MICROCAPITAL BRIEF: Reserve Bank of India: Islamic Banking Not Workable Under Current Law, Financial Literacy Needs Boost

At a recent event in Kochi, India, Reserve Bank of India (RBI) Governor Duvvuri Subbarao reportedly ruled out the implementation of Islamic banking in the country at this time due to legal issues that would require a new law in order to allow the practice. Separately, RBI is seeking to encourage the financing of development efforts through funds raised from Indians living abroad. Further details on this initiative are not available at this time.

Governor Subbarao also argued in favor of increasing financial education in grade schools and colleges to increase financial inclusion. He reportedly claimed that increased financial literacy would support government in its effort to disburse subsidies and state-sponsored scholarships to students by bank transfer in order to reduce costs including losses due to corruption and fraud.

At the same event, Chief Minister of Kerala, Oommen Chandy, reportedly encouraged banks to increase the provision of education loans to students.

By Jennifer Young, Research Associate

About Reserve Bank of India (RBI)
Established in 1935, the Reserve Bank of India (RBI) undertakes consolidated supervision of the financial sector comprising commercial banks, financial institutions and non-banking finance companies (NFBCs). The current focus of RBI is to supervise financial institutions, consolidate accounting standards, resolve legal issues in cases of banking fraud, monitor non-performing assets and supervise the rating model for the banking sector. In 1979, the National Bank for Agriculture and Rural Development (NABARD) was formed at the behest of RBI to provide regulatory oversight to regional rural banks (RRBs) and to promote the development of agricultural lenders: tasks that had been the responsibility of RBI. While non-banking financial companies such as for-profit microfinance institutions operate under RBI regulations, the responsibility for inspecting agricultural lenders, RRBs, state cooperative banks, district central cooperative banks and state cooperative agricultural and rural development banks was transferred to NABARD. RBI maintains these responsibilities for for-profit MFIs. Although RBI was originally the parent organization of NABARD and until October 2010 held a 72.5 percent stake in the outfit, RBI owns a one-percent stake in NABARD as of 2011.

RBI’s reserves stood at USD 302 billion at the end of 2011.

Sources and Additional Resources

Zee Biz Story: “RBI Rules Out Introduction of Islamic Banking”
http://zeenews.india.com/business/news/finance/rbi-rules-out-introduction-of-islamic-banking_64902.html

MicroCapital Story: “MICROCAPITAL BRIEF: MICROCAPITAL.ORG STORY: Basix Chairman Vijay Mahajan Advocates The Use Of Interest-Free Microfinance And Islamic Finance Techniques To Help Muslim Clients in Small Communities In India,” August 12, 2009.
https://www.microcapital.org/microcapitalorg-story-basix-chairman-vijay-mahajan-advocates-the-use-of-interest-free-microfinance-and-islamic-finance-techniques-to-help-muslim-clients-in-small-communities-in-india/

MicroCapital Story: “MICROCAPITAL BRIEF: Reserve Bank of India (RBI) Convenes Financial Inclusion Advisory Committee,” October 23, 2012.
https://www.microcapital.org/microcapital-brief-reserve-bank-of-india-rbi-convenes-financial-inclusion-advisory-committee/

MicroCapital Story: “MICROCAPITAL BRIEF: Securities and Exchange Board of India (SEBI) Seeks Comment on “Massive Campaign” Proposed as part of Draft National Strategy for Financial Education,” July 31, 2012.
https://www.microcapital.org/microcapital-brief-securities-and-exchange-board-of-india-sebi-seeks-comment-on-massive-campaign-proposed-as-part-of-draft-national-strategy-for-financial-education/

MicroCapital Universe Profile: Reserve Bank of India (RBI)
https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Reserve+Bank+of+India+%28RBI%29

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