Beginning of Islamic Banking in India

The first Islamic bank in the country with active involvement of the Kerala government is likely to start operations in Kochi by next year as the bank's registration formalities are currently being fulfilled on a war footing.

Kerala State Industrial Development Corporation, which is the designated agency for the formation of the bank, will have 11 per cent stake in the proposed banking company.

It will be registered as a non-banking finance company in the beginning and later get transformed into a full-fledged Shari'ah-compliant bank. It is likely that the registration formalities will be completed in the current year itself and the NBFC will become operational in 2010.

The project proposes to raise an initial capital of Rs 500 crore (Rs 5 billion) from leading non-resident Indians and Indian business houses. According to sources close to the development, leading NRI businessmen such as Mohammed Ali, MA Yusuf Ali, CK Menon and other Kerala-based industrialists such as Azad Mooppan have shown keen interest in the venture.

Though an RBI study group had eariler rejected the concept of Islamic banking, it got the backing of the Raghuram Rajan Committee on banking reforms. Purely based on Shari'ah principles, the bank will avoid interest-based business activities.

The proposed Kerala-based bank plans to invest funds in infrastructure projects, and two areas, Bai al Salam and Instinsa, under Shari'ah have been identified for such investments.

The bank will invest all its funds in wealth generating investment avenues and will distribute profit to its shareholders. The proposed Islamic bank will also set apart a social fund, compulsory under Shri'ah principles and the Islamic banking concept, and will provide interest-free loans to the Gulf returnees to set up business or small scale ventures.

The concept is getting widespread support among the Muslim community of the state as a large number of rich Muslims are strictly practicing Shari'ah principles in business.

A major chunk of such persons do not have a bank account. A lot of discussion is also going on whether investment in capital market is against Shari'ah principles. A section of the community believes that share trading is against the fundamentals of Islam. So the formation of an Islamic bank will be a relief to them.

This concept is very popular in West Asia and in predominantly Muslim nations such as Malaysia and Indonesia. Leading international banks such as HSBC and Standard & Charted have exclusive Islamic banking windows.

The biggest challenge before the Kerala-based bank will be the formation of a Shai'ah Supervisory Board in order to monitor the activities of the bank. The board should include independent scholars on Shari'ah and banking business.