Yojna, Pradhan Mantri Mudra Yojna etc."

The RBI committee headed by Deepak Mohanty in its report posted on the RBI website on December 29, 2015 had recommended that banks open a separate window offering interest-free deposits and advances to address financial exclusion based on faith.

"An increasing number of commercial banks around the world are considering the possibility of offering interest-free financial products. In many countries, this reflects the banks’ desire to offer services to a growing population interested in such products, but in several instances it is also motivated by the wish to tap the growing pool of international investors attracted to Shariah-compliant products", the committee observed in its report.

"At first, a commercial bank may only want to probe the potential of this market, and thus may be interested in launching a pilot project. The bank can take advantage of its existing branch network to open so-called interest-free windows, through which they can reach out to potential new clientele", the report added.

After making the above observations, the committee recommended that commercial banks in India may be enabled to open specialised interest-free windows with simple products like demand deposits, agency and participation securities on their liability side and to offer products based on cost-plus financing and deferred payment, deferred delivery contracts on the asset side.

The committee also recommended in the event that interest-free banking is allowed in India, the extant regulatory guidelines in respect of capital and liquidity as applicable in the case of commercial banks would have to be made applicable to those as well.

An interest-free window is simply a window within a conventional bank through which customers can conduct business utilising only Shariah-compatible instruments.

At the inception of the window, the products typically offered are safekeeping deposits —on the liability side of the bank —and relevant trade-finance products for small and medium companies —on the asset side of the bank. It also requires the bank to institute appropriate firewalls to avoid the commingling of interest-free and conventional funds.


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