By Mohammed Waseem

Kerala is an Indian state which has around 25% Muslim population. Of these, a huge number of individuals work in the Arabian Gulf countries and other foreign countries. When the earnings from their jobs are deposited in India, this money earns interest.

Business Today reports that approximately Rs. 50000 Crore ($8 Billion) interest money is lying unclaimed with Kerala banks, most of which is from the Muslims working in the Gulf and other foreign countries, as according to the Sharee’ah, they are not allowed to claim interest from banks. Business Today also reports that Kerala government has been requesting the central bank to allow Islamic Banking in the state for almost a decade.

Islamic Banking in India

Earlier, the central bank of India – RBI (Reserve Bank of India) had ruled that Islamic Banking was not possible in India as interest is the bloodline of commercial banks in any non-Islamic country including India. RBI controls the rates and reserves for all commercial banks across India and said earlier that the framework does not support Islamic Finance which negates the most important element of commercial banking: “interest”.

After so much trying, Kerala State Industrial Development Corporation (KSIDC) has been allowed to start a financial corporation based on Islamic Sharee’ah. But it should be noted that it is not a commercial bank but a Non-Banking Financial Corporation (NBFC) which works differently compared to commercial banks. Al Baraka Financial Services is the first financial corporation in India based on Sharee’ah laws, which will be floated by KSIDC, as Times of India reports.

Now, what does NBFC mean? And how is it different from commercial banks?

A NBFC is similar to commercial banks and is under the control of the central bank, which is RBI is this case. However, there are a few differences, most importantly:

i) They are not authorized to accept demand deposits

ii) They are not authorized to issue cheques drawn on their behalf

So, you can deposit money but it would not be withdraw-able like the savings bank deposits with commercial banks; this is similar to chits, as in case of Chit Funds. Additionally, you can take loans from them.

Hopefully, this NBFC will be launched before the 2014 elections. If not, you never know what the coming government does with rules. Though there is still a long way to have a full-fledged Islamic Bank in India, but this could be the beginning.

According to me, it will take a very long time to have a commercial Islamic bank in India. Because if one bank is allowed to function in the country, demand will increase and will shift from non-Islamic banks, because the people will run after loans with no interest, some of them because of the Sharee’ah and few others because they won’t have to pay extra money, late fines, etc.

Hopefully, this will be a beginning for a full-fledged commercial Islamic bank in India.