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The Reserve Bank of India’s proposal to tap Islamic banking to provide banking services to Muslims - who are averse to a interest-based model, has raised hope of this system becoming a reality in the near distant future.

According to Dr D.K. Batra, marketing professor, IMI, New Delhi, a large section of Muslims in India did not access banking services on religious grounds due to the element of interest which is prohibited in Islam. So it is interesting that “RBI will explore the opportunity to offer interest-free banking in consultation with the government to open Islamic banks,” he said. This requires a law to be passed, and therefore legislative support, since it concerns net interest margin for banks. The Islamic finance has not grown fast enough as the concept faced opposition from political parties, said Dr Batra.

The Reserve Bank of India (RBI) has begun the process of reviewing regulations on Islamic banking in India. The central bank has set up an internal committee to examine the matter. The three-member panel comprises senior RBI officials, Rajesh Verma, a deputy general manager, department of banking operations, Archana Mangalagiri, general manager, non-banking supervision and Bindu Vasu, joint legal adviser. The demand for re-look at Islamic banking regulations have revived again with the Indian central bank opening up doors for differentiated banks in India – payments banks and smaller banks – to begin with. Supporters of Islamic banking are making a case for Islamic banking in the face of the reforms in the banking sector.

India’s central bank has allowed a firm in the southern state of Kerala to operate as a non-banking financial company that follows Islamic principles ? a small step towards developing syariah-compliant finance in the country. Cheraman Financial Services said it had obtained approval to operate from the Reserve Bank of India (RBI) and would follow the Islamic ban on interest. RBI governor Duvvuri Subbarao has said Islamic banking was not possible in the country but syariah-compliant products could be delivered through alternative means.

The Reserve Bank of India (RBI) has taken a positive approach to the suggestion of an alternative banking system for Muslims after K. Rahman Khan, Minister for Minority Affairs, emphasized that it was the duty of the State to facilitate every citizen to practice and follow his/her religion. The RBI Governor pointed to the need for certain amendments to the laws concerned. The Minister said, in India the biggest issue was who should regulate the proposed alternative system, as it needed a strong monitoring mechanism. He added that concrete efforts should be made, such as setting up an expert committee to draw up a framework of an alternative banking system, along with a strong legal system to back it.

Indian Islamic finance industry is still facing legal obstacles on allowing Sharia-compliant banking products in the country. Indian Muslim minority which is the largest in the word, nowadays cannot access Islamic financial services as the sector requires banking to be based on interest, which is forbidden in Islam. The issue of Islamic finance is being studied by the Reserve Bank of India since 2005.

According to Reserve Bank of India, Indian banks are not legally allowed to involve in Islamic banking operations. Even though India is the country with the third largest Muslim population, Islamic finance has been denied several times already. Due to lack of interest-free banking products people, economically disadvantaged strata of society, cannot access banking products and services because of faith issues. In addition, India is cut off substantial sources of savings from near countries.

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