The Reserve Bank on Thursday said it is considering the possibility of allowing Islamic financial institutions to function as NBFCs since Islamic banks are not permitted under the present laws.
Under the Indian banking rules, depositors have to be paid interest for their money in banks, which is not permitted by Islamic banking principles, RBI Governor D Subbarao said.
RBI, however, was examining the possibility of allowing Islamic financial institutions to function as non-banking finance companies (NBFCs), he said.
Sharia (Islamic rulings) does not allow charging or paying interest rates. In India, there are two types of NBFCs - one which accept deposits and the one which does not. Subbarao said the Centre will have to enact a separate legislation in case Islamic banking is to be allowed in the country.
The question on Islamic banking came up in the backdrop of Kerala government taking the initiative to set up a joint venture financial institution based on Islamic banking principles.
The proposal was stayed by the Kerala High Court, while admitting a petition filed by Janata Party leader Subramanian Swamy on the constitutional validity of the proposal a few months ago.