In a first in the mainstream banking sector in Maharashtra, a cooperative bank controlled by BJP leader and state cooperation minister Subhash Deshmukh has launched Sharia-compliant Islamic banking. Here, interest-free deposits will be accepted from both Muslims and non-Muslims and distributed largely to the needy from the minority community at zero rates of interest to ensure their financial inclusion.

So far, the Lokmangal Cooperative Bank Ltd, controlled by Deshmukh, has distributed Rs 2.50 lakh to poor Muslims through the route. The minister will now call on other banks and financial institutions in Maharashtra to follow suit and adopt this model, which is also referred to as "participatory banking".

"Under Islamic banking policy, depositors are not paid interest. Similarly the borrowers too will not be charged any interest for the money lent," Deshmukh, who is the chairman of the bank, told dna. The bank has nine branches, including eight in Solapur and one in Pune, and Deshmukh, a MLA from Solapur (South), said all of them would get a separate counter for such Islamic, interest-free deposits and loans.

Deshmukh added that during the inauguration of a branch of his bank at Barshi in Solapur this week, he was called upon to adopt the model, after which he announced it. Two persons, including a Hindu, then contributed Rs 1 lakh and Rs 50,000 as interest-free deposits.

"I then said that by evening, this money will be distributed free of interest, based on their recommendations," he said, adding that the money was given to 12 needy people.

"We will see if the Reserve Bank of India (RBI) or Government of India come out with rules in this regard... we will have to take some nominal service charge (from borrowers) for (administrative costs like) staff, electricity bills and stationery," said Deshmukh, adding that even if they were not allowed to charge this nominal service fee, they would continue giving out interest-free loans.

"We have received Rs 2.50 lakh deposits under this. I can claim that this is the first instance in Maharashtra," said Deshmukh, adding that the money was distributed to 18 people, who were needy from the Muslim community. Some of these disbursements were made on Saturday, which was also Prime Minister Narendra Modi's birthday.

"We will give most loans to (poor from the) Muslim community... It is Modi saheb's dream. The Muslim community is poor and must be economically uplifted," he noted.

Deshmukh said that depositors, however, will not be able to withdraw their deposits prematurely as the money will be lent out. He said he would also appeal to other financial institutions to follow suit with this banking model.

During Prime Minister Modi's trip to Saudi Arabia in April, the state-owned Exim Bank and the Islamic Corporation for the Development of the Private Sector (ICD), which is an arm of the Islamic Development Bank (IDB) group, had signed an agreement. The IDB later said it would open a branch in Modi's home state of Gujarat.

In 2015, a report by RBI committee on 'Medium-term path on financial inclusion' – led by Deepak Mohanty – had noted that "One area that has not been adequately addressed is the role of interest-free banking in financial inclusion. Globally, interest-free banking, also known as Islamic banking, has witnessed a significant increase, especially in the wake of the financial crisis. According to Lagarde (2015), total Islamic finance assets are estimated at around $2 trillion, practically a ten-fold increase from a decade ago, and outperforming the growth of conventional finance in many places."

The committee had recommended that "commercial banks in India may be enabled to open specialised interest-free windows with simple products like demand deposits, agency and participation securities on their liability side and to offer products based on cost-plus financing and deferred payment, deferred delivery contracts on the asset side."