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06 October 2012

Islamic banking on radar

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Puducherry: The Reserve Bank of India (RBI) is in correspondence with the government to look into ways to bring in new rules to accommodate the concept of Islamic banking, said Governor D Subbarao. Speaking at the Jawaharlal Institute of Postgraduate Medical Education & Research, he said: “The current Banking Regulation Act does not allow the model of Islamic banking.

Under the current Act, banks are required to borrow and deposit (and paying interest) with RBI, and to give interest to depositors.”

One of the basic principles of an Islamic banking system is that there should not be collection or payment of interest.

It also includes risk sharing by banks, rather than the risk-transfer method followed by conventional banks.

According to earlier reports, Union law minister Salman Khurshid had written to RBI for a response on the issue. Prime Minister Manmohan Singh had in 2010 itself asked the central bank to look at Islamic banking practices in Malaysia as a possible model. An attempt by the earlier Left Democratic Front government in Kerala to allow the start of a bank based on Islamic principles had met legal hurdles in 2010.

On foreign direct investment (FDI) in multibrand retailing, Subbarao said it would help consumers get better quality products at reasonable prices. At present, around 40 per cent of farm products perish before reaching the market and FDI could bring in a better supply chain, helping producers get more benefit. The apprehensions on FDI were understandable but in the long term, he added, it would be good for the economy.

On food inflation, he said addressing it was largely the domain of the government and it had initiated some programmes which needed to be expanded. Retail FDI would help reduce wastage, thus increasing the supply.

Food inflation in the long term would harden inflation expectations among people and RBI was trying to break those expectations, he added.

(Courtesy: Business Standard)

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