ressure from Bharatiya Janata Party leader Subramanian Swamy led to the suspension of the launch of Islamic banking in India. The launch of State Bank of India (SBI) Sharia Mutual Fund, designed to invest in Sharia (Islamic law) compliant companies, was "deferred" at the last moment in December 2014 as Swamy wrote to Prime Minister Narendra Modi about his grievances against the system and got it stalled.

Though SBI Mutual Fund termed the "deferment" as a commercial decision, Swamy admitted to The Sunday Guardian that he wrote a letter to the Prime Minister in December saying that introducing Islamic banking would be "politically and economically disastrous for our country". "Yes, I wrote a letter to him (Narendra Modi) and he acknowledged it. He acted immediately and asked the concerned officials to stop it. So it was deferred at the eleventh hour," Swamy said.

In his letter, Swamy spoke about the Kerala government's decision to introduce a Sharia compliant bank there, which was challenged by him in court. "...The Reserve Bank under the then Governor Dr Y.V. Reddy had filed an affidavit stating that under Indian secular laws and under the Reserve Bank Act, Sharia compliant is not permitted," reads the letter.

"Now by another door the same is being attempted regretfully because the present Governor of RBI, who is an appointee of the UPA, and for some inexplicable reason he is continuing as Governor of the RBI, namely, Dr Raghuram Rajan. He is openly encouraging the formation of Sharia compliant financially institutions, which in my opinion will be politically and economically disastrous for the country," Swamy wrote in his letter. He added that "I trust you will ensure that the dubious funds in the Middle East do not enter our country through legally baptized channels of Sharia compliant financial institutions."

The SBI Sharia fund had received the market regulator SEBI's green signal. "A few days before the launch date, CEO and MD of SBI MF, Dinesh Khara, had invited me and he was very sure about the launch. He asked us to support it. But it was cancelled suddenly," said H. Abdur Raqeeb, general secretary of the Indian Centre for Islamic Finance (ICIF).

The SBI has been saying that it needs to study Sharia Mutual Fund more so that the product can be "reoffered as a better and more attractive fund in future".

Prime Minister Narendra Modi has been receiving demands from various quarters to introduce a Sharia compliant, interest-free banking, which, it has been claimed, will boost his Pradhan Mantri Jan Dhan Yojana. In a letter to the PM, the ICIF has urged him "to include the option of an alternate interest-free finance in the banking sector as recommended by Raghuram Rajan Committee on Financial Sector Reforms (CSFR)".

The CSFR report, submitted by former chief economist of the International Monetary Fund (IMF), Raghuram Rajan, who is now Reserve Bank of India Governor, has observed that "certain faiths prohibit use of financial instrument that pays interest. The non-availability of interest-free banking products results in some Indian — including those in the economically disadvantaged strata of society — not being able to access banking products and services due to reasons of faith."

"Even after 40 years of nationalization of banks, 60% of the people do not have access to formal banking services and only 5.2% of the villages have bank branches. Marginal farmers, petty traders, landless labourers, self-employed and unorganised sector enterprises, ethnic minority and women — common man of the country. The PM must facilitate interest-free banking in the larger interest of the country," said Raqeeb.

Former Minority Affairs Minister and Rajya Sabha member K. Rahman Khan said, "I don't understand why the Sharia compliant mutual fund was deferred suddenly. During my tenure as minister, I facilitated the introduction of interest-free banking. Why should SBI do it when it had already made all the preparations for it?"

According to Raqeeb, interest free banking is not meant for Muslims alone, but for all. "In Malaysia, 40% of the customers of interest-free banking are from other communities. In the United Kingdom, it is 20%," he said. Sukuk, an Islamic finance product based bond, has emerged as an alternative of investment the world over for infrastructure development and India can also opt for the same. Brazil, one of the BRIC countries, has huge investments in various sectors based on Sukuk. Brazil has a negligible Muslim population.

Sources said that the Reserve Bank of India last year started the process of reviewing regulations on Islamic banking in India by setting up an internal committee. The RBI also allowed a non-banking finance company in Kerala, Cheraman Financial Services, to operate in a Sharia compliant mode.

Globally, Islamic banking is prevalent in many countries, with banks such as Standard Chartered and Hong Kong and Shanghai Banking Corporation running Islamic banking divisions, apart from conventional banking operations.