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As Raghuram Rajan departs, RBI opens door to Islamic finance

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The Reserve Bank of India (RBI) has proposed working with the government to introduce interest-free banking to tackle financial exclusion for religious reasons, potentially opening Islamic finance to the largest Muslim minority population in the world.India’s central bank made the proposal in its annual report last week, as departing RBI governor Raghuram Rajan hands over the reins to close ally Urjit Patel.

RBI governor Raghuram Rajan during interview at RBI Head quarter
RBI governor Raghuram Rajan during interview at RBI Head quarter on Wednesday. Photo by Prashant Nadkar. 03.06.2015. Mumbai.

That has meant an estimated 180 million Muslims in India, the country’s second-largest religious group, have been unable to access Islamic banking because of laws that require banking to be based on interest, which is forbidden in Islam.The RBI said it would explore introducing interest-free banking products in consultation with the government, a key detail as this opens the prospects of supportive legislation.”This is definitely a significant development as it is the first time that the RBI has concretely mentioned that it will now work with the government to introduce Islamic banking,” said Saif Ahmed, managing partner at Bangaluru-based Infinity Consultants, which specialises in Islamic finance.

The government’s external lending agency, Exim Bank, said in April it would extend a $100 million credit line to the private sector arm of the Islamic Development Bank. The Exim Bank’s credit line would support foreign buyers of Indian goods and services, with the Saudi-based Islamic Corporation for the Development of the Private Sector acting as the intermediary.In 2015, a central bank committee recommended opening a specialised interest-free window to offer cost-plus financing, deferred payment and deferred delivery contracts, a reference to common sharia-compliant contracts such as murabaha and istisna.

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The Exim Bank’s credit line would support foreign buyers of Indian goods and services, with the Saudi-based Islamic Corporation for the Development of the Private Sector acting as the intermediary.“Some sections of Indian society have remained financially excluded for religious reasons that preclude them from using banking products with an element of interest. “Towards mainstreaming these excluded sections, it is proposed to explore the modalities of introducing interest- free banking products in the country in consultation with the government,” RBI said in its annual report for 2015-16.

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