The Kerala High Court Thursday gave the green signal to a company registered under the tenets of sharia to start operating a financial institution based on the principles of Islamic banking with the participation of a state-run firm.Such institutions cannot charge interest.
Dismissing the petitions of Janata Party leader Subramanian Swamy and others, a division bench headed by Chief Justice J. Chalameshwar gave the go ahead to Al-Baraka Company to start the institution with Kerala State Industrial Development Corp as an investor.
Al-Baraka has 14 promoters who have contributed Rs.4.20 crore toward its capital and a 17-member board, with prominent Gulf-based businessmen P. Mohammed Ali as chairman and C.K. Menon as the vice-chairman.
Kerala State Industrial Development Corporation will have a 11-percent stake in the firm which will have to follow some strict rules that specify which areas or businesses money can be extended. The company also cannot charge interest as per sharia laws.
“We welcome the honourable court’s order today. We will very soon convene a meeting of our board of directors and discuss the future course of action to begin operations,” member and another prominent businessman E.M. Najeeb told IANS.
“The basic principle our company would follow is: There will be no interest charged, no interest taken. There are many people who are willing to put in their money and need no interest. We will pool this money and invest in infrastructure projects,” Najeeb added.
Al-Baraka Company, accordingly, will not operate as a bank and extend loans, but make direct investments into such projects, after which profits would be shared in the form of dividends and not as interest.
In its interim judgment last year the bench had asked the state government and agencies under it to keep off from the proposed bank but said in its final order that there was nothing wrong in granting permission.
The verdict Thursday also leaves some questions unanswered since the current laws do not permit Islamic banking in the country, because of which Prime Minister Manmohan Singh had asked the Reserve Bank of India last October to study this issue in detail.
“There have been from time to time demands for experimenting with Islamic banking in the country,” the prime minister had said in Malaysia during an official visit there in October last year.
“I would certainly recommend to the Reserve Bank of India, which is looking into this question, to look at what is happening in Malaysia in this regard,” the prime minister had added.
As per estimates, nearly $1 trillion is currently being managed by about 400-odd Islamic banks worldwide.“With the present Banking Regulation Act, Islamic banking just cannot take place as many of the banking principles in place today are based on interest payment,” RBI Governor D. Subbarao had told reporters here last year.
“However, Islamic banking is possible through a separate legislation.”Swamy had objected to Al-Baraka’s concept on the principle that since public money was involved, with a state-run agency proposed as a partner, the application would favour one particular community in a secular country.
Islamic banking has been a major demand of muslims in India, who number more than 160 million — the third-largest such population in the world after Indonesia and Pakistan where they number 200 million and 175 million, respectively.
In Kerala, Muslims form the second largest community with close to 24 percent of the 32 million population.According to a study done by Prof. S. Irudayarajan of the Centre for Development Studies, out of 1.85 million non-resident Keralites in 2007, nearly 50 percent were Muslims and accounted for half the remittances into the state.