After refusing to allow Islamic banking in the country for long, the Reserve Bank seems to have moved closer to changing its stand by permitting the state-run Kerala Industrial Development Corporation to launch an NBFC that will offer services compatible with Sharia law.

"The RBI has permitted KSIDC to float a non-banking company and offer products based on Islamic principles," the Central bank spokesperson Alpana Killawala told PTI here today.

Outgoing Governor Duvuuri Subbarao, who is retiring on September 4, had earlier said that Islamic banking was not possible in the country.

"Islamic banking is not possible in the country as there are some legal problems," Subbarao had said last November and added that RBI could look at other avenues to help productively channelise the huge NRI funds.

Under the Islamic banking norms, depositors do not get interest on deposits, nor can the charge interest to its borrowers. can invest the money, but keep off taboo areas like liquor, tobacco and gambling or speculation.

Similarly, Islamic also cannot invest in bonds, treasury bills, and commercial papers, or lend to inventory or projects for interest.

However, RBI today clarified that what it has allowed "is not Islamic banking" in the strict sense, as the permission is for not for commercial banking but only for an NBFC.

Kerala, a remittance-driven economy, has been requesting the RBI to allow Islamic banking for nearly a decade. It now becomes the first state to start a Sharia-based NBFC.

It has been reported that close to Rs 50,000 crore of interest money is lying unclaimed with Kerala banks, most of which is remittance from Kerala Muslims working in the Gulf and other foreign countries, as under Sharia they cannot claim interest from banks.