India may be closer to allowing Islamic banking than ever before with the central bank and the finance ministry discussing ways in which rules need to be changed to allow the interest-free practice that’s compatible with Shariah law. Demands by Muslim groups over the past few decades to allow the method have thus far been stalled because of concerns over incompatibility and fears that it could be used as a conduit for terror funding. RBI governor D. Subbarao said last week that the apex bank was holding discussions with the government on how existing laws can be restructured or amended “so that they are in conformity with Islamic banking”. The finance ministry recently wrote to RBI asking it to examine the possibility of making the interest-free model part of India’s 75 billion banking system.
The finance ministry’s communication to RBI followed a meeting with the National Commission for Minorities (NCM) in June, a constitutional body headed by former chief information commissioner Wajahat Habibullah. NCM asked the apex bank to take a fresh look at Islamic banking. Following this, the National Committee on Islamic Banking (NCIB), a non-profit body, submitted an action report to RBI in this regard. The NCIB report argues that it’s not necessary to change banking laws to implement interest-free products, though tax laws would need to be amended. “Our (existing) banking system is based on the philosophy that money must become more money (by accruing interest) as time passes. One can imagine why people who benefit from that do not want any other model to enter this system,” said Nejatullah Siddiqui, an economist. “The only area where a change is necessary is the tax laws, as they do not match with the sale and investment-based contracts offered by participator banks such as wakala (agency contract), murabaha (trust-based sale), musharaka (joint venture),” said H. Abdur Raqeeb, convenor, NCIB.