RBI Proposes Islamic Finance As Raghuram Rajan Exits

Reserve Bank of India ,Bank of Japan, Bilateral Swap Arrangement , BSA,India ,Japan

The RBI is considering introducing Islamic finance in India for financial inclusion of the largest Muslim minority population in the world, according to Moneycontrol.com. The proposal was made in the annual report last week and is seen as a parting gift to RaghuRam Rajan, who has been advocating Islamic banking for some time.

The Reserve Bank of India bid adieu to former governor Raghuram Rajan on September 4 and welcomed Urjit Patel as the new RBI governor.

RBI has proposed working with the government to roll out interest-free banking products after consultation with the government.

Saif Ahmed, managing partner at Bengaluru-based Infinity Consultants told Moneycontrol,

For Islamic banks to function in India, separate parallel legislation or an amendment needs to be passed by Parliament and that can only happen with the active support of the incumbent government.

This will be a tough task for the Narendra Modi-government as the Parliament is often disrupted due to one reason or the other. Pressure will mount from Muslim groups to make Islamic banking a reality sooner.

This is the first concrete step by the Indian central bank in encouraging interest-free banking for the Muslim population, however, there are several questions left to be answered. Will interest rates be lowered for other sections of the society as well?

Islamic finance is interest-free banking because interest is forbidden in Islam. Business corporations in Muslim nations raise capital in accordance with Sharia or Islamic law.

Islamic finance hasn’t taken off in India because of strong opposition from bureaucrats and politics from Hindu-nationalist BJP, but it seems that under the leadership of Prime Minister Narendra Modi, the proposal may become a reality. The government’s external lending agency, Exim Bank, had said in April that it would extend a USD 100 million credit line to the private sector arm of the Islamic Development Bank.