HC issues notice to GoI, RBI on petition for Islamic banking
Srinagar, Mar 19: J&K High Court on Monday issued a notice to Government of India and its central banking institution on a petition seeking opening up of Islamic banking by J&K Bank.
A division bench directed a notice to Union of India through its Secretary, Ministry of Finance, Reserve Bank of India (RBI) through its Governor, J&K government and Chairman Jammu and Kashmir Bank.
The petition was filed by J&K Peoples Forum through advocate M.M Shuja.
The petition sought judicial intervention with direction to Union of India and RBI prescribing appropriate notification to permit opening of Shariah Banking Window by J&K Bank in all its branches, financial services and other units within and outside the state of Jammu and Kashmir.
The petitioners said that non-interest banking system prescribed under Islamic law is in vogue successfully not only in many Muslim countries but also in several secular, developed and industrialized nations of the world.
The petitioner substantiated his plea by a number of research papers by national and international financial institutions, economy and business experts who infer that Islamic banking leads to financial inclusion, stability and growth of the economies.
He said the people of the state have no option but to go to the J&K Bank for on advancement of loan at required times and in return they have either to repay the principal and interest amount with utmost displeasure as charging of interest is prohibited in Islam.
Had there been interest-free banking window or system in place , it would have been easier for the people of the state to become the beneficiaries of broad-based financial inclusion within the meaning of Article 39 of the Constitution of India, he said.
The petitioner submitted that non-interest banking system existing elsewhere in the world has not only yielded better and positive results but has also been duly acknowledged by world bodies like International Monetary Fund (IMF), World Bank and other credible agencies.
He cited a World Bank report by Muliani Indrawati, its Managing Director, who said the Bank Group has “formally recognized Islamic finance and has designated it a priority area in their financial sector program”.
The World Bank has always closely cooperated with the Islamic financial services sector. This demonstrates our commitment to help strengthen the institutional development of the industry, said the petition.
It also cited an IMF report saying “It is easy to see the appeal of Islamic Finance as it has the potential to contribute to higher and more inclusive economic growth by increasing access of banking services to underserved populations”.
Quoting Christine Legarde, the IMF chief, it said the Islamic Finance has, in principle, the potential to promote financial stability because its risk-sharing feature reduces leverage and its financing is asset-backed and thus fully collateralized.
“It is only a matter of expediency that the people at large are compelled to join the interest banking system as there is no alternative system available for them,” said the petition.
It referred to the formation of a committee in the RBI in 2015 for making recommendations to improve the banking system for financial inclusion. The Committee headed by Executive Director Reserve Bank of India (RBI) Deepak Mohanty, in his report said “globally, interest-free banking, also known as Islamic banking, has witnessed a significant increase, especially in the wake of the financial crisis.”
The petition said that the “the Committee recommends that commercial banks in India may be enabled to open specialized interest-free windows with simple products like demand deposits, agency and participation securities on their liability side and to offer products based on cost-plus financing and deferred payment, deferred delivery contracts on the asset side.”
Despite these recommendations neither the government nor the RBI have taken any practical steps for implantation of the Islamic banking in the country, added the petition.
The petitioner organization has also supported its case with the contents of the newsletter periodically circulated by RBI which said that in India thousands of crores are lying idle as it is not claimed by the Muslims who by faith decline to claim interest.
In Kerala alone it said that this money could be above Rs 40,000 crore.
It referred to an Inter-Departmental Group on Islamic Banking constituted in RBI which prepared a report that suggested that a few products similar to conventional banking products may be considered for introducing through Islamic Window of the conventional banks after necessary notification by the government.
It also referred to former J&K Finance minster Haseeb Drabu’s opinion saying that Islamic banking is the best alternative for inclusion of the weaker section of Muslim community in the financial sector.
The petitioner said the credit per account to Muslims is about half that of other minorities and one-third of others, even as the deposit per account for Muslims is almost the same as the national average.
With 97 percent of Muslims engaged in unorganized sector enterprises, this state of financial penetration has an impact on the entire mini- and micro-enterprise sector especially in the post-demonetization period that has debilitated their economic strength.