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RBI Proposes Islamic Window in Banks for Gradual Introduction of Sharia Banking

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

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Reserve Bank of India. VOA
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New Delhi, November 20, 2016: The Reserve Bank of India (RBI) has proposed the introduction of “Islamic window” in the conventional banks for “gradual” start of Sharia-compliant or interest-free banking in the country.

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Both the RBI and Centre are looking for the possibility of the introduction of Islamic banking so as to ensure the financial inclusion of those sections of the society that remain not a part due to mere religious reasons.

Islamic or Sharia banking is a finance system based on the principles of not charging interest, which is prohibited under Islam.

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“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,” the RBI has told Finance Ministry in a letter, according to PTI report.

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“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.

Representational image. Pixabay
Representational image. Pixabay

The central bank’s proposal is based on the examination of legal, regulatory and technical issues regarding the feasibility of introducing the Islamic banking in India on the recommendation of the Inter Departmental Group (IDG).
RBI has also assembled a technical analysis report which has been sent to the Finance Ministry.

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“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.

by NewsGram team with PTI inputs

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RBI’s Governor Quits After Months of Pressure From The Central Government

The timing just before this week's board meeting suggests that there's still a huge gap between the government and RBI positions on key issues

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Urjit Patel, Bank
The Reserve Bank of India (RBI) Governor Urjit Patel attends a news conference in Mumbai, India. VOA

The Governor of India’s central bank, Urjit Patel, resigned abruptly Monday after a months-long tussle over policy with the government that has raised concerns about the bank’s independence as a national election nears.

Government officials have been pressuring the Reserve Bank of India to allow some bad-debt-laden public sector banks to lend more easily, and pushed for it to hand over some of its surplus reserves to help fund the fiscal deficit.

Prime Minister Narendra Modi’s ruling Hindu nationalist Bharatiya Janata Party (BJP), which must call national polls by May, faces anger in rural communities because of slumping farm incomes, and broader concerns about a lack of jobs growth in small businesses that are finding it hard to get banks to lend them money.

Getting control of the reserves would give the government more flexibility in spending on welfare policies and farm support schemes.

Patel cited “personal reasons” for his decision to immediately step down.

His resignation came four days before an RBI board meeting, and at a sensitive time for the government.

Bank
Reserve Bank of India. VOA

 

On Tuesday, votes in key state elections are due to be counted, with exit polls suggesting the BJP could suffer some major defeats at the hands of the opposition Congress party.

That scenario, and Patel’s resignation, are expected to roil Indian markets. On Monday, forward contracts tracking the rupee against the dollar outside of market hours posted their biggest fall in more than five years.

That added to earlier losses caused largely by concerns — triggered by the state exit polls — that next year’s election might end with a defeat for the pro-business Modi and a weak coalition government, leading to policy uncertainty.

Investors will want to know quickly who Patel’s replacement will be, and how that will affect the direction of financial and monetary policy, analysts said. There was no clear front-runner, but one name being mentioned was former Finance Secretary Hasmukh Adhia who retired at the end of November.

While not commenting directly on Patel’s exit, Moody’s Investors Service said on Monday any signs the government was attempting to curtail the RBI’s independence would be a credit negative.

“We currently assume that the RBI will continue to pursue price and financial stability and implement policies towards these goals,” the agency said in an emailed statement.

Modi, Bank
India’s Prime Minister Narendra Modi gestures as he addresses a gathering in New Delhi, India. VOA

 

Patel announced his departure in a short statement on the RBI’s website in which he said that “on account of personal reasons, I have decided to step down from my current position effective immediately.”

Modi suggested he had not wanted Patel to leave. On Twitter, the Indian leader praised Patel as a “thorough professional with impeccable integrity.”

“He steered the banking system from chaos to order and ensured discipline. Under his leadership, the RBI brought financial stability,” Modi tweeted. “He leaves behind a great legacy. We will miss him immensely.”

Building for months

Even before Patel’s announcement, the 10-year benchmark Indian government bond yield rose the most since September, and stocks posted their worst close in four weeks, with the broad NSE index losing 1.9 percent.

The pressure on him had been building for some months.

The government has made clear it was not happy with the RBI’s policies and stacked its board with pro-BJP representatives.

Former RBI Governor Raghuram Rajan, who did not take an extension after his term ended in September 2016, said Indians should be concerned about what was happening.

farmers, Bank
Police try to stop farmers during a protest demanding a better price for their produce on the outskirts of New Delhi, India. VOA

 

“We should go into the details on why there was an impasse which forced (Patel) to take this ultimate decision,” Rajan told the ET NOW television channel. “The strength of our institution is really important.”

Within the RBI there was a combination of anxiety and relief at the announcement.

“It was very shocking. … Morale of employees is very down,” said one RBI official who has been with the central bank for more than a decade. “This is very sad moment.”

But another official said Patel was often inaccessible to key financial market players and had stifled discussion within the RBI, and that now it might be possible to open up more.

“Finally things will come to peace. I can talk more openly,” this official said.

The officials asked not to be named due to the sensitivity of the matter.

Urjit Patel, Bank
Urjit Patel’s resignation signals dangerous trend: AIBEA. VOA

 

Argentine warning

The rift between the government and the central bank became very public in late October when RBI Deputy Governor Viral Acharya warned in a speech that undermining a central bank’s autonomy could be “catastrophic.”

He referred to a meltdown in Argentina’s financial markets in 2010 after a struggle between the government and the central bank over who controlled the bank’s reserves.

Last week, Patel declined to answer reporters’ questions about the rift with the government, which former government officials and analysts said they were convinced was a major factor in his decision to quit.

Also Read: Arvind Kejriwal Accuses Modi Government of Betraying Farmers

There was speculation a month ago that Patel might quit over the government pressure, but the rumors eased after the two sides reached an uneasy truce ahead of last month’s RBI board meeting.

“The timing just before this week’s board meeting suggests that there’s still a huge gap between the government and RBI positions on key issues,” said A. Prasanna, head of research at ICICI Securities Primary Dealership in Mumbai. “Markets will now hope that the government has a plan of action ready so as to restore calm.” (VOA)