Islamic Banking in India

INTRODUCTION

There are many types of banking in this world, and the most widely known are the Conventional banking and the Islamic banking. As the name would imply, it should follow the principles of Sharia Laws, also known as Fiqh-ul-mua’amlat. As the history would have it, the origin is officially known as since 1960s but it begins from much earlier in time. The scholars have categorized Islamic banking into three; Early age, Middle age and Modern age.

The early age refers to the era when Prophet Mohammed did not receive the holy revelations and he was not known as a prophet. Then, trade was in a rudimentary stage. The middle age is believed to have lasted till the empire of Calip Uthman which was affected by the takeover of Roman Empire although ‘Fatwas’ was frequently promulgated in the interest of Islamic banking. Lastly, the modern era is said to begun when Mit Ghamr Savings bank started off in 1963 in Egypt. It contributed to the lives of farmers and poor strata for the better since it offered social service, loans, Equity participation, etc. However, soon the grey areas began to muddy the waters and a need for scholars of sharia banking was felt. Taking a lead, the King faisal bin abdul aziz al saud of Saudi Arabia called upon the Organization of Islamic Countries to set up proper Islamic banks and this led to the establishment of Dubai Islamic Bank, Islamic development bank and Faisal Islamic Bank of Egypt.

Basically, it is a finance management system based on a cooperation and partnership amongst the depositors, borrowers and the shareholders that is to say it is based on a profit-and-loss sharing model taking a shift from the interest. This principle, like many other principles of Islam, were formed out of general consensus within the Islamic scholarship. The choice of alternative to the Interest Rate was accepted in many parts of the world on a popular rationale that given the economics and justice it will be unfair if anyone accrued fixed profits by lending out fully secured funds while being insulated against any chance of losses in relation to those who invest time, energy and help a business succeed without being guaranteed fixed profits. The principles of Islamic banking bar the charging of Interest (known as ‘Riba’ in Arabic) over the principle amount lent, its utilization for business activities and works on an agreement to share the fortunes and misfortunes are the most crucial differentiating features. The reasons for such standards are purely religious, in that, the holy Qur’an forbids ‘Riba’ (Interest) in Surah-al-Imran verses 13—132: “O believers, take not doubled and redoubled interest, and fear God so that you may prosper”. This belief holds that Riba makes the Rich, Richer and the Poor, Poorer, thereby disturbing the equality in the society as contradictory to the Islamic ideals of societal peace and progress. This system has grown to be a controversial one as it burst into popularity since the first modern Islamic bank began operations in Pakistan in late 1950s. Multitudinous Islamic banks grew in the period of 1970s. The Second oil crisis of 1980 played a huge role in moving the Islamic Banks in the western countries as the oil-rich countries UAE, Saudi Arabia and Kuwait began ‘Internationalization’ and globalising their finance entities after the crisis. In India, the first such Islamic bank began its operations in kerela through an agency kerela state industrial development corporation (KSIDC). This followed a nod from the High Court of Kerela after the bench comprising of Justices Chelameswar and Ramchandra Menon dismissed two pleas challenging the establishment of Islamic bank on its alleged grounds that it runs against secularism and favors a particular religion over others. This has sufficiently indicated judiciary’s support for such entities. Apart from that, some Islamic banks in india are Tameem Impex, Associated Industrial Creidt Society Al-Siraat Investment & Banking, Baitun Nasr Urban Co-operative society, etc.

Principles and Application

Its principles

1. That the Payment of interest as the time value for money is considered forbidden

2. That banks are restricted from investing in ‘haram’ industries such as pornography, pork, alcohol, gambling, or anything that might be considered un-Islamic.

3. That trading in debt is prohibited except ‘sukuk’ which are certificates issued to investors against money due to which investors have a share in the tangible asset produced or profit directly generated by it unlike interest paid in bonds.

4. That banks should own products before lending them.

Islamic financing is on the “Financing on Profit & Loss Sharing” (PLS) basis. The bulk of financing by Islamic banks has to be equity oriented. In this mode of financing, the losses are shared by the financier along with the entrepreneur in the ratio of their respective capitals. [1]

Musharakah means a joint enterprise formed for conducting some business in which all partners share the profit according to a specific ratio while the loss is shared according to contribution ratio. Partnership is of two types based on Joint ownership (ul-mulk) and based on contract (ul-aqd).

In practice, Mudaraba works in diminishing manner for illustration ‘A’ wants to purchase a taxi to use it for offering transport services to passengers and to earn income through fares recovered from them, but he is short of funds. ‘B’ agrees to participate in the purchase of the taxi, therefore, both of them purchase a taxi jointly. 80% of the price is paid by ‘B’ and 20% is paid by ‘A’. After the taxi is purchased, it is employed to provide transport to the passengers whereby the net income of Rs. 1000/11is earned on daily basis. Since ‘B’ has 80% share in the taxi, it is agreed that 80% of the fare will be given to him and the rest of 20% will be retained by ‘A’ who has a 20% share in the taxi. It means that Rs. 800/- is earned by ‘B’ and Rs. 200/- by ‘A’ on daily basis. At the same time the share of ‘B’ is further divided into eight units. After three months ‘A’ purchases one unit from the share of ‘B’. Consequently the share of ‘B’ is reduced to 70% and share of ‘A’ is increased to 30% meaning thereby that as from that date ‘A’ will be entitled to Rs. 300/- from the daily income of the taxi and ‘B’ will earn Rs. 700/-. This process will go on until after the expiry of two years, the whole taxi will be owned by ‘A’ and ‘B’ will take back his original investment along with income distributed to him as aforesaid.

In Salam, the seller undertakes to supply specific goods to the buyer at a future date in exchange of an advanced price fully paid at spot. The price is in cash but the supply of purchased goods is deferred Purpose of use: To meet the need of small farmers who need money to grow their crops and to feed their family up to the time of harvest. When Allah declared Riba haram, the farmers could not take usurious loans. Therefore Holy Prophet allowed them to sell their agricultural products in advance. To meet the need of traders for import and export business. Under Salam, it is allowed for them that they sell the goods in advance so that after receiving their cash price, they can easily undertake the aforesaid business. Salam is beneficial to the seller because he received the price in advance and it was beneficial to the buyer.

Istisna is a sale transaction where a commodity is transacted before it comes into existence. It is an order to a manufacturer to manufacture a specific commodity for the purchaser. The manufacturer uses his own material to manufacture the required goods. In Istisna, price must be fixed with consent of all parties involved. All other necessary specifications of the commodity must also be fully settled. Cancellation of contract after giving prior notice, either party can cancel the contract before the manufacturing party has begun its work. Once the work starts, the contract cannot be cancelled unilaterally. Istisna’ as a mode of financing Istisna may be used to provide financing for house financing. If the client owns a land and seeks financing for the construction of a house, the financier may undertake to construct the house on the basis of an Istisna. If the client does not own the land and wants to purchase that too, the financier can provide him with a constructed house on a specified piece of land. The financier does not have to construct the house himself. He can either enter into a parallel Istisna with a third party or hire the services of a contractor (other than the client). He must calculate his cost and fix the price of Istisna with his client that allows him to make a reasonable profit over his cost. The payment of installments by the client may start right from the day when the contract of Istisna is signed by the parties. In order to secure the payment of installments, the title deeds of the house or land, or any other property of the client may be kept by the financier as a security until the last installment is paid by the client. The financier will be responsible to strictly conform to the specifications in the agreement for the construction of the house. The cost of correcting any discrepancy would have to be borne by him. Istijrar means purchasing goods time to time in different quantities. Istijrar is an agreement where a buyer purchases something from time to time; each time there is no offer or acceptance or bargain. There is one master agreement where all terms and conditions are finalized. There are two types of Istijrar: Whereby the price is determined after all transactions of purchase are complete. Whereby the price is determined in advance but the purchase is executed from time to time. The first kind is relevant with the Islamic mode of financing. This kind is permissible with certain conditions. In the case where the seller discloses the price of goods at the time of each transaction; the sale becomes valid only when the buyer possess the goods. The amount is paid after all transactions have been completed. If the seller does not disclose each and every time to the buyer the price of the subject matter, but the contractors know that it is being sold on market value and the market value is specified and determined in such a manner that it does not vary and it does not lead to differences of the contractors. If at the time of possession, the price of subject matter was unknown or contractors agree that whatever the price shall be, the sale will be executed.

Most of the Islamic banks and financial institutions are using “Murabaha” as an Islamic mode of financing, and most of their financing operations are brd on “Murabaha”. That is why this term has been taken in the economic circles today as a method of banking operations. “Murabaha” is, in fact, a term of Islamic Fiqh and it refers to a particular kind of sale having nothing to do with financing in its original sense. If a seller agrees with his purchaser to provide him a specific commodity on a certain profit added to his cost, it is called a “murabahah” transaction. The basic ingredient of “murabahah” is that the seller discloses the actual cost he has incurred in acquiring the commodity, and then adds some profit thereon. This profit may be in lump sum or may be based on a percentage. The payment in the case of murabahah may be at spot, and may be on a subsequent date agreed upon by the parties. Therefore, murabahah does not necessarily imply the concept of deferred payment.

Murabahah, in its original Islamic connotation, is simply a sale. The only feature distinguishing it from other kinds of sale is that the seller in murabahah expressly tells the purchaser how much cost he has incurred and how much profit he is going to charge in addition to the cost. If a person sells a commodity for a lump sum price without any reference to the cost, this is not a murabahah, even though he is earning.

The actual sense of the term “Murabahah” is a sale, pure and simple. However, this kind of sale is being used by the Islamic banks and financial institutions by adding some other concepts to it as a mode of financing. But the validity of such transactions depends on some conditions which should be duly observed to make them acceptable in Shariah.

The rules of Sale in sharia

The subject of sale must be existing at the time of sale. If a non-existent thing has been sold, though by mutual consent, the sale is void according to Shariah. Example: A sells the unborn calf of his cow to B. The sale is void. The subject of sale must be in the ownership of the seller at the time of sale. If he sells something before acquiring its ownership, the sale is void.

Example: A sells to B a car which is presently owned by C, but A is hopeful that he will buy it from C and shall deliver it to B subsequently. The sale is void, because the car was not owned by A at the time of sale.

The subject of sale must be in the physical or constructive possession of the seller when he sells it to another person. Example: A has purchased a car from B. B has not yet delivered it to A or to his agent. A cannot sell the car to C. If he sells it before taking its delivery from B, the sale is void. The sale must be instant and absolute. Thus a sale attributed to a future date or a sale contingent on a future event is void.

If the parties wish to effect a valid sale, they will have to effect it afresh when the future date comes or the contingency actually occurs. Example: A says to B on the first of January: “I sell my car to you on the first of February”. The sale is void, because it is attributed to a future date. The subject of sale must be a property of value Thus, a thing having no value according to the usage of trade cannot be sold or purchased. The subject of sale should not be a thing which is not used except for a haram purpose, like pork, wine etc. The subject of sale must be specifically known and identified to the buyer. Example: There is a building comprising a number of apartments built in the same pattern. A, the owner of the building says to B, “I sell one of these apartments to you”; B accepts. The sale is void unless the apartment intended to be sold is specifically identified or pointed out to the buyer. The delivery of the sold commodity to the buyer must be certain and should not depend on a contingency or chance. Example: A sells his car stolen by some anonymous person and the buyer purchases it under the hope that he will manage to take it back. The sale is void. The certainty of price is a necessary condition for the validity of a sale. If the price is uncertain, the sale is void. Example: A says to B, “If you pay within a month, the price is Rs. 50. But if you pay after two months, the price is Rs. 55”. B agrees. The price is uncertain and the sale is void, unless anyone of the two alternatives is agreed upon by the parties at the time of sale. The sale must be unconditional. A conditional sale is invalid. Example: A buys a car from B with a condition that B will employ his son in his firm. The sale is conditional, hence invalid.

Murabaha as a financing mode

The ideal mode of financing according to Shariah is mudarabah or musharakah. However, in the perspective of the current economic set up, there are certain practical difficulties in using mudarabah and musharakah instruments in some areas of financing. Therefore, the contemporary Shariah experts have allowed, subject to certain conditions, the use of the murabahah on deferred payment basis as a mode of financing. But,

1. It should never be overlooked that, originally, murabahah is not a mode of financing. It is only a device to escape from “interest” and not an ideal instrument for carrying out the real economic objectives of Islam. Therefore, this instrument should be used as a transitory step taken in the process of the Islamization of the economy, and its use should be restricted only to those cases where mudarabah or musharakah are not practicable.

2. The second important point is that the Murabahah transaction does not come into existence by merely replacing the word of “interest” by the words of “profit” or “mark-up”. Unless some conditions are fully observed, Murabahah is not permissible. In fact, it is the observance of these conditions which can draw a clear line of distinction between an interest-bearing loan and a transaction of Murabahah.

Under the Murabaha agreement, the client provides the bank with the specifications of goods when the bank and the client have agreed on the terms of the deal, the bank purchases the goods from a third party, sells them to the client and delivers them physically or delivers their documents of title to the client on a deferred payment basis for their cost, plus its profit, which was mutually agreed. The bank has to give the client the breakdown of its cost along with expenses related to the transaction. The profit is a certain agreed amount, not worked out on a combination, for on a combination of period and volume of funds involved. It can, however, differ according to the period alone, for example, if the payment is made in 3 months, the profit will be so much and if the payment is made in 6 months the profit will be so much, not necessarily double the amount of 3 months profit. The bank is responsible for the goods until the client takes possession of them, and thus the bank undertakes a risk. To safeguard against subsequent rejection of the goods by the client, the murabaha contract should have a clause that the client will buy the goods as it is. Moreover, when the client has approved the terms and conditions of the supply contract, the bank should assign to the client all its rights relating to warrantees against the supplier. The bank also tries to minimize the gap between its purchase of the goods and their sale to the client.

When a specific commodity is required by the customer, the institution appoints the client as his agent for purchasing the commodity on its behalf, and an agreement of agency is signed by both the parties. The bank gives money to the client.

The client purchases the commodity on behalf of the institution and takes its possession as an agent of the institution. The client informs the institution that he has purchased the commodity on his behalf, and at the same time, makes an offer to purchase it from the institution. The commodity must remain in the risk of institution during the period between third and fifth stage.

This is the only feature of murabahah which can distinguish it from an interest-based transaction. Therefore, it must be observed with due diligence at all costs, otherwise the murabahah transaction becomes invalid according to Shariah.

Issues in Murabaha

The concept may remain ambiguous and its practical application may be susceptible to errors and misconceptions.

Murabaha is that, when used as a mode of financing, it is always effected on the basis of deferred payment.

The financier purchases the commodity on cash payment and sells it to the client on credit.

While selling the commodity on credit, he takes into account the period in which the price is to be paid by the client and increases the price accordingly. The longer the maturity of the murabaha payment, the higher the price. Therefore the price in a murabaha transaction, as practiced by the Islamic banks, is always higher than the market price.

If the client is able to purchase the same commodity from the market on cash payment, he will have to pay much less than he has to pay in a murabaha transaction on deferred payment basis. The question arises as to whether the price of a commodity in a credit sale may be increased from the price of a cash sale.

Some argue that the increase of price in a credit sale, being in consideration of the time given to the purchaser, should be treated analogous to the interest charged on a loan, because in both cases an additional amount is charged for the deferment of payment. So practices in the Islamic banks, are not different in essence from the interest-brd loans advanced by the conventional banks. This seems to be logical in appearance, is based on a misunderstanding about the principles of Shariah regarding the prohibition of riba.

The modern capitalist theory does not differentiate between money and commodity in so far as commercial transactions are concerned. In the matter of exchange, money and commodity both are treated at par. Both can be traded in. Both can be sold at whatever price the parties agree upon. One can sell one dollar for two dollars on the spot as well as on credit, just as he can sell a commodity valuing one dollar for two dollars. The only condition is that it should be with mutual consent. The Islamic principles, however, do not subscribe to this theory. According to Islamic principles, money and commodity have different characteristics and therefore, they are treated differently.

Many institutions financing by way of murabaha determine their profit or mark-up on the basis of the current interest rate, mostly using LIBOR (Inter-bank offered rate in London) as the criterion. For example, if LIBOR is 6%, they determine their mark-up on murabaha equal to LIBOR or some percentage above LIBOR. This practice is often criticized on the ground that profit based on a rate of interest should be as prohibited as interest itself. No doubt, the use of the rate of interest for determining a halal profit cannot be considered desirable. It certainly makes the transaction resemble an interest-based financing, at least in appearance, and keeping in view the severity of prohibition of interest, even this apparent resemblance should be avoided as far as possible. But one should not ignore fact that the most important requirement for validity of murabaha genuine sale with all its ingredients and necessary consequences. If a murabaha transaction fulfils all the conditions merely using the interest rate as a benchmark for determining the profit of murabaha does not render the transaction as invalid, haram or prohibited, because the deal itself does not contain interest. The rate of interest has been used only as an indicator or as a benchmark.

Another issues is that the bank/financier cannot enter into an actual sale at the time when the client seeks Murabaha financing from him, if the client is not bound to purchase the commodity after the financier has purchased it from the supplier, the financier may be confronted with a situation where he has incurred huge expenses to acquire the commodity, but the client refuses to purchase it. The commodity may be of such a nature that it has no common demand in the market and is very difficult to dispose of. In this case the financier may suffer unbearable loss.

The murabaha price is payable at a later date. The seller/financier naturally wants to make sure that the price will be paid at the due date for this purpose, he may ask the client to furnish a security to his satisfaction. The security may be in the form of a mortgage or a hypothecation or some kind of lien or charge.

The seller in a murabaha financing can also ask the purchaser/client to furnish a guarantee from a third party. In case of default in the payment of price at the due date, the seller may have recourse to the guarantor, who will be liable to pay the amount guaranteed by him. The rules of Shari’ah regarding guarantee are fully discussed in the books of Islamic fiqh.

Penalty of Default is also a problem in murabaha financing in that if the client defaults in payment of the price at the due date, the price cannot be increased. In interest-based loans, the amount of loan keeps on increasing according to the period of default. But in Murabaha financing, once the price is fixed, it cannot be increased. This restriction is sometimes exploited by dishonest clients who deliberately avoid to pay the price at its due date, because they know that they will not have to pay any additional amount on account of default. This characteristic of murabaha should not create a big problem in a country where all the banks and financial institutions are run on Islamic principles, because the government or the central bank may develop a system where such defaultors may be penalized by depriving them from obtaining any facility from any financial institution. This system may serve a deterrent against deliberate defaults. However, in the countries where the Islamic banks and financial institutions are working in isolation from the majority of financial institutions run on the basis of interest, this system can hardly work, because even if the client is deprived to avail of a facility from an Islamic bank, he can approach the conventional institutions. The defaulter should be given a grace period of at least one month after the maturity date during which he must be given weekly notices warning him that he should pay the price, otherwise he will have to pay compensation. It is proved beyond doubt that the client is defaulting without valid excuse. If it appears that his default is due to poverty, no compensation can be claimed from him.

The compensation is allowed only if the investment account of the Islamic bank has earned some profit to be distributed to the depositors. If the investment account of the bank has not earned profit during the period of default, no compensation shall be claimed from the client. This concept of compensation, however, is not accepted by the majority of the present day scholars. It is the considered opinion of such scholars that this suggestion neither conforms to the principles of Shariah nor is it able to solve the problem of default. So far as grace period is concerned, it is a minor concession which is sometimes given by the conventional banks as well. Once again, in practical terms, there is no material difference between interest and the late payment charged as compensation.

Sometimes the debtor wants to pay earlier than the specified date. In this case he wants to earn a discount on the agreed deferred price. Is it permissible to allow him a rebate for his earlier payment. The issue is known in the Islamic legal literature as “Za wa tajal” (Give discount and receive soon). Some earlier jurists have held this arrangement as permissible, but the majority of the Muslim jurists, including the four recognized schools of Islamic jurisprudence do not allow it, if the discount is held to be a condition for earlier payment. The majority of the jurists hold that if the earlier payment is conditioned with discount, it is not permissible. However, if this is not taken to be a condition for earlier payment, and the creditor gives a rebate voluntarily on his own, it is permissible. The same view is taken by the Islamic Fiqh Academy in its annual session.

It means that in a murabaha transaction effected by an Islamic bank or financial institution, no such rebate can be stipulated in the agreement, nor can the client claim it as his right. However, if the bank or a financial institution gives him a rebate on its own, it is not objectionable. 9.1.8 Calculation of Cost in Murabaha It is already mentioned that the transaction of murabaha contemplates the concept of cost-plus sale, therefore, it can be effected only where the seller can ascertain the exact cost he has incurred in acquiring the commodity he wants to sell. If the exact cost cannot be ascertained, no murabaha can be possible. In this case, the sale must be effected on the basis of musawamah (i.e. sale without reference to cost). This principle leads to another rule: the murabaha transaction should be brd on the same currency in which the seller has purchased the commodity from the original supplier. If the seller has purchased it for Pakistani rupees, the onward sale to the ultimate purchaser should also be based on Pakistani rupees, so that the exact cost may be ascertained. However, in the case of international trade, it may be difficult to have both purchases on the same currency. If the commodity intended to be sold to the customer is imported from a foreign country, while the ultimate purchaser is in Pakistan, the price of the original sale has to be paid in a foreign currency and the price of the second sale will be determined in Pak. Rupees.

Banking Regulation Act and Islamic Banking

‘Islamic banks’ fall under the definition of ‘banks’, or whether ‘Islamic banking’ qualifies as banking business, under the present statutory framework.

As per the BR Act, a ‘banking company’ is a “company which transacts the business of banking in India”.[2]

However, the explanation clause to section 5 (c), specifically excludes a manufacturing or trading company which accepts deposits from public to finance its own business, from being regarded as a banking company under the BR Act.

The statutory definition of ‘banking’ placed acceptance of deposits for lending as the primary function of a bank.[3]

The BR Act defines ‘banking’ as: “…the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, or otherwise.” [4]

As per section 5 (b) the functions of ‘accepting deposits for lending’ has been recognised as the principal function of a bank, by the SC in ICICI Bank Limited. [5]

It does not explicitly prohibit it since commercial banks are also engaged in the business of mobilising and accepting deposits from public, and using such deposits for making investments. However, the peculiar nature of financial intermediation in Islamic banks raises two issues where certain aspects of Islamic banking would potentially conflict with the definition of ‘banking’ provided in section 5 (b).

Issues with respect to BR act-

First, with respect to investment deposits (mudharabah deposits), where depositor’s capital is not guaranteed but subject to profit or loss. Due to the risk-sharing nature of such deposits, an Islamic bank may face difficulty in repaying the depositors in full. Thus, to accommodate investment deposits, either such deposits would require to be classified as ‘investments’ and treated as a separate banking activity; or since section 5 (b) recognises ‘investment’ as a lawful channel of deploying public deposits, an explanatory amendment recognising return of deposits subject to ‘profit or loss’ would conveniently accommodate investment deposits.

Secondly, issue would emerge from the sale-based nature of financing used in Islamic banking as the bank accepting public deposits is not engaged in lending in a conventional sense, but essentially undertakes trade financing properties in the name of customer and selling/leasing it to the customer, the use of such deposits for such purpose would fall outside the scope of ‘lending and investments’ used in context of banking business.

Section 6 of BR Act in clause 1 sub-clauses (a) to (o) types of business banks are permitted to do i.e. “borrowing, lending, advancing of money; acquiring and holding and dealing with property (security) or right, title and interest therein; selling, improving leasing or turning into account or otherwise dealing with such security; doing all such other things as are incidental or conducive to the promotion or advancement of the business of the company and any other form of business which the Central Government may notify…”delineated in ICICI. [6] The case also laid down conditions for banking activities to be permissible; That the relevant business activity need not be a deposit-taking or lending activity prescribed u/s 5 (b) of the BR Act; and must not fall within the prohibitions imposed u/s 8 and 9 of the BR Act.

Constitutionality of Religious Banking

‘Islamic’ banking appears contrary to the principle of equality u/s article 14 of the constitution r/w article 15, which forbids discrimination on the basis of ‘religion’ since prefixes like ‘Islamic’ to the system. Such a challenge would form a strong legal basis for the judiciary to strike down any law which introduces Islamic banking for the sole access of the Muslims. Hence, it must pass test of reasonable classification to remain exclusionary in its nature. The experiences from across the world have shown that Islamic banking is open to all persons irrespective of their religion. Notwithstanding the fact that Muslims are the major consumers of Shariah-compliant banking, non-Muslims are free to access such banks and avail their services.

With regards to the halal certification of food products which in India cannot be called as violative of article 14 or 15, merely because it provides certification of food products in accordance with the Islamic dietary code, since the certification is not restricting other communities from consuming such products, but is merely assuring Muslims that the relevant food conforms to their religious dietary standards. Thus, the introduction of Islamic banking, unless introduced with specific exclusionary provisions, would not be violative of article 14 and 15 of the constitution.

The Kerala HC Subramanium Swamy[7], pronounced a landmark judgment which sought to harmonize Islamic financial activities with the concept of secularism. Wherein on October 14, 2009 the Government of Kerala took an in-principle decision to promote Islamic financial services as an alternative route of attracting investments. The Government of Kerala announced that the Kerala State Industrial Development Corporation (KSIDC) would contribute 11% equity to a proposed Shariah- compliant NBFC. As a result, on November 30, 2009 Al-Barakah Financial Services Ltd. was incorporated, with an 11% equity from KSIDC. This was challenged in the Kerala HC.

Petitioners contended that the decision of the Kerala Government and the KSIDC to contribute equity in Al-Barakah Financial Services Ltd. was violative of State’s constitutional obligation as a secular entity and specifically article 27.10

The respondents argued that the objective behind was to attract utilised funds and investments from Gulf countries – thus, purely to derive ‘commercial benefit’ not to spread religion and that as long as the company operated in compliance with the existing laws and regulations, mere adherence to the principles of Shariah would not make the business inconsistent with the constitutional doctrine of secularism.

The HC dismissed the writ and ruled that it had no objection to KSIDC carrying on a business that was Shariah- compliant, in addition to fulfilling with the laws of the country.

[1] Usmani, Dr. M. Imran, Ashraf, Islamic Banking, Karachi, Darul Ishaat, 2002, pp 87

[2] Banking Regulation Act, 1949, § 5 (b), No. 10 Acts of Parliament, 1949.

[3] State Savings Bank of Victoria Commissioners v. Permewan Wright and Co Ltd., (1915) 19 CLR 457.

[4] Banking Regulation Act, 1949, § 5 (b), No. 10 Acts of Parliament, 1949.

[5] ICICI Bank Limited v. Official Liquidator of APS Star Industries Ltd., (2010) 10 SCC 1 (para. 12).

[6] Ibid 4.

[7] Dr. Subhramanium Swamy v. State of Kerala, 2011 SCC OnLine Ker 3692.