Islamic banking on offer soon

Overseas branches of domestic banks may be able to offer Islamic banking products. RBI is exploring the possibility of allowing them to do so.

Islamic banking products are designed in sync with the principles of Islam. The products have to keep in mind that banks can't pay interest on deposits nor charge for advances, as interest income is not allowed in the religion. Specialised Islamic banking products are designed on profit-sharing basis.

Internationally, banks that offer such products take help from consultants in Islamic law and get their products vetted by them before offering them to public. The consultants also monitor the Shariah compliance of the products at various stages.

RBI has set up an internal group to study the pros and cons of allowing domestic banks offer such products in international markets. However, when contacted, an RBI spokesperson said, "Currently, there is no proposal with RBI on Islamic banking."

Earlier, a committee constituted by RBI to examine the issue had viewed that Islamic banking cannot be offered by banks in India as well as overseas branches of local banks under the present legal framework. However, the government has been receiving repeated requests to allow banks to offer Islamic banking in the country and permit overseas branches to selectively offer such products.

The proposal is considered significant since a number of domestic banks are expanding their global footprint, often launching business in countries where Islam is a dominant religion. The banks find it tough to compete in such countries as others offer such products.

"For branches of Indian banks to grow in countries such as Malaysia as well as the Gulf region, they would have to offer products that would sell there. And, since all other banks with whom they have to compete offer Islamic banking products, they would also have to develop such products," banking expert US Bhargava said.

However, he said since domestic banks don't have experience in such products, they will have to study them in-depth. In the UK, there is a law that makes it possible for banks to offer Islamic banking products. In India, the Banking Regulation Act even disallows an Indian bank from floating a subsidiary abroad to launch such products.