What is in a name?


Prime Minister Manmohan Singh on Wednesday said that he would ask RBI to take a look at the demand for establishing Islamic banking in India .He was responding to a query on the subject at a press conference he addressed along with Malaysian Prime Minister Najib Razak. He said the pressure was mounting on the RBI  for such an establishment.The statement is significant as it comes in the backdrop of the RBI governor D Subbarao’s statement that Islamic banking cannot be allowed within the current rules of the RBI. “With the present set Banking Regulation Act, Islamic banking just cannot take place as many of the banking principles in place are based on interest payments. However, Islamic banking is possible through a separate legislation,” He said.

It must be recalled that the Kerala High Court had recently asked Kerala’s CPM controlled state government to keep away from a new company that was registered under the Sharia laws of banking. Former Union Minister Subramaniam Swamy had petitioned the court against the Kerala State Industrial Development Corporation taking the lead to start an Islamic bank with private players ( Mostly NRI businessmen). Some leading NRI investors had approached Minister Elamarom Kareem who quickly agreed to the proposal and soon KSIDC came out with the investment offer. The bank would not pay any interest to customers, but only “ profit”, while a Sharia board would decide what sort of investments it would make..

In his PIL, Mr Swamy had said that public money was being appropriated for favouring a particular religion in a secular country, as KSIDC, an arm of the state, offered to take 11% stake in the bank.

A section of “liberal” opinion within the country is backing the idea. Jurists like VR Krishna Iyer are of the view that Islamic banking, that prohibits levying of interest, are humanistic in nature. ( He often swims against the current) M D Nalappat ( Madhavikkutty turned Kamala Suraiya’s son) wrote an article supporting Islamic Banking during the International Seminar on Islamic Banking. http://www.isifk.com/mdnalappa/

Islamic finance is based on the generation of assets which are structured to be Islamic law or Sharia-compliant. The sharia bans usury or the charging of interest ( riba) on money lent to others. The issue then is to find alternative routes to ensuring a margin between the cost of funds and the return they earn to cover intermediation costs and make a profit.Whatever, methods to generate profits are indirectly methods to circumvent  Sharia laws.  It is against Islam to take "interest", but can accept "profit" from investment.

Having said this, one must also remember that the world’s leading financial hubs all have Islamic Banking Centres. London, Zurich and New York are the leading Islamic Banking centres, but the major fund holders are Iran and Saudi Arabia. The Islamic banking market continues to flourish around the world with current estimates suggesting that assets managed by Islamic banks are in excess of $700 billion (predominately concentrated in the Middle East)  and expected to cross a  trillion by 2013. It is likely that if India opens up Islamic Banking, funds would flow in, considering the fact that we have ideal investment conditions and a large Muslim population.

A curious project is said to have been undertaken in England, that is the establishmen of a  " Roman Catholic Bank".The name of the bank would be "Anglo Universal Bank" and the aim would be "protection and developementof Catholic Banking interests through out the world"!

Other religions are likely to follow the suit.

There is apprehension among many Indians on the prospects of Islamic Banking. There are fears that it would further ignite the ongoing religious issues, and that funds could be diverted to religious establishments for anti national interests. Islamic Banks will be governed by Sharia Councils,and not the government.

It is time that our policy makers think seriously about matters of national interest before blabbering in public. Singh obviously has some difficulty to speak and walks around like a mechanised robot, and when he speaks, sounds as if Sonia Ji is speaking.

Illustration by: DinarStandard.com


  1. Are you serious? Islamic banking...is not it enough to have separate family law based on religion? Now separate banking based on religion.

  2. If many of world's leading financial hubs already have flourishing I.B. ,then in my opinion i see no harm in it happening in India .The biggest hurdle would be setting up a different legislation .

  3. @A
    I think you misunderstood me. It is some thing like " have your say". I modified the post.

  4. Interesting topic. Don't really know what view to offer.

  5. Huh? Islamic Banking? I don't get this, if they do not charge interest, they should also not get profits right?
    Anyway, I never understood many Islamic ways, I really would not like to understand to be honest.

    Watch for it, tomorrow, some other caste will come up and say they want a separate banking system.
    I think democracy is no longer relevant in India.

  6. ..Islamic banking....well I will never vote for that...Cuz...so many religions ,so many people ...I mean its absurd a..whole new agenda and legislation...there are several other issues that needs to be taken care off..rather then simplifying problems why multiply?

  7. The principle of not charging interest and usurious transactions seems fine. Then the question arise how would the cost be met?
    Again anything with minority content is sacrosanct in India , especially when it is something related to Islam.Flow of funds and application of funds will have to be controlled by the RBI like for any FDI remittance. Because it is also a fact that we must have the guts to acknowledge- money from repressive dogmatic regimes in the Gulf are finding ways into the hands of home grown militancy with various colour coding.

  8. @Kavitha
    To me, the name is not appealing. It is not difficult to modify existing rules or to add any newer portfolios. Islamic Banking doesnt mean no returns.They give it a different name, profit.
    @clouds & Rachna
    Thanks for the visit
    @ madhu
    It defenitely creates profit. How can a bank run otherwise? They give it another pet name, that is profit, in place of interest.Islam doesnot prohibit profit,only interest.They invest and make profit and then divide the profit for investors.There are always ways!!
    @ Harman
    The general opinion.Do we really need it? That is the question.
    @NRI girl
    You are,as usual,wise.
    Yes,this is our major concern.These funds are controlled by Sharia Councils,than government.
    Generating income is on the same principles,except that the investment is only to Sharia compliant investment. They wont invest in Pork or alcohol for example.They by pass the interest issue,by buying you the car,instead of giving the money.It works out the same.

  9. Nice post Physician. As always you take subjects which are relevant.

    Islamic banking is normal in our part of the world. They dont charge interest but they have various fees and it is quite high like the interest.

    For deposits they dont provide interests and many Muslims feel okay with that. They might get profit percentage of the bank every year. They consider it not as interest.

  10. Yes, it was reported in the ET about Islamic banking in India.
    What else can we expect from a Govt. which survived only on minority appeasement.

  11. I am OK with it as long as it is wholly funded by private individuals and no public/government funding is involved.

  12. Islamic banking is common here in my country. Profit sharing is just another way of getting interest.. that's how I look at it.

  13. @stranger
    they can accept profit,but not interest.I have nothing against any feasible banking principle.But not a religious baranding.
    @ BKC
    Oh..you know that.But they also piss in their pyjamas when they hear the name.
    But then what about other communities? Dont they have a say as well?
    Yes,I know that.But the problems arise when it is applied to a secular state.

  14. Yes, the general opinion "do we really need it?"
    There are so many other burning issues that have to be addressed.

  15. Oh God!! Why does our government complicate things for common man!! Just imagine if it becomes a reality.

  16. Hi
    My father is a retired banker.All life we kept on debating about interest matter and Islamic views and the impact of interests on social stratification.
    though he spent 20 years doing banking job he never spoke in the favour of interest.your post show that you researched a lot.
    I personally believe that if you find a way more easy to tread upon we just opt it without giving it the title of any religious belief.

  17. well JAI ho indian govt..

    thats all i can say after reading this ...


  18. when sanskrit is introduced in varsities it is saffron tinted and now this
    our PM is just an Endhiran under Italian remote but where is the famed economist when he falls to such sectarian compulsions ?

  19. practically interest and profit look the same but it seems profit is when there is some work done on the money to produce something, so the result of work. are islamic banks in reality differ with other banks in their handling money?...

  20. i wonder if our super rich politicians would like to invest their money in banks that don't offer interest.I feel they should lead by example and this interest free investment can be utilized for developmental enterprises. i know I am being unrealistic but there is no harm in wishful thinking isn't it?

  21. @Harimohan,
    Welcome to the blog.
    Our politics survive on the basis of minority appease.We need the London School of Economicsteach that.
    @Anonymous and Padma
    Islamic banks invest in Sharia compliant investments.Thy defenitely create income,but they call it by the name profit.Islam prohibits interest,but they can accept profit.
    @Heavenly Muse
    Welcome to the blog.
    It is in the name.If there is something good in that kind of banking, there is nothing wrong in incorporating the principles in to the existing banking system.But in a secular country, can we leave the control to Sharia Councils.
    That is the question.
    Unfortunately, we have a very compassionate government.
    Yes..Jai to whom ?

  22. hey i was never aware of this"islamic banking".no interests too for loans..sounds interesting.would this be only for "muslim community"?and then how would they assure return of the loans?

  23. @Raji
    Not so simple. If you want to take a car loan,the bank will buy the car for you,and then take money back in instalments with what they call " commission" added. The bank will not say they gave u the money on interest.The bank will also invest in Sharia compliant investments,make profit and then distribute it to the depositors. They call it profit,instead of interest. It is partly a play of words.


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