Islamic Banking: Appeasement leading to peril!?
by B R Haran on 05 Feb 2010 5 Comments

As a continuation of its minority appeasement policy and votebank politics, the UPA is contemplating introduction of ‘Islamic Banking’ in the guise of attracting investments from Gulf countries to the tune of $ 1 trillion. The Centre had silently formed a committee, headed by the Cabinet Secretary, comprising secretaries of other ministries, including finance, as its members. This submitted its report to the government recommending introduction of Islamic Banks, as if they are highly productive. Based on this report, the RBI and Finance Ministry are believed to be working jointly on necessary legislative changes for implementation of Islamic Banking in India.


K Rahman Khan, Deputy Chairman, Rajya Sabha, and patron of ‘Indo-Arab Economic Co-operation Forum’ is organizing an “Indo-Arab Economic Summit” on Feb. 3 & 4 in New Delhi, confirmed the government’s move and said investments from Arab countries would be attracted by opening up channels like ‘venture capital’ and ‘mutual fund’ which would be ‘Sharia compliant’! He confirmed such Sharia compliant initiatives being implemented in UTI and SBI.



Leading international banks such as HSBC and Standard & Chartered have exclusive Islamic banking windows. The Raghuram Rajan Committee’ set up by the Planning Commission in 2008 to recommend various ways to take the country’s financial sector reforms forward, also recommended certain principles of Islamic Banking.

( ).


Islamic banking can be defined as a system of banking or banking activity consistent with the principles of Islamic law (Sharia) and its practical application through the development of Islamic economics. The important aspect in this system is that Sharia prohibits the payment or acceptance of interest fees for the lending and accepting of money respectively, (Riba, usury) for specific terms, as well as investing in businesses that provide goods or services considered contrary to its principles (Haraam, forbidden).


While these principles were used as the basis for a flourishing economy in earlier times (8th-12th centuries), it is only in the late 20th century that a number of Islamic banks were formed to apply these principles to private or semi-private commercial institutions within the Muslim community.


Started in 1963 in Egypt, Modern Islamic Banking is growing at a rate of 10% to 15% with more than 300 institutions spread over 51 countries, including the United States. The “World Islamic Banking Conference”, held annually in Bahrain since 1994, is internationally recognized as the largest and most significant gathering of Islamic banking and finance leaders in the world. Interestingly, the Vatican has also put forward the idea that “the principles of Islamic finance may represent a possible cure for ailing markets”!


Islamic Banks operate in accordance with the rules of Sharia, known as Fiqh al-Muamalat (Islamic rules on transactions). The basic principle of Islamic banking is the sharing of profit and loss and the prohibition of riba (usury). In an Islamic mortgage transaction, the bank doesn’t give loans to the buyer. Instead, the bank itself buys the item from the seller, and re-sells it to the buyer at a higher-than-market price keeping a huge profit margin, while allowing the buyer to pay in installments. To safeguard itself against default by the buyer, the bank asks for strict collateral. So, the profit margin acts as the ‘interest’ through backdoor!

( ).


Even while the Centre was considering the idea of introducing Islamic Banking, the Kerala state government took a fast decision in mid-August and approved a project report prepared by Ernst & Young. In its order dated 14 Oct., the Kerala government accorded sanction for registration of an Islamic finance serving company by Kerala State Industrial Development Corporation, to provide financial service as per Sharia laws. Kerala State Industrial Development Corporation, the designated agency for the formation of the bank, would have 11% stake in the proposed banking company and it would be initially registered as a non-banking finance company and later get transformed into a full-fledged Sharia-compliant bank. The government had planned to complete all registration formalities in 2009, so that the NBFC could become operational in 2010.


In a reply (CHN/RIA/09/985/22 dated 10.11.2009) to the application of one Mr. T.G. Mohandas under ‘RTI Act’ of 2005, Kerala State Industrial Development Corporation represented by its Managing Director stated that: KSIDC is taking steps to promote Islamic Financial Institution; it is a company promoted by the Private Promoters and KSIDC; the proposed institution will not collect interest or charge interest for financing. It will function with full compliance of SHARIA PRINCIPLES. Advertisements for filling up vacancies for the positions of Chief Executive Officer (CEO), Company Secretary and so on have been placed in the website ( and in the terms of reference for CEO, it is stated that he will report to the Sharia Advisory Board.  


The activities of the institution would be monitored by a Sharia Advisory Board, which would include independent scholars on Sharia and Banking business.


This move of the Kerala Government was challenged by former Union Minister and Janata Party President Dr. Subramanian Swamy in the state High Court. Though his petition cited the above facts, the High Court pointed out that he had not produced documents confirming the constitution of the board and posted the matter for 5 January, as Dr. Swamy sought time to produce the documents. (


Dr. Swamy contended that an Islamic bank, or even NBFC, that operates in India, would violate the laws, rules and regulations such as

1)      Partnership Act (1932), which stipulates a maximum of 20 partners, since KSIDC says it will be an open partnership between it and private investors without limit.

2)     Wagering (not permitted under Sharia) as per Section 30 of Indian Contract Act (1872).

3)     Sections 5(b) & (c), 9 and 21 of Banking Regulation Act (1949) on prohibition of profit-sharing, buying and selling property, and for not charging interest.

4)     RBI Act (1934)

5)     Negotiable Instruments Act (1881) and

6)     Co-operative Societies Act (1961). 


In his PIL, Dr. Swamy contended that public money was being appropriated to favour a particular religion in a secular country, as KSIDC has 11% stake in the multi-crore bank. He said, “The government’s participation is clear instance of state favouring a particular religion. The Sharia is the canon law of Muslims. A financial services company set up with government participation which would follow the canon law of a particular religion is a clear instance of the state favouring a particular religion. This is violative of Article 14 and 25 of Constitution which promises equality before law and right to freedom of religion. A 7-judge bench of the SC had ordered that no public money should be used for promoting institutions of a particular religion.”


Citing (Ramana D Shetty v. International Airport Authority of India, AIR 1979 SC 1628: (1979) 3 SCC 489), SR Bommai v. Union of India (1994) 3 SCC 1, 233) and M.P Gopalakrishnan Nair v. State of Kerala, (2005) 11 SCC 45) Dr. Swamy prayed for the following:

A) Call for records leading to the case and issue a writ of certiorari or any other appropriate writ, order or direction, quashing the Government Order;

B) Issue such other appropriate writ, order or direction which this Hon’ble Court may deem fit in the circumstances of the case

C) Award costs


When the case came up for hearing on 5 January, the division bench of the Kerala High Court stayed all further moves by the state-owned Kerala State Industrial Development Corporation (KSIDC) to set up the Islamic bank in the state. The division bench accepted Dr. Swamy’s petition and issued notices to the Union government and KSIDC.


Even while silently watching the Kerala High Court’s proceedings, the Congress-led UPA has been going ahead with its scheme to introduce Islamic Banks in India. Anticipating strong opposition to this blatant appeasement, the government seems to be thinking of giving a ‘secular’ colour by naming it ‘Participative Banking’ rather than ‘Islamic Banking’. This reminds us of Rural Development Minister CP Joshi’s outrageous proposal of automatic inclusion of Muslims in the BPL list along with Scheduled Castes and Scheduled Tribes, wherein he suggested the word ‘minority’ in place of ‘Muslims’ to preempt opposition.


At this juncture, it would be appropriate to recall UPA’s Muslim-appeasement politics. It began with the repeal of POTA and Sonia’s call for a Muslim headcount in the Armed Forces. It continued with the unwarranted constitution of Justice Banerjee Committee to inquire the Godhra train carnage, Prime Minister’s rousing announcement that Muslims had the first claim on resources, constitution of the Sachar Committee and Ranganath Mishra Commission. And now the Rural Development Ministry’s suggestion to include Muslims automatically in the BPL list and the proposal to introduce Islamic Banks!


Dr. Swamy is right in questioning the silence of the Congress in Kerala: “The Congress does not want to annoy rich Dubai-based industrialists and hawala operators. Moreover, since the Prime Minister’s Principal Secretary TKA Nair is the Chairman of the KSIDC, and Dr Manmohan Singh believes that Muslims must get first charge on our resources, the party is keeping silence, much as Bhishma and Drona kept quiet when Draupadi was disrobed. Hence, patriots in Kerala must rise and protest to save Kerala from fast-creeping Islamisation. And rest of India must help”.


Though Islamic Banking has spread across 51 countries including Europe and America, “Islam Watchers” and “Security Experts” are skeptical about the sudden surge of this new system. “CBN News” reports that, the Sharia Finance is a distortion of Koranic teachings and not widely practiced by Muslims themselves until the 1960s; it is being promoted as a weapon against western countries. They term it “Financial Jihad” or “Jihad with Money”. They feel that Sharia Advisory Boards would comprise ‘fundamentalist’ clerics and the money would be used for waging jihad as per the scriptures, to destroy constitutional form of governance.



This kind of system may hold good for Islamic nations, but certainly not for a secular country like India, which has Hindus constituting 85% of the population. At a time when there is an urgent and necessary need for a united India, it is condemnable that the UPA government is consistently following the policies of appeasement, divide & rule and votebank politics. Because of this the Muslim community is getting more and more alienated from the rest of the country, and it is unfortunate that Muslims do not realize this sad fact! The sooner they do the better for our country.


The writer is a senior journalist; he lives in Chennai

User Comments Post a Comment
Comments are free. However, comments that include profanity or personal attacks or other inappropriate material will be removed from the site. Readers may report abuse at
Post a Comment

Back to Top