Court stays government-aided Islamic banking

Source: IANS:Thursday, April 8, 2010 |

Kochi, April 8  The Kerala High Court Thursday in an interim order restrained the government or state-run organisations from starting Islamic banks, but allowed a private company to start its operations.

The bench headed by Chief Justice J. Chalameshwar allowed Al-Baraka Company to go ahead with its operations.

Former union minister Subramaniam Swamy and one more person had petitioned the court against state-owned Kerala State Industrial Development Corporation starting an Islamic bank with private collaboration.

The court asked the state government to freeze all such activities till a final verdict on the issue.

Chief Minister V.S. Achuthanandan said the state government will look into all aspects of the court's interim verdict and then decide what needs to be done.

"We have to see if such a thing happens, will it be good for the people or would it be detrimental. So at the moment I do not wish to make any comments. We will study all aspects and then decide," said Achuthanandan.

Director of Al-Baraka, prominent businessman E.M. Najeeb said, "In the wake of this verdict, the board of the company will soon meet and decide the future course of action."

Al-Baraka has 14 promoters who have contributed Rs.4.2 crore and a

17-member board with prominent Middle East businessman P. Mohammed Ali as its chairman and another businessman, C.K. Menon, as the vice-chairman.

With the latest verdict, three government officials who are on the board of the company will have to step down.

According to the company, the proposed bank will give no interest and a sharia board will decide on what sort of investment to make.

Muslims are the second largest community in the state with close to 24 percent of the 3.2-crore population.

Delhi mulls Islamic banking

CITHARA PAUL

New Delhi, Dec. 5: The government is considering changing banking law to introduce an interest-free Islamic banking system in the country, sources said. The Shariat prohibits the collection and payment of interest, so many Muslims now avoid opening bank accounts or refuse to claim the interest, which goes to a suspended account. Under the Islamic banking system, banks don’t pay interests on deposits; nor do they charge interest on loans. The money deposited is used to finance projects on ownership basis. The depositors share in the profit or loss of the projects financed through their deposits instead of getting interest. For instance, in case of a housing loan, the bank buys the property and rents it out to the borrower for a specified period of time. The rent is calculated on the basis of the cost of the property plus a profit margin. After the lease term is over, the tenant gets ownership of the property. Under the existing banking system, only current accounts comply with Islamic banking since these accounts don’t give any interest. An Islamic bank, however, cannot invest the money just anywhere: the Shariat prohibits investment in businesses considered haraam, such as those related to alcohol, pork or pornography. An Islamic banking system will benefit India’s 15 crore Muslims, and also the economy by helping unlock the huge sums that remain uninvested by the community. Islamic banking is currently not allowed under India’s banking act, but it is allowed through the non-banking financial institution route. The Centre plans to amend the act, adding to it a chapter exclusively dealing with all aspects of Islamic banking, sources said. It’s not clear if the amendment bill would be tabled in the current session of Parliament. The sources said the government would form a Shariat Supervisory Board to monitor the functioning of the Islamic banking system. Finance minister Pranab Mukherjee has had discussions with the Reserve Bank of India on the subject and obtained its approval, they said. Although an RBI study group had earlier rejected the concept of Islamic banking, the Raghuram Rajan Committee on banking reforms later gave a positive report on “interest-free banking”. The minority ministry too is understood to be in favour. There has been a strong demand for Islamic banking in India from various groups and even the Gulf countries. The Muslim League has handed a memorandum to the Planning Commission urging it to promote interest-free, profit-based banking. The concept is popular in West Asia and predominantly Muslim nations such as Malaysia and Indonesia. Leading international banks such as HSBC and Standard Chartered have exclusive Islamic banking windows. The Kerala Industrial Development Corporation recently launched an Islamic banking company of sorts, which has been registered as a non-banking finance company and will be transformed into a full-fledged Shariat-compliant bank once the banking regulations allow it.