RBI, govt exploring introduction of interest-free banking

Mumbai, Aug 30 (PTI) Reserve Bank and the government areexploring introduction of interest-free banking, also known asIslamic Banking, to financially include sections of thesociety that remains excluded due to religious reasons. "Some sections of Indian society have remained financiallyexcluded for religious reasons that preclude them from usingbanking products with an element of interest. "Towards mainstreaming these excluded sections, it isproposed to explore the modalities of introducing interest-free banking products in the country in consultation with thegovernment," RBI said in its annual report for 2015-16. Islamic or Sharia banking is a finance system based on theprinciples of not charging interest, which is prohibited underIslam. Earlier this year, Jeddah-based Islamic Development Bank(IDB) had announced it will open its first Indian branch inAhmedabad. India’s Exim bank had signed an MoU with IDB for a USD 100million line-of-credit to facilitate exports to IDBs 56 membercountries. This plan of Saudi Arabia-based bank was opposed by theVishwa Hindu Parishad. In past as well, this concept has facedopposition from some political sections. Globally, Islamic banking has witnessed a significantincrease, especially in the wake of the financial crisis. It could be noted that in late 2008, a committee onFinancial Sector Reforms, headed by Raghuram Rajan had opinedthe need for a closer look at the issue of interest-freebanking in the country. The committee had said, "Certain faiths prohibit the useof financial instruments that pay interest. The non-availability of interest-free banking products results insome Indians, including those in the economicallydisadvantaged strata of society, not being able to accessbanking products and services due to reasons of faith." "This non-availability also denies the country access tosubstantial sources of savings from other countries in theregion," the committee had said. Last December, a committee on ‘Medium-term Path onFinancial Inclusion’, headed by RBI’s executive directorDeepak Mohanty had also recommended that commercial banks inthe country may be enabled to open specialised interest-freewindows with simple products like demand deposits, agency andparticipation securities on their liability side and to offerproducts based on cost-plus financing and deferred payment,deferred delivery contracts on the asset side. PTI HV ARSABKRDS