Sharia banking: RBI proposes ‘Islamic window’ in banks

  1. The Reserve Bank of India (RBI) has proposed opening of “Islamic window” in conventional banks for “gradual” introduction of Sharia-compliant or interest-free banking in the country.
  2. Both the Centre and RBI are exploring the possibility of introduction of Islamic banking for long to ensure financial inclusion of those sections of the society that remain excluded due to religious reasons.
  3. Given complexities of Islamic finance and various regulatory and supervisory challenges involved in the matter and also due to fact that Indian banks have no experience, Islamic banking may be introduced in India in gradual manner.
  4. Islamic or Sharia banking is a finance system based on the principles of not charging interest, which is prohibited under Islam.
  5. Interest-free banking for financial inclusion will require proper certification of product as Sharia compliant, required both on asset and liability side & funds received under the interest-free banking could not be mingled with other funds and therefore, this banking will have to be conducted under a separate window.
  6. In late 2008, a committee on Financial Sector Reforms, headed by former RBI Governor Raghuram Rajan, had opined the need for a closer look at the issue of interest-free banking in the country.
  7. Committee had said, “Certain faiths prohibit the use of financial instruments that pay interest. The non- availability of interest-free banking products results in some Indians, including those in the economically disadvantaged strata of society, not being able to access banking products and services due to reasons of faith.”
  8. This non-availability also denies the country access to substantial sources of savings from other countries in the region.

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