India to get its first Islamic bank

The Kerala High Court on Thursday cleared the way for setting up the country's first Islamic bank in this state.

The court nod came after it dismissed two PILs challenging the setting up of an Islamic Financial Institution in the state on the lines of Islamic Banks with the support of Kerala State Industrial Development Corporation (KSIDC).

Inputs: Business Standard, Arun Lakshman

A Division Bench comprising Chief Justice J Chelameswar and Justice Ramachandra Menon said the petitioners could not demonstrate how the impugned government order had the effect of directly promoting a particular religion.

The petitions were filed by Janata Party leader S Subramanian Swamy and Hindu Aikya Vedi. The state justified its stand and contended that the investment was commercial in nature and will not offend the secular principles of the Constitution.

The bank will adopt the policy of zero interest to tap a huge number of expatriates working in the Middle East. These expatriates invest money in Islamic banks in the foreign countries. The funds could be used in operating new projects in the state.

The Company Al Barakh Financial Services, which was registered under the Companies Act, assured the Court that funding of financial institution will be in strict adherence to the laws prevailing in the country as well as principles of Shariat.

The petitioners complained that the government's decision was against the secular principles of the Constitution. Swamy's contention was that Article 27 of Constitution prohibits a state government body, in this case the KSIDC, to engage in ventures like Islamic Banking.

The mandatory governing principles of Shariat, religious code of Islam, to be adhered to is that not only interest payment and receipt are barred, but also it bars certain other activities which are legitimate under Indian laws, he had stated.

KSIDC cannot be permitted to promote a corporate called Al Barakh Financial Service Ltd, he submitted.

The bank was also to have a body of Islamic scholars to advise whether the principles of shariah were being complied with.

The High Court had during the admission stage of the petition in April last year directed the government and its institutions not to participate financially or otherwise in the financial company modelled on the lines of Islamic Bank.

The Kerala government had initiated formation of the first Islamic Bank in India in May 2009 and made KSIDC the nodal agency.

A few months later, an NBFC named Al-Baraka Financial Services was registered, as the first step towards starting a bank under the Sharia code.

An NBFC was registered because the Banking Regulation Act does not allow operation of an Islamic bank. KSIDC has 13 per cent stake in the company. The rest is with Gulf-based Indian businessmen.

Islamic banking refers to a system of banking in accordance with the principles of Islamic law (Sharia) and its practical application through the development of Islamic economics.

Sharia prohibits the payment or acceptance of interest on loans. Stressing on equity and justice, Islamic banking discourages debt and charging interest on debt.