India’s first Islamic bank will open in Kerala by 2010

September 20, 2009

What is a Islamic Bank?
Islamic banking refers to a system of banking or banking activity that is consistent with the principles of Islamic law (Sharia) and its practical application through the development of Islamic economics. Sharia prohibits the payment of interest fees for the lending of money for specific terms, as well as investing in businesses that provide goods or services considered contrary to its principles (Haraam, forbidden).

This concept is very popular in West Asia and in predominantly Muslim nations such as Malaysia and Indonesia. Leading international banks such as HSBC and Standard & Charted have exclusive Islamic banking windows.

India’s First Islamic bank with active involvement of the Kerala government may open in 2010 at Kochi in Kerala. Kerala industries department is actively involved in the new initiative and a high level meeting held at Kozhikode on August 12 which approved a project report prepared by Ernst & Young. Kerala State Industrial Development Corporation (KSIDC) will have 11 per cent stake in the proposed banking company.

In past an RBI study group had eariler rejected the concept of Islamic banking in india, However Raghuram Rajan Committee on banking reforms supported the idea.

How the business will be done in Islamic Banking?

Purely based on Shari’ah principles, the bank will avoid interest-based business activities. However the bank will invest funds in infrastructure projects.
The bank will invest all its funds in wealth generating investment avenues and will distribute profit to its shareholders.
The proposed Islamic bank will also set apart a social fund, compulsory under Shri’ah principles and the Islamic banking concept, and will provide interest-free loans to the Gulf returnees to set up business or small scale ventures.

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