Asks Centre, RBI to file its views by June.
There is no problem in forming an Islamic bank if the procedures and permissions in this regard are adhered to, but neither the government nor its enterprises can associate with such an effort, the Kerala High Court (HC) said today, in an interim order.
The order partly modifies a January 5 order, which had frozen the Kerala government-sponsored process of setting up an Islamic bank.
Chief Minister VS Achuthanandan said the state government would decide what to do after a detailed examination of today’s developments.
The next hearing is on June 3. The Union finance ministry and the Reserve Bank of India are supposed to file their replies by then (notices in this regard were issued on January 5).
On that latter date, the HC had issued an interim stay on the decision to help establish such a bank. The Kerala State Industrial Development Corporation (KSIDC) had been made the nodal agency for the project. The state government, KSIDC and Al Barakah Financial Services, a company formed to take the endeavour forward (in which KSIDC took 13 per cent stake), asked the HC to remove the January 5 stay.
Al Barakah was formed as a non-banking finance company (NBFC), as the first step to have a bank which functioned in full compliance with the traditional Islamic code, the Shariah.
Since there are strictures on usury-based lending in Islamic beliefs, many Muslims are opposed to modern banking or depositing their money with banks. The proposed Islamic bank was meant to help draw more Muslims (20 per cent of the state’s population) into the modern economy and tap their savings. The partners in this effort were various businessmen, including many non-resident Keralites based in West Asia. The plan was to raise Rs 500 crore with the state government also putting in some equity.
Ernst & Young, commissioned to report on the viability of an Islamic bank, said in August last year there was a market for it.
The January 5 order was issued by a two-judge Bench of the high court comprising the then Chief Justice, SR Bannurmath, and TB Radhakrishnan. Today’s order was also from a two-judge Bench of the present Chief Justice, J Chelameshwar, and CN Ramachandran Nair.
The HC got into the issue due to a public interest suit filed to stop the government effort. The suit was filed by former Union law minister Subramanian Swamy and a body called the Hindu Aikya Vedi.
Swamy had challenged the October 14 order of the state government’s principal secretary (industries) to allow KSIDC to register a company to provide banking services on Sharia lines. The NBFC was registered as the Banking Regulation Act does not permit Islamic banking.
The suit argued that such an institution would be against the basic principles of the Constitution, which provided equal status to all religions. Starting a bank that followed Shariah principles and worked under a Shariah board would be preferential treatment to a religion, it said.
KSIDC had invited applications for posts of chief executive officer and company secretary for the NBFC through its website. The notification said the selected officers would report to the Shariah board that governed the NBFC and that the institution would be governed by the Muslim Personal Law. Since the Shariah is confined to Muslims, starting a bank under this law would be against the basic principles of India’s Constitution, the petitioner said.
