Modi Government Junks The RBI’s Idea Of Islamic Banking

The Finance Ministry said Friday (9 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. This observation was made by an inter-departmental group set up by the Reserve Bank of India (RBI) on Islamic banking with the aim of promoting financial inclusion, “accessing huge market potential to attract finance from Gulf countries for infrastructure development”.

In May this year, the deck was all but cleared for Islamic banking with an RBI report suggesting banks should be allowed to open “interest-free windows”. This was a divergence from the earlier view of the RBI with former Governor Duvvuri Subbarao saying simply that “Islamic banking is not possible… there are some legal problems, it can be got around, not through banking...”

Swarajya’s editorial director R Jagannathan had written earlier this year that while any bank should be allowed to run operations in India, the purpose of such operations should not be based on religious ideas. In practice, Islamic banking is just normal banking in disguise. All that really happens is the use of Islamic terms to camouflage interest as profit or profit-sharing.