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Tuesday, 23 September 2008

India: CFSR report alludes to Islamic banking

by Kumud Das/The Financial Express

Without using the term Islamic banking, the final report by the committee on financial sector reforms (CFSR) has taken a cue from the concept by advocating interest-free banking. Headed by Raghuram Rajan, former chief economist of the International Monetary Fund who currently teaches at University of Chicago, the committee submitted its report before the Prime Minister, Manmohan Singh, in New Delhi on September 12. The same has already been reported by The Financial Express in its edition of September 4. The two reasons as cited by the comprehensive report for interest-free banking being to ensure the ongoing financial inclusion programme in the country for ‘economically disadvantaged strata of society’ and making the country accessible to substantial sources of savings from other countries in the region. This short two paragraph note is related to the topic as added in Chapter 3 on Financial Inclusion on page No 104 of the comprehensive report.

Another area that falls broadly in the ambit of financial infrastructure for inclusion is the provision of interest-free banking, says the report. Certain faiths prohibit the use of financial instruments that pay interest. The non-availability of interest-free banking products (where the return to the investor is tied to the bearing of risk, in accordance with the principles of that faith) results in some Indians, including those in the economically disadvantaged strata of society, not being able to access banking products and services due to reasons of faith. This non-availability also denies India access to substantial sources of savings from other countries in the region.

Talking further about interest-free banking, the committee has recommended measures be taken to permit the delivery of interest-free finance on a larger scale, including through the banking system. This is in consonance with the objectives of inclusion and growth through innovation. Also, the committee believes that it would be possible, through appropriate measures, to create a framework for such products without any adverse systemic risk impact.

After a preliminary draft was placed in the public domain for comment, we received a large number of comments, both directly, and in the press. While we have not accepted all suggestions, each one has been weighed for its consistency with our overall framework and alterations, where justified, have been made to the report, said Rajan while submitting the report. Welcoming the report, Syed Zahid Ahmad, assistant secretary general, All India Council of Muslim Economic Upliftment Trust, said that the economies of scale for interest-free banking had to be evaluated in comparison to interest based banking. Besides financial targets, we need to meet social and economic targets which require innovative financial products with ability to fulfill economic needs, social responsibilities with allowing financial advantages as well.

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