KOCHI: The Kerala high court on Thursday 8 dismissed a petition challenging the state government's plans to co-promote an Islamic 8 finance institution. The move could pave the way for introduction of Islamic finance products by existing lenders and also reduce regulatory objections for an Islamic Bank.
On Thursday, a division bench comprising Chief Justice J Chalameswar and Justice P R Ramachandra Menon dismissed petitions objecting to the creation of an Islamic financial institution and said the proposed body was to work in accordance with financial laws of the country even while it complied with sharia rules.
The move has much broader implications considering Islamic finance has not taken off due to a stand taken by RBI that such a form of banking is not possible given present regulation. This stance was taken by an internal working group of RBI whose report was never made public. In the past, Islamic scholars had made representations to RBI to allow such products. Subsequent representation to allow Islamic finance products was stalled as the government was awaiting the verdict of the Kerala High Court.
The key difference between Islamic and conventional banking is that while the conventional form offers interest on deposits mobilized, Islamic finance works on the principles of investment and sharing of profits. Islamic banking products are offered by leading banks in the West who also use Shariah compliant products to mobilize funds from the Middle East.
Exisiting lenders like State Bank of India too have considered the feasibility of launching Islamic finance products through its international banking operations. However, these products have not taken off because of lack of regulatory clarity. Some bankers feel that considering that India has the second largest Muslim population in the world, there will be large potential for Islamic banking products.
In January 2010, the HC had stayed implementation of the proposal on petitions by Janata ! Party ch ief Subramanian Swamy and Hindu Aikyavedi leader R V Babu who argued that the participation of the state government in such an institution went against secular principles enshrined in the Constitution.
Dismissing the petition, the court observed that although the institution was based on the principles of a religion, its motive was not to propagate the religion and the state's participation in it was purely based on commercial prospects. ''Therefore, there is no need to object the state's participation in it,'' the bench said. The bench said the Reserve Bank of India would examine whether the Islamic financial institution went against any of the central bank's guidelines. Swamy said he would decide on the future course of action after studying the verdict.
''We have made representations to the RBI and government and submitted them documents to show how banks in UK and Singapore, Hong Kong and Japan have amended their regulations to facilitate Islamic finance. They have told us that they will look into it,'' said H Abdur Raqueeb, general secretary, Indian Centre for Islamic Finance-ICIF. He added that although ICIF has made representations to the finance ministry as well, they have been informed that the matter was sub-judice.
State-owned Kerala State Industrial Development Corporation (KSIDC) began work after finance minister Thomas Isaac had floated such an idea in 2009. The plan was to start an institution based on Islamic banking principles and this was to be established under another entity, which was registered as Al-Baraka Financial Services. The proposal was also to appoint an advisory body, comprising Islamic scholars who would ensure that the institution functioned under the Shariah rules. KSIDC was to hold 11% share in Al-Baraka. The financial institution also has 14 promoters and Gulf-based Kerala entrepreneurs P Mohammed Ali and C K Menon are to hold the posts of its chairman and vice-chairman respectively.
Dr K N Harilal, Kerala Planning Board Member, w! elcomed the HC order and said the Islamic banking system would help a large number of people in the country. ''A study by Centre for Development Studies, which was also referred to by the Kerala finance minister, had shown that although immigrant workers from Kerala remit between Rs 25,000 crore and Rs 28,000 crore, a large part of this goes into gold or real estate,'' he said.
He added that Islamic finance would enable this money to go into productive purposes.
A Boston Consultancy Group report in 2008 said that pure Islamic Banks along with Islamic subsidiaries and 'windows of conventional banks' control $400bn in assets compared to $100bn in 2000. However, the report also pointed out that the Islamic banking industry needs common and internationally accepted standards on capital adequacy, risk and asset quality management.
On Thursday, a division bench comprising Chief Justice J Chalameswar and Justice P R Ramachandra Menon dismissed petitions objecting to the creation of an Islamic financial institution and said the proposed body was to work in accordance with financial laws of the country even while it complied with sharia rules.
The move has much broader implications considering Islamic finance has not taken off due to a stand taken by RBI that such a form of banking is not possible given present regulation. This stance was taken by an internal working group of RBI whose report was never made public. In the past, Islamic scholars had made representations to RBI to allow such products. Subsequent representation to allow Islamic finance products was stalled as the government was awaiting the verdict of the Kerala High Court.
The key difference between Islamic and conventional banking is that while the conventional form offers interest on deposits mobilized, Islamic finance works on the principles of investment and sharing of profits. Islamic banking products are offered by leading banks in the West who also use Shariah compliant products to mobilize funds from the Middle East.
Exisiting lenders like State Bank of India too have considered the feasibility of launching Islamic finance products through its international banking operations. However, these products have not taken off because of lack of regulatory clarity. Some bankers feel that considering that India has the second largest Muslim population in the world, there will be large potential for Islamic banking products.
In January 2010, the HC had stayed implementation of the proposal on petitions by Janata ! Party ch ief Subramanian Swamy and Hindu Aikyavedi leader R V Babu who argued that the participation of the state government in such an institution went against secular principles enshrined in the Constitution.
Dismissing the petition, the court observed that although the institution was based on the principles of a religion, its motive was not to propagate the religion and the state's participation in it was purely based on commercial prospects. ''Therefore, there is no need to object the state's participation in it,'' the bench said. The bench said the Reserve Bank of India would examine whether the Islamic financial institution went against any of the central bank's guidelines. Swamy said he would decide on the future course of action after studying the verdict.
''We have made representations to the RBI and government and submitted them documents to show how banks in UK and Singapore, Hong Kong and Japan have amended their regulations to facilitate Islamic finance. They have told us that they will look into it,'' said H Abdur Raqueeb, general secretary, Indian Centre for Islamic Finance-ICIF. He added that although ICIF has made representations to the finance ministry as well, they have been informed that the matter was sub-judice.
State-owned Kerala State Industrial Development Corporation (KSIDC) began work after finance minister Thomas Isaac had floated such an idea in 2009. The plan was to start an institution based on Islamic banking principles and this was to be established under another entity, which was registered as Al-Baraka Financial Services. The proposal was also to appoint an advisory body, comprising Islamic scholars who would ensure that the institution functioned under the Shariah rules. KSIDC was to hold 11% share in Al-Baraka. The financial institution also has 14 promoters and Gulf-based Kerala entrepreneurs P Mohammed Ali and C K Menon are to hold the posts of its chairman and vice-chairman respectively.
Dr K N Harilal, Kerala Planning Board Member, w! elcomed the HC order and said the Islamic banking system would help a large number of people in the country. ''A study by Centre for Development Studies, which was also referred to by the Kerala finance minister, had shown that although immigrant workers from Kerala remit between Rs 25,000 crore and Rs 28,000 crore, a large part of this goes into gold or real estate,'' he said.
He added that Islamic finance would enable this money to go into productive purposes.
A Boston Consultancy Group report in 2008 said that pure Islamic Banks along with Islamic subsidiaries and 'windows of conventional banks' control $400bn in assets compared to $100bn in 2000. However, the report also pointed out that the Islamic banking industry needs common and internationally accepted standards on capital adequacy, risk and asset quality management.
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