Indian and international Islamic banking experts have welcomed Reserve Bank of India’s decision allowing operation of an interest-free non-banking financial company (NBFC) in Kerala, saying it would encourage the country’s 200-million-strong Muslims to participate in the country’s development projects.
“It will have a big impact on the Indian economy and contribute to the expansion of Islamic banking and finance worldwide,” said Mohammed Azmi Omar, director general of the Islamic Research & Training Institute, an affiliate of Islamic Development Bank.
Cheraman Financial Services, based in Kerala's city of Kochi, plans to offer leasing and equity-finance products under Islamic principles. It said it had obtained approval to operate from the Reserve Bank of India and would follow the Islamic ban on interest; it will not take deposits from customers. Cheraman plans to roll out its products by the end of August.
“India has one of the world’s largest Muslim population and the RBI decision would help tap huge funds of these Muslims for Shariah-compliant investment projects,” Omar told Arab News. Islamic finance promotes inclusive growth and accelerates development of real economy, he added.
The RBI decision appears to open the door to the possibility of more NBFCs offering non-interest products in future, even though full-fledged Islamic banks are expected to remain banned.
Last year, the RBI directed Kochi-based Alternative Investments and Credits Ltd. (AICL) to stop its non-interest NBFC business almost a decade after the firm was launched. This prompted an ongoing legal challenge by AICL.
"The grant of an NBFC license should have an impact on the AICL proceedings and there are good chances that the matter may get settled soon," said Suprio Bose, Mumbai-based lawyer at Juris Corp., a law firm which previously represented AICL.
"The event reflects a significant and welcome change in RBI's attitude toward Shariah-based NBFCs and sets a precedent for others to follow suit."
However, many analysts think that unless and until full-fledged Islamic banks are permitted in India, an Islamic finance sector will find it hard to develop.
"I don't think there is going to be a rush for NBFC applications. RBI's attitude toward the Shariah-compliance concept is yet to be tested," said Shariq Nisar, director of research and operations at Mumbai-based Taqwaa Advisory and Shariah Investment Solutions.
According to central bank data, credit extended to NBFCs increased by 1.9 percent from a year earlier in June, compared with an increase of 43.9 percent in June last year. There are over 12,000 registered NBFCs in India.
“The RBI’s welcome decision will boost inclusive growth of the marginalized and the minorities,” said H. Abdur Raqeeb, convenor, National Committee on Islamic Banking, and general secretary, Indian Centre for Islamic Finance (ICIF)
Raqeeb said the interest-free financial system would benefit not only Muslims but also non-Muslims, adding that thousands of non-Muslims in Malaysia, UK, Singapore and other countries are its beneficiaries.
V.K. Abdul Aziz, secretary-general of Indian Forum for Interest-free Banking, also welcomed the RBI decision. “The fundamental objective of the interest-free banking system is to eliminate exploitation of borrowers. It considers lending as an investment and distributes investment risk between the users and suppliers of funds,” Aziz told Arab News. The system will also help eliminate poverty in the country, boost small and medium enterprises, and create more job opportunities, he added.