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RBI to study Malaysia’s Islamic banking model
Ruchika M Khanna
Tribune News Service

Islamic Banking: A Snapshot Islamic banking is an interest-free banking system It’s consistent with the principles of Islamic law and its practical application through the development of Islamic economics India has received several requests to allow the system Close to $1 trillion is being managed by about 400-500 Islamic banks and the figure is expected to rise to $ 4 trillion by 2020

Kuala Lumpur, October 27
Prime Minister Manmohan Singh today said that he would ask the Reserve Bank of India to look into Islamic banking practices in Malaysia. The Indian government has received several requests from Islamic banks in West Asia to start this system on an experimental basis.

Singh added that that there have been demands for experimenting with Islamic banking. “I will certainly recommend it to the RBI to look at what is happening in Malaysia in this context. RBI is already looking into the question of whether India should allow Islamic banking,” he said.

Over the past few months, pressure has been mounting on the RBI to introduce Islamic banking, which is an interest-free banking system. It is a system of banking that is consistent 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 fee for loans of money (Riba, usury), for specific terms, as well as investing in businesses that provide goods or services considered contrary to its principles (Haraam, forbidden). These principles were used as the basis for a flourishing economy in earlier times. However, it is only in the late 20th century that a number of Islamic banks were formed to apply these principles to private or semi-private commercial institutions within the Muslim community.

If introduced, this will rake in billions of dollars in investments from West Asian countries. Close to $1 trillion is being managed by about 400-500 Islamic banks and the figure is expected to rise to $ 4 trillion by 2020.

The investment surplus in the West Asian region is expected to be around $9 trillion by 2020, up from the current $1.5 trillion.

Malaysia is recognised as Asia’s Islamic financial hub by Pricewaterhouse Coopers. Recently, the firm concluded that by 2009-end, Malaysia’s Islamic banking assets equaled RM113.5 billion ($35.2 billion). According to a 2009 report by the Malaysia International Islamic Financial Center (MIFC), Malaysia had the largest “sukuk” — the Islamic equivalent to a bond — market in the world by 2007 — at $25 billion.