Cithara Paul By

Firm in its belief that minorities will fetch it majority in 2014, a section of the Congress-led UPA is pulling all stops to introduce Sharia-based Islamic Banking in the country.

Islamic banking complies with Islamic law (Sharia) and is guided by the religion’s brand of economics that prohibits collection and payment of interest. It disallows investments in businesses considered unlawful, or haraam, like selling alcohol, pork or pornography. As Islam forbids simply lending out money at interest, rules on transactions have been created to prevent it. The basic principle of Islamic Banking is based on risk-sharing which is a component of trade rather than risk-transfer which is seen in conventional banking. It introduces concepts such as profit sharing, safekeeping, joint venture, cost plus, and leasing.

The idea of introducing Islamic Banking was first mooted by RBI governor Raghuram Rajan, now the UPA’s poster boy of economic revival, back in 2008. With the MIT-educated former IMF economist now in the driver’s seat, Islamic Banking lobbyists within the government are making deft moves to follow through that recommendation.

Though the matter comes under the Finance Ministry’s ambit, spearheading the lobbyists is K Rehman Khan, the Minister for Minority Affairs. A staunch supporter of Islamic Banking, Khan met Rajan immediately after he took over as RBI boss last month. “The new RBI chief was very positive on the subject’’ said a source in the ministry.

According to the source, the RBI chief made it clear to the minister that the decision was more political than financial. The ministry, thus, is preparing a blueprint explaining the positive impact Islamic Banking could have on the Indian economy, for circulation among stakeholders.

“It is natural for others to have apprehensions about an initiative called Islamic Banking. Our effort would be allay these fears,” said an official assigned the task of implementing it. Though the PM, Planning Commission boss Montek Singh Ahluwalia and Finance Minister P Chidambaram are in favour of the system, others in the government need convincing.

In 2008, Rajan as head of the High Level Committee on Financial Sector Reforms had recommended interest free finance should be introduced in the main banking sector for growth with inclusion. “The non-availability of interest-free banking products (where return to investor is tied to the bearing of risk, in accordance with principles of that faith) results in some Indians, including economically disadvantaged, unable to access banking products and services due to reasons of faith. This non-availability denies India access to savings from other countries in the region,” he had noted.

Read also: RBI supports Islamic banking