Subbarao: Need separate legislation for Islamic banking

Last Updated: Thu, Nov 22, 2012 19:41 hrs

Reserve Bank of India (RBI) Governor D Subbarao on Thursday said separate legislation should be enacted to commence Islamic banking in India.

“There should be separate legislation for the purpose. The Kerala government had proposed to permit Islamic banking, as the inward remittance here is the highest. Though RBI is not against the idea, we can work only under the country’s legal framework,” he said.

RBI had studied Kerala’s proposal thoroughly and it felt there were a few legal hurdles to implementing the proposal, he said, adding it wasn’t possible to resolve these under the current banking framework, according to which interest has to be charged on both deposits and loans. Under the Islamic banking system, interest is not permitted.

Subbarao said RBI would consider India’s economic situation before taking a decision on the policy rate. “We will announce our decisions at the next review meeting scheduled for December 18,” he said.

Earlier, addressing an event marking Ernakulam district in Kerala as the country’s first with total financial inclusion, he said merely having a bank account wasn’t sufficient; people should use the account actively and secure credit, microinsurance and other financial assistance through banks. Through this, leakages on the part of the government would be curtailed to a great extend. Banks should not see this as an obligation, but as a viable business model, he said, adding financial exclusion was higher in urban areas.

The RBI governor also said banks had been directed not to insist on collateral securities to give educational loans of up to Rs 4 lakh.

RBI has suggested financial literacy be included in the curriculum of primary schools and has also prepared study material for this. This has been translated into regional languages and a pilot project on this has been launched in Karnataka.

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