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Monday, February 07, 2011

Kerala High Court clears way for India's first Islamic bank

 

India is all set to have its first Islamic bank.

The Kerala High Court on Thursday dismissed petitions challenging the Kerala government's decision to establish India's first Islamic Bank which will work on the principles of Shariah.

The order came from a Division Bench comprising Chief Justice J Chalameswar and Justice P R Ramachandra Menon, which rejected petitions filed by Janata Party President Subramaniam Swamy and another. The petitioners contended that the state establishing a bank which will work on the principles of a religion will violate the principle of secularism enshrined in the Constitution. However, the court did not agree.

Reacting to the HC verdict, Swamy said he will consider appealing to the Supreme Court after going through the full text. ``I will challenge the same if it was dismissed on merits,'' he said.

The state had first floated the idea of establishing the bank under an entity registered as Al-Baraka Financial Services way back in December 2009. The bank was also to have a body of Islamic scholars to advise whether the principles of shariah were being complied with.

A report by Ananthakrishnan G in Times of India. More Here.



'It is not a case of supporting or promoting a particular religion', HC snubs Subramaniyam Swamy.

The judges said that under Article 298, if the State government had the freedom or authority to carry on any trade or business or acquire or dispose of property and to enter into a contract, the belief that the State was prohibited from doing any trade or business, either with a religious organisation or an organisation which proposed to carry on a business in a manner compliant with a set of religious beliefs, would be “ inconsistent with the established rules of interpretation of constitutional documents.” The Constitution did not place any “absolute embargo” on the government associating itself with any religious activity.

The petitioners could not demonstrate how the impugned government order had brought about the effect of directly promoting a particular religion, the Bench said

The government's intention was to derive commercial benefits from the venture. Money from the exchequer would be paid to an institution which did not propose to carry on religious activities such as preaching or propagation.

The government's participation in such a joint venture would not have the primary and direct effect of supporting or promoting a particular religion.

From a report in The Hindu. More Here.

A major victory in the battle of establishing Islamic Bank in India

The move has much broader implications considering Islamic finance has not taken off due to a stand taken by RBI that such a form of banking is not possible given present regulation. This stance was taken by an internal working group of RBI whose report was never made public. In the past, Islamic scholars had made representations to RBI to allow such products. Subsequent representation to allow Islamic finance products was stalled as the government was awaiting the verdict of the Kerala High Court.

H Abdur Raqeeb with Amit Mithra
The key difference between Islamic and conventional banking is that while the conventional form offers interest on deposits mobilized, Islamic finance works on the principles of investment and sharing of profits. Islamic banking products are offered by leading banks in the West who also use Shariah compliant products to mobilize funds from the Middle East.

Exisiting lenders like State Bank of India too have considered the feasibility of launching Islamic finance products through its international banking operations. However, these products have not taken off because of lack of regulatory clarity. Some bankers feel that considering that India has the second largest Muslim population in the world, there will be large potential for Islamic banking products.

In January 2010, the HC had stayed implementation of the proposal on petitions by Janata Party chief Subramanian Swamy and Hindu Aikyavedi leader R V Babu who argued that the participation of the state government in such an institution went against secular principles enshrined in the Constitution.

 

H Abdur Raqeeb with Pranab Mukherjee
Dismissing the petition, the court observed that although the institution was based on the principles of a religion, its motive was not to propagate the religion and the state's participation in it was purely based on commercial prospects. ''Therefore, there is no need to object the state's participation in it,'' the bench said. The bench said the Reserve Bank of India would examine whether the Islamic financial institution went against any of the central bank's guidelines. Swamy said he would decide on the future course of action after studying the verdict.

''We have made representations to the RBI and government and submitted them documents to show how banks in UK and Singapore, Hong Kong and Japan have amended their regulations to facilitate Islamic finance. They have told us that they will look into it,'' said H Abdur Raqueeb, general secretary, Indian Centre for Islamic Finance-ICIF. He added that although ICIF has made representations to the finance ministry as well, they have been informed that the matter was sub-judice.

State-owned Kerala State Industrial Development Corporation (KSIDC) began work after finance minister Thomas Isaac had floated such an idea in 2009. The plan was to start an institution based on Islamic banking principles and this was to be established under another entity, which was registered as Al-Baraka Financial Services. The proposal was also to appoint an advisory body, comprising Islamic scholars who would ensure that the institution functioned under the Shariah rules. KSIDC was to hold 11% share in Al-Baraka. The financial institution also has 14 promoters and Gulf-based Kerala entrepreneurs P Mohammed Ali and C K Menon are to hold the posts of its chairman and vice-chairman respectively.
From a report of T Ramavarman in Times of India. More Here.

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