RBI allows non-bank Islamic finance firm

The Reserve Bank of India (RBI) has allowed a firm in Kerala to operate as a non-banking financial company (NBFC) that follows Islamic principles - a small step towards developing sharia-compliant finance in the country.

An estimated 177 million Muslims in India, the largest Muslim minority population in the world, are unable to use Islamic banks because laws covering the sector require banking to be based on interest, forbidden in Islam. But some companies, especially in Kerala which has a large Muslim population and a diaspora of workers who remit money back from the Gulf, are nevertheless trying to develop Islamic financial products outside the banking sector. Cheraman Financial Services, based in Kochi, plans to offer leasing and equity-finance products under Islamic principles. It said it had obtained approval to operate from RBI and would follow the Islamic ban on interest; it will not take deposits from customers. "We propose to roll out the products by the end of August," a spokesman for Cheraman, formerly known as Al Barakah Financial Services, said.

He did not elaborate on the design of the products. Instead of interest, Islamic finance uses structures such as asset buy-backs and agency agreements to provide returns to investors. The RBI did not respond to a request for comment on Cheraman's case. But its decision appears to open the door to the possibility of more NBFCs offering Islamic non-interest products in future, even though full-fledged Islamic banks are expected to remain banned. RBI governor Duvvuri Subbarao, who will step down in September, has said Islamic banking is not possible in the country but sharia-compliant products could be delivered through alternative means.