Introduction of Islamic Banking in India

By Pamkhuila Shaiza on June 17, 2016
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Over the past many years, several initiatives have been undertaken by the Indian government and Reserve Bank of India (RBI) to introduce Islamic banking in India. In 2010 and after 34 years, Indian Prime Minister visited Saudi Arabia, which is one of the major investor in Islamic banking (Kumar 2016). Similarly the recent visit of Indian Prime Minister in 2016 has helped to develop bilateral relationship between the two countries. Demographically, many Indians living in the Gulf will garner interest from the introduction of Islamic banking. The rich Gulf investors look for Shariah-compliant financial system. The potential investors from Gulf countries invest mostly in Islamic banking system available in London, New York, Zurich and Frankfurt (Rahman 2009).

Steps taken by Indian Government for the development of Islamic banking in India

The Indian government has formed various committees to review the need and possibility of the Islamic banking in India. In 2005 Reserve Bank of India (RBI) formed a committee under the direction of Anand Sinha with the aim of setting up of Islamic banking. However the idea of Islamic banking was rejected by Reserve Bank of India later. The committee suggested that the proposal of Islamic banking in India is not feasible.

In 2008 the Planning commission of India formed a new committee under Raghuram Rajan to suggest the reforms in Indian banking sector. Rajan and his committee report shows that when certain community is not allowed by their faith to use financial institutions that pays interest, then the government should make interest-free banking system available for them (Kumar 2015; Khan & Hussin 2013). Such unavailability causes one section of the society to remain economically disadvantaged. Based on findings the committee gave two major recommendations. First, that interest free finance system can be established as part of contributing to innovative growth. Secondly if committee takes appropriate measures, the issues and challenges can be avoided in setting up the Islamic banking system (Khan & Hussin 2013). Similarly the parliamentary committee formed under Mr. Rahman Khan also focus on the development of Islamic banking in India (Khan & Hussin 2013).

Given such developments, Justice VR Krishna Iyer, urged to pave the way for Islamic banking in India by coming up with strict legal framework (Padanna 2014). He further asserted that the Reserve Bank of India (RBI) should not create any issue on this matter, if the Government of India allows interest-free ethical banking system. In 2014 the Indian Centre for Islamic Finance (ICIF), New Delhi hails the launching of “Pradhan Mantri Jan Dhan Yojana” by Prime Minister. The main aim of the scheme was  to eradicate poverty and financial issues among the poor by providing them with bank accounts (Muslim Mirror News 2014). Taking the recommendation of Raghuram Rajan Committee on financial sector reforms, the ICIF urged the Indian premier to also include an alternate interest free finance in the Islamic banking. Since then, RBI was reviewing their regulations by setting up internal committee.

So on the basis of the recommendation from different committees the Indian Government undertaking and RBI sanctions the Shariah-compliant Islamic banking in January 2016. In Kerala the government has initiated the setup of the Islamic banking in 2010 which also garners to the development of Islamic banking in India.

However the introduction of Islamic banking faces opposition from the State Bank of India (SBI). Sharia Mutual Fund, which is designed to invest in the Sharia (Islamic Law) was deferred reportedly under the influence of the Swami, although SBI called it ‘deferment’ and RBI referred to it Sharia compliant not being permissible under the Reserve Bank Act (Kumar 2015; Padanna 2014).

Relevance of Islamic Banking in India

Islamic banking is expected to play an important role in the Indian banking sector which will mobilize the enormous capital held by the Muslims community. Similarly the global market for the sharia-compliant assets has increased to 1.6 trillion USD in 2013. Also the significant population of Muslims in India will also benefit from the development of Islamic banking (SINGH & YADAV 2013).


  • Khan, M.A. & Hussin, N., 2013. Islamic Banking in India: Developments, Prospects and Challenges.
  • Kumar, N., 2016. RBI “clears deck” for Islamic banking in India. Sunday Guardian.
  • Kumar, N., 2015. Swamy sabotaged Islamic banking. The Sunday Guardian.
  • Muslim Mirror News, 2014. Muslim Mirror » PM urged to Introduce interest free Islamic Banking for inclusive growth & infrastructure development. Muslim Mirror.
  • Padanna, A., 2014. Eminent jurist urges Narendra Modi to promote Islamic banking in India. The Gulf Today.
  • Rahman, S.B., 2009. Islamic banking in India: Challenges and prospects.
  • SINGH, J. & YADAV, P., 2013. ISLAMIC BANKING IN INDIA – GROWTH AND POTENTIAL. nternational Journal of Marketing, Financial Services & Management Research_, 2(4), pp.59–77.


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