RBI GOVERNOR DR. RAGHURAM RAJAN AND ISLAMIC BANKING

By Mufti Muhammad Yahya  Qasmi

Many collective and individual efforts have been made for the cause of Islamic banking in India. Prime Minister himself, after the visit to Malaysia recently, had endorsed Islamic Banking and asked Reserve Bank of India to look into the Malaysian model.
The Hon’ble President of India and erstwhile union Finance Minister Mr. Pranab Mukherjee had promised a delegation of Indian Centre for Islamic Finance (ICIF) in 2009, to discuss prospects of interest free-banking in India with Reserve Bank of India Governor.
 Union Minority Affairs Minister Rehman Khan has shared his aspirations on Islamic Banking to the new Reserve Bank of India Governor Dr. Raghuram Rajan.  National Commission for Minorities chairman Wajahat Habibullah had also openly supported the same.
Reserve Bank of India (RBI) instilled a new hope in this process by granting licence to an NBFC operating in a Shariah tolerant manner in Kerala. The government of Kerala have 11% holding in this company. And above all, the appointment of Raghuram Rajan as the 23rd Governor of the Reserve Bank of India has further brightened the prospects of Islamic Banking in India..
In 2005, Government of Indian asked Reserve Bank of India to examine Islamic Banking instruments and constituted a Working Group headed by Mr. Anand Sinha, Chief Manager, Department of Banking and Operation and Development along with senior Bankers from SBI, ICICI and Oman International Bank that came up with its report in 2006 which said: In the current statutory and regulatory framework it would not be possible for banks in India to undertake Islamic Banking activities and concluded that if the banks are allowed to do Islamic banking appropriate amendments are required in Banking regulations Act 1949.
In August 2007, Govt. of India under planning commission constituted a high level committee on Financial Sector reforms (CFSR) under the chairmanship of Dr. Raghuram Rajan, former chief economist, IMF along with other eleven members who are the finest financial and legal minds in the country.  CFSR submitted its final report in Sept. 2008 to Prime Minister with the specific recommendation of interest free banking in country:
“Another area that falls broadly in ambit of financial infrastructure for inclusion is the provision of interest-free banking. Certain faiths prohibit the use of financial instruments that pay interest. The non-availability of interest-free banking products (where the return to investor is tied to the veering of risk, in accordance with the principles of that faith) results in some Indians, including those in the economically disadvantaged strata of society, not being able to access banking products and services due to reasons of faith. This non-availability also denies India access to substantial sources of savings from other countries in the region.
While interest-free banking is provided in limited manner through NBFCs and Cooperatives, the Committee recommends that measures be taken to permit the delivery of interest-free finance on a larger scale, including through the banking system. This is in consonance with the objectives of inclusion and growth through innovation. The Committee believes that it would be possible, through appropriate measures, to create a framework for such products without any ad verse systemic risk impact.”
Dr. Raghu Ram Rajan had submitted the report in 2008 in which he recommended for interest free-banking. During preparation of report, he, surely, must have seen closely the possibilities of Islamic Banking and its growing development, evasion of Indian Muslims from conventional banking due to their belief and faith, their participation in Indian economic mainstream and causes of their underdevelopment and poverty. That is why he, having mentioned these things in his report, advised to set up interest-free banking in India. So, it is a good sign for interest-free banking in India that a person who himself recommended for Islamic Banking, was appointed as the Governor of Reserve Bank of India, and he, by his powers, could play a key role in this regard.
But, on 5th September 2013, while addressing the press conference after taking the oath as the 23rd Governor of Reserve Bank of India he had not any reference to this. But he believes in change as he said: ‘This is part of my short term time table for the Reserve Bank. It involves considerable change, and change is risky. But as India develops, not changing is even riskier. We have to keep what is good about our system, of which there is a tremendous amount, even while acting differently where warranted. The RBI has always changed when needed, not following the latest fad, but doing what is necessary.’
His statement indicates that some rules and laws which are obstacles to economic growth and financial stability also could be modified, and amendment may be made to the rules, because he, as a great economist, might have read the changes in financial and banking industry around the world in recent years.
The rapid growth of Islamic banking is amazing economists of the world. Therefore, according to The Ernst & Young report published on 24 May 2013, “The Islamic banking growth story continues to be positive, growing 50% faster than the overall banking sector. The industry is growing at 20 % per annum. Islamic banking assets with commercial banks globally grew to $1.3 trillion in 2011, and are forecast to grow beyond $2 trillion by 2014. This year, we launch the EY Islamic Banking Universe that tracks industry performance across core Islamic finance markets with a combined GDP of $5 trillion in 2011.” According to Standard & Poor’s Islamic Finance Outlook 2012, “Banks will spearhead double-digit growth in global Islamic finance in the years to come, and believe it is reasonable to project a compound annual growth rate (CAGR) of about 20% over 2011-2015, or roughly a doubling in size over the period.”
Looking at the growth of Islamic Banking utility, International banks like JP Morgan, Dow Jones, Citibank, Morgan Stanley and Stan Chart Bank have implemented the same. Financial institutions are adopting Islamic finance on the basis of its market power and sustainability. That is why HSBC and Citigroup have established Islamic Finance Division around the globe in 1990. In the same year, Ernst & Young also opened its doors for Islamic financial services. Even the central banks also have surrendered   to the attraction of Islamic finance. West London will soon be the centre of Islamic finance. Japanese and British governments have announced the issuance of Islamic bonds (skuk) for attracting Muslim investors.
France has also made change in its legal code to attract Islamic investors. All important banks have Islamic windows in London. Amendment has been done to make Islamic finance easy in many non-Islamic financial centres like London, Singapore and Hong Kong. Moreover, diversified and ethical based products of Islamic banking attracted non-muslim investors. 40% of customers of Islamic banks in Malaysia and 20% in UK are non-Muslims.
 The new governor of RBI Dr. Raghuram Rajan might have known the above mentioned statistics of development of Islamic finance and banking. Therefore, in the light of his statement, it can be understood that, looking at the progress and growing significance of Islamic banking in world economy, he will focus on it, and play a great role to introduce Islamic banking in India.
 The most important news for him is that recently Reserve Bank of India (RBI) gave a green signal to Kerala government to set up non-banking finance company. According to THE TIMES OF INDIA report published on 18 August 2013: “The Kerala government has got a go-ahead from the Reserve Bank of India to launch a financial institution following the principles of Islamic finance. Cheraman Financial Services Limited (CFSL) will be floated by Kerala State Industrial Development Corporation to function as a non-banking finance company (NBFC). A formal announcement on CFSL, the latest incarnation of Al Baraka Financial Services, was made on Saturday.” This news provided Mr. Rajan with an important precedent for the implementation of his recommendations.