Inaccessibility to faith based Banking- Denial of a Constitutional Privilege??

Inaccessibility to faith based Banking- Denial of a Constitutional Privilege??

"There have been from time to time demands for experimenting (with) Islamic banking. I would certainly recommend to RBI, which is looking into the question, to look at what is happening in Malaysia in this regard", - the then Indian Prime Minster Mr.Manmohan Singh was quoted as saying in the year 2010. Dr.Raghuram Rajan Committee, a high level Committee on the Financial Sector Reforms appointed by the Planning Commission, Government of India recommended that measures be taken to permit the delivery of interest-free finance on a larger scale, including through the banking system. That it would be possible, through appropriate measures, to create a framework for such products without any adverse systemic risk impact. Though these indicate that a shift, from the common perception that Islamic banking is not feasible under the Indian statutory and regulatory regime, seems to be gripping the political mind-set and regulatory outlook, nothing plausible ensued. The political leadership and consequently regulatory machinery continue to shelter behind the legal unviability argument which remains largely unchallenged.

It appears that there cannot be more apposite a time to offer a legal challenge to the views on Islamic banking in the milieu of India.The Hon’ble Supreme Court of India in a decision rendered on 30 September 2010 observed –“The BR Act, 1949 is an Act enacted to consolidate and amend the law relating to banking. Thus, while interpreting the Act one needs to keep in mind not only the framework of the banking law as it stood in 1949 but also the growth and the new concepts that have emerged in the course of time”. The Hon’ble High Court of State of Kerala held in a decision dated 3 February 2011 that it is constitutional for an instrumentality of a state to partake in a Sharia’a Compliant business and that compliance with Sharia’a principles in addition with the laws of the country is not inconsistent with the secular principles as embodied in the Constitution of India. The ratio emerging from the submission of the question of sustainability of Islamic banking vis-à-vis the secular constitutional fabric of India to judicial scrutiny for the first time, for the enthusiasts of Islamic banking, is in affirmative.

Basic traits of Islamic banking relevant to Indian legal regime

So, what is Islamic banking/finance?? ‘Islamic law’ (Sharia’a) covers all aspects of human behaviour. It is much wider than the Western understanding of ‘law’, and governs ‘the Muslim’s way of life in literally every detail, from political government to the sale of real property, from hunting to the etiquette of dining, from sexual relations to worship and prayer[1]. In general, Islamic law (or Sharia’a) extends to the understanding of a believer’s rights and obligations vis-à-vis God, humankind, and the universe at large[2].As such it extends to the financial and commercial transactions engaged into by an Islam including banking. “While Islamic banks respond to the needs of Muslim customers, they are not acting as religious institutions. Like other banks they are profit-maximizing entities. They act as intermediaries between savers and investors and offer custodial and other services found in traditional banking systems”. However, what makes Islamic Banking distinct from conventional banking is that Islamic banking works in accordance with the prescriptions of Sharia’a. The foundations of Islamic finance are (broadly) based on 5 principles such as prohibition of riba (interest), prohibition of gharar (uncertainty) and maysir (speculation and random), prohibition of investment in haram (illicit) activities, tangibility of assets and Sharing of profits and losses[3]. The Organization of Islamic Conference (OIC) defined Islamic banking as “a financial institution whose statutes, rules and procedures expressly state its commitment to the Principles of Islamic Shariah and to the banning of the receipt and payment of interest on any of its operations[4]”.   The transactions are so structured so as to ensure compliance with Sharia’a. “In Islamic finance, interest-bearing contracts are replaced by a return bearing contract, which often takes the form of partnerships. Islamic banks provide savers with financial instruments that are akin to equity called Mudaraba or Musharaka. In these lending arrangements, profits are shared between the investors and the bank on a pre-determined basis”[5]. The banking system compatible to Sharia’a principles based on two-tier Mudarabah comprise of a contract in between depositor and banker whereby the parties agree to share the profits accruing to the bank’s business[6].

It can be seen that the ban on interest and the structuring based on profit and loss sharing accounts for the fundamental difference in between conventional and Islamic banking[7]. Islamic banking though serves the purpose as that of a financial intermediary akin to conventional banking; it is the said structure of Sharia’a compliant transactions that invite statutory and regulatory road block especially in non- Sharia’a compliant and secular countries. The position is same with India too, being a secular[8] country with a robust statutory and regulatory regime especially in financial sector.  Banking sector in India is governed by a series of legislations such as Banking Regulations Act, 1949, Reserve Bank of India Act, 1934, Negotiable Instruments Act 1881, and Co-operative Societies Act 1961. In addition it is regulated by RBI and SEBI Regulations. The basic characteristics of Sharia’a compliant banking are unknown to Indian banking practices and to the regulatory machinery. As far as India is concerned, due to the constitutional mandate of being a secular country any search into the compatibility of Sharia’a compliant banking shall be commenced from a Constitutional view point.

Is Islamic banking constitutional in India?

This question would have generated a mixed response from the legal luminaries if asked prior to the pronouncement of a landmark decision by Hon’ble High Court of Kerala[9]. This judgement has alleviated various concerns regarding the conflict of Islamic finance principles with the doctrine of secularism as enshrined in the Constitution of India. The judgement’s importance lies in the fact that it not only holds that Islamic finance is constitutional in India but also that the association of State or its instrumentality with a Sharia’a compliant business is not contrary to the Constitutional requirement that the State should be a secular State. The main challenge, as far as relevant to the topic covered in this paper, raised in the writ petition challenging the decision of Govt. of Kerala and its instrumentality, KSIDC to contribute for share capital of a sharia compliant institution is that it is directly contrary to the mandate contained under Article 27[10] of the Constitution of India[11]. The business proposed to be carried on was one of Non-Banking Financial Service as defined under Section 45-I (a) of The Reserve Bank of India Act [12](RBI Act). It was also contended that the proposed business is one that is not permissible under Chapter III B[13] of the RBI Act.

A brief narration of facts is essential before commenting on the aspects of the judgement and its possible effect on Islamic finance in India. ‘The Government of Kerala based on the realisation that The Islamic Financial Services (IFS) Industry has grown substantially over the years forming a significant segment within global financial services and is generating lot of interest as an alternative model of financial intermediation entrusted KSIDC[14] with conducting studies and looking into various aspects of formation of an Islamic investment company in Kerala for attracting investments in a right manner as per the Sharia’a of the Muslim community for the development of the common public at large. The professional studies conducted on this project have concluded that there is a genuine commercial potential for an Islamic Financial Institution based in Kerala that has the potential to become a global player. The Board of KSIDC had approved a share contribution amounting to 11% of the initial paid up Share Capita of the proposed company and decided to proceed with further steps for registration of the company for promoting the Islamic Financial Institution’[15]. It is at this juncture the instant petition was filed challenging, inter alia, the constitutionality of the decision of Government of Kerala.

‘The case of Government of Kerala and KSIDC was that the impugned decision was taken in order to garner huge amounts of unutilised funds from the Gulf countries available with the non-resident Indians working in those countries with a view to utilise such funds for the investment in the State of Kerala for the development of its people by promoting and providing financial assistance to the industries in the State of Kerala. That the business of the proposed company would be conducted strictly in accordance with the law of the country and as such intention to additionally comply with Shariah principles will not render the activity of the company inconsistent with secular Constitutional principles’[16]. The High Court while indulging in a detailed investigation aimed at gathering a clear understanding of the expressions "secularism", "religion", "secular activity associated with religious practice", explored the landmark decisions of the Hon’ble Supreme Court of India and other High Courts in this sphere. The Court observed that the Constitution of India recognizes the distinction between practices which are essentially religious and activities which are secular such as economic, financial and political which are amenable to regulation by law, but associated with religious practice[17].   Further that Under Article 298, it is declared that the executive power of the Union and of each State extends to carrying on of any trade or business and also to acquire, hold and dispose of property and making of contracts for any purpose and as such it would be illogical to restrict the commercial interaction of the State even with a religious denomination, on the ground that it is inconsistent with the declaration that the State should be a 'Secular Republic'[18]. The Court held that there is no constitutional infirmity in the impugned action of Government of Kerala observing that the Constitution of India does not adopt the doctrine of “Wall of separation”. It was also held that the act of the Government of Kerala is not violative of Article 27 as the intention of the Government is to employ the returns from the business activities for the general welfare of the State of Kerala and not for any religious purposes. It was further contended on the strength of the affidavit filed by Union of India stating that the current statutory and regulatory frame work (of the Country) is not feasible for Islamic Banking Activities including NBFC’s[19]. The Court rejected this contention, accepting the contention of Government of Kerala held that while considering the constitutionality of the impugned action it need not concern itself with the question of violation of any relevant statute and that as such the said question is to be considered by RBI before whom the approval application is pending[20]. The Court also did not decide or express any view on the question if principles of Shariah which the Respondents propose to comply with while carrying on the business are inconsistent with the mandate of secular State contemplated by the Constitution of India or the laws of India on the grounds of lack of specific pleadings & on relying on the submission of the Respondents’ that the business would be conducted strictly in accordance with the law of the land. However, it could be inferred from the observation made in Para 42 of the judgement that a Court of Law is unlikely to interfere merely on the grounds of compliance with Shariah principles if such compliance is in addition to the compliance with the law of the land. It makes it abundantly clear that Islamic banking especially Sharia’a compliant banking through Islamic windows can be prevented in India only if the regulators can point out a legal provision expressly barring a specific Sharia’a compliant product offered through Islamic windows.

Is Islamic banking permissible under the existing statutory & regulatory framework?

The position that Islamic banking per se is not violative of Constitution of India drives us to the question as to the conflict Islamic banking can possibly have with the Indian statutory regime. It would be a misnomer to use the term Islamic banking while undertaking an investigation of a conflict with Indian laws. Indian statutes do not have anything that prevents “Islamic banking” per se provided such banking complies with statutory and regulatory framework governing the sphere. As such it is not the concept of faith oriented (Islamic) banking that is facing statutory and regulatory road blocks in India but the practices , based on profit loss sharing and prohibition of cash to cash transactions, followed while perpetuating Islamic banking that is prima facie seen as unfeasible. This section would analyse the impact of the primary legislation governing banking in India, the Banking Regulation Act, 1949 on the practices followed in Sharia’a compliant banking practices.

The principal statute that governs banking is Banking Regulation Act, 1949 (BR 1949). The purpose of BR 1949 is to consolidate and amend the law relating to banking in India[21]. It is essential to understand certain provisions of BR 1949 that is widely perceived as fundamentally preventing Islamic banking in India. BR 1949 defines “banking” in a comprehensive manner in order to bring within its purview all such institutions that receive deposits for lending or investing.  BR 1949 also provides Reserve Bank of India (RBI) with power to regulate banking companies. Banking is defined to mean accepting deposits to lend[22]. BR 1949 further provides that a banking company may engage, in addition to the business of banking, in any one or more forms of business as enumerated in sub-clauses (a) to (o) of Section 6(1)[23]. The said clauses cover, inter alia, borrowing, lending, advancing of money, acquiring, holding and dealing with property (security) or right, title and interest therein; selling, improving, leasing or turning into account to otherwise dealing with such security; doing all such other things as are incidental or conducive to the promotion or advancement of the business of the company and any other form of business which the central government may notify. Section 8[24] of BR 1949 contains a prohibitory provision whereby it is provided that no banking company shall deal in the buying or selling of goods except in connection with the realization of security. Section 9[25] of BR 1949 further deals with disposal of assets which prescribes for mandatory disposal of certain non-banking assets. It is pertinent to note that both Ss.8 and 9 are notwithstanding the provisions of s.6 (1).

The provisions of BR 1949 conscripted herein above, appears prima-facie as conflicting with the principles of Sharia’a upon which Islamic banking is founded. The definition of banking as per s.5(b) of BR 1949 has three limbs to it, such as (i) acceptance of deposits of money from public (ii) acceptance of deposits is for the purpose of lending or investment (iii) repayment of such deposits on demand or otherwise. Thus, “banking”, contemplates inter alia, lending of deposits of money from public, but in Islamic Banking, as it may prima-facie appear and resorted to as an argument by anti-enthusiasts of Islamic Banking , the bank accepting deposits of money from public is not engaged in lending or the pure financial activity in a conventional manner, but is engaged in equity financing and trade financing (Musharaka[26] and Mudaraba[27]), i.e. taking risk of sharing profits or losses as against lending (where there is no risk of loss and only profit in the form of interest at a specified rate). Islamic banks resort to purchase and resale of properties, which might appear contrary to the provisions of Ss.8&9 of BR1949. The stipulation that banks shall not deal in immoveable property other than for own use in s.9 might appear contrary to structures like Ijarah.

The sustainability argument

I would contend that, in spite of such prima facie conflict, operation of an Islamic window by conventional banks is permissible within the frame work of BR 1949 as it exists now. The definition of banking is an enabling provision rather than a prohibitory one and in light of s.6, it can be contended that the intention of the s.5 (b) is not to provide an exhaustive definition of activities that could be undertaken under the aegis of ‘banking’ activity. The observations made by Hon’ble Supreme Court of India in ICICI Bank Limited v APS Star Industries & Ors[28] (ICICI case) are squarely applicable in this regard. The Court held - “While laying down such policies under the said Act, RBI can lay down parameters enabling banking companies to expand its business. For example, RBI’s permission is required to be obtained if a banking company seeks to deal in "derivatives". It is a business which will not fall in Clauses (a) to (o) of Section 6(1) (a) and yet RBI can lay down guidelines and directions enabling banking companies to deal in derivatives like futures and options. The point we are trying to make is that apart from the principal business of accepting deposits and lending the said 1949 Act leaves ample scope for the banking companies to venture into new businesses subject to such businesses being subject to the control of the Regulator, viz. RBI. In other words, the 1949 Act allows banking companies to undertake activities and businesses as long as they do not attract prohibitions and restrictions like those contained in Sections 8 and 9. In this connection we need to emphasize that Section 6(1) (n) enables a banking company to do all things as are incidental or conducive to promotion or advancement of the business of the company[29].”

Thus the test laid down by the Hon’ble Supreme Court to determine if a business undertaken by banking company is permissible under BR Act 1949 is two pronged;

(i)     that the proposed transaction/business need not be strictly falling within the definition of banking as contained in s.5(b) of BR 1949

(ii)   that the proposed transaction/business would be permissible if not falling within the purview of restrictions imposed by Ss.8 & 9 of BR 1949

It is straightforward that a Sharia’a compliant product offered by a conventional bank satisfies the first test. In other words, the first test is an enabling one for an unconventional transaction (unconventional to Indian banking regulatory regime) such as Sharia’a compliant transactions. The second test on a prima facie analysis might appear to be a stumbling block as s.8[30] prohibits a banking company from buying or selling or bartering of goods. The ingredients of the section are as follows;

(iii)    shall not engage in buying or selling or bartering of goods except in connection with the realisation of security given to or held

(iv)    shall not engage in any trade or buy or sell or barter goods for others otherwise than in connection with the bills of exchange received for collection or negotiation or with its business within the purview  of clause (i) of sub-section (1) of section 6

(v)        the restrictions are not withstanding anything to the contrary in section 6

(vi)      the restrictions are not withstanding anything to the contrary in any contract

It is pertinent to note here that issue involved in the ICICI case was permissibility of banks engaging in trading of NPA.  The said activity is not expressly provided for in the BR 1949 and it was contended that trading is not possible as it violates the prohibition contained in s.8 of BR 1949 and that the guidelines issued by RBI governing such trading is ultravires BR 1949. The Hon’ble Supreme Court, rejecting the said contentions, held that trading in NPA[31]’s has the characteristics of bonafide banking business and as such not violative of BR 1949. Such argument of violation of s.8 of BR 1949 can at least prima facie be extended to the Sharia’a compliant structures such as Musharaka, Murabaha, Twarruq. However, as there is no universally applicable structure and as structure can be reengineered to suit relevant regulatory environment for any Sharia’a compliant transaction, RBI as a regulator cannot resort to a generalist assumption as to the permissibility of such structures. s.8 might not be applicable for certain Sharia’a compliant structures or by engaging in  careful product-designing or reengineering process by jurists, lawyers and bankers collectively can remove elements not complying with s.8 requirements or replace it with complying elements[32]. Moreover, in the light of RBI allowing and regulating transactions such as derivatives and trading of NPA’s without any amendment in BR 1949 authorising such business and the apex Court validating such powers of RBI, RBI without seeking an amendment of BR 1949 can initiate appropriate measures so as to regulate a Sharia’a compliant transaction of a conventional bank. RBI has the power to formulate guidelines, if at all so felt, with respect to such transactions and shall allow such transactions. The following observation of the Hon’ble Supreme Court in the ICICI case is relevant;

‘The "banking policy" is enunciated by RBI. Such policy cannot be said to be ultra vires the Act. The idea behind empowering RBI to determine the Policy in relation to Advances is to enable banking companies to expand their business of banking and in that sense such guidelines also define - as to what constitutes banking business[33]

Another element to be analysed in this regard is the intention of s.8 of BR 1949. The BR 1949 was drafted and enacted at a time when the concept of Islamic banking was unheard off. The Islamic banking Industry as such is a young one compared to the conventional banking industry. The true launching of Islamic finance with the creation of Islamic bank such as Islamic Development Bank (Jedda), Dubai Islamic Bank and Albaraka Banking Group (Bahrain) happened in seventies[34]. The buying and selling involved in a Sharia’a compliant transaction such as Musharaka or Twarruq is essentially banking tailored to meet the requirements of Sharia’a. The concept of a banker buying a product solely for the purpose of enabling its customer to own/possess that product is perhaps attributable only to Islamic banking and not foreseeable at the time when BR 1949 was enacted. The BR 1949 being an Act enacted to consolidate the law relating to banking, the intention behind s.8 would have been to prevent a banker from engaging in the activity of buying and selling as a business separate and distinct from ‘banking’ business. I would contend that such a prohibition is not intended to be applied to a transaction which in which buying and selling is only incidental to facilitating banking activity in a manner compliant with Sharia’a principles.  The following observation made the Hon’ble Supreme Court in ICICI case supports this contention;

‘The BR Act, 1949 is an Act enacted to consolidate and amend the law relating to banking. Thus, while interpreting the Act one needs to keep in mind not only the framework of the banking law as it stood in 1949 but also the growth and the new concepts that have emerged in the course of time Thus, the BR Act, 1949 mandates a statutory comprehensive and formal structure of banking regulation and supervision in India[35]

“By definition, an Islamic bank abides by Islamic law, the Sharia’a. The literal meaning of the Arabic term Sharia’a is ‘the way to source of life’ and in a technical sense, it is now used to refer to a legal system in keeping with the code of behaviour called for by holy Qur’an and the hadith (the authentic tradition). Muslims cannot in good faith compartmentalise their behaviour into religious and secular dimensions, and their actions are always bound by the Sharia’a. Islamic law thus embodies an encompassing set of duties and practices including worship, prayer, manners and morals, marriage, inheritance, crime and commercial transactions”[36]. As such in light of the decision rendered in Subramanian Swamy v State of Kerala, the above argument can further be stretched to content that reluctance on the part of RBI to allow Islamic windows will amount to denial of Constitutional privilege to some and hence such act of RBI is unconstitutional. Sharia’a compliant banking ipso facto is not violating the Constitution and as such a narrow import of s.8 BR1949 would in fact amount to denial of certain constitutional rights to a citizen/person who is bound to follow the principles of Sharia’a in all walks of one life. The ratio of Subramanian Swamy case r/w ICICI Bank case abundantly proves that Islamic banking is constitutional in India and that RBI has a positive mandate on it to facilitate banking business so as to expand the same. Of course it is with the proviso that the intended transaction shall be bonafide. Any argument that a Sharia’a compliant transaction would not be a bonafide banking transaction would sound unreasonable and illogical to any man of prudence.

However, it may be noted that even if RBI as a regulator allows Islamic Banking windows, there are other statutory obstacles. The most fundamental one would be the application of double stamp duty and taxation.  The issue of stamp duty is more complex as the Constitution of India divides the power to levy stamp duty between Union and the State. Under the Constitution of India, the power to levy stamp duty is divided between the Union and the State. The Central Government has the power to levy stamp duty on the instruments specified in Article 246 read with Schedule VII, List I, Entry 91 and the State Government has the power to levy stamp duty on instruments falling under Article 246 read with Schedule VII, List II, Entry 63[37]. As such amendment of the applicable provisions in each state would amount to a herculean task considering the divergent political and economic conditions prevailing in India. It could be possible to structure an Islamic banking transaction so as to avoid double stamp duty as opined by legal experts[38]. Such views predominantly may be based on the fact that multiple transactions involved in an Islamic Banking transaction is in fact multiple legs of same transaction and multiplicity is not for undertaking a sham transaction so as to avoid stamp duty. The provisions permitting in transit sales can also be explored for getting over the issue of double taxation on sales of moveable goods.

Conclusion

I would conclude by stating that the flexibility Sharia’a compliant banking possess with respect to product designing and reengineering shall be utilized by the stakeholders to commence Sharia’a compliant banking through Islamic windows which appears in principally permissible, as aforesaid. We being anextremely complex country, politically and legally, a formal regulatory approval might take eras especially in the back ground of absence of any Islamic banking activities through Islamic windows. As such the Islamic finance experts, bankers and regulators shall strive for striking a consensus. The regulators shall lead, especially when we have sorts like Mr.Raghuram Rajan, who is in favour of ‘interest free banking”, heading RBI. The regulators and political leadership shall introspect why a financial committee headed by an economist was forced to use the term “interest-free banking” substituting “Islamic finance”. Mr. Narendra Modi, the Prime Minster who enjoys the mandate of a majority, purportedly aims for an inclusive and sustainable growth trajectory. Probably, a single point remedy lies in promoting Islamic finance. It might help in winning the confidence of a minority and in driving an inclusive and sustainable financial growth beneficial for the majority.









[1]Nicholas HD Foster, Islamic Commercial Law: An Overview (I), p.3




[2] Ali Adnan Ibrahim, The Rise of Customary Businesses in International Financial Markets: An Introduction to Islamic Finance and the Challenges of International Integration, American University International Law Review, Volume 23, Issue 4 Financial Innovations in the Muslim World, p.674




[3] H. Derbel, T. Bouraoui, N. Dammak, Can Islamic Finance Constitute a Solution for Crisis? , International Journal of Economics and Finance, Vol. 3, No. 3; August 2011,p.77




[4] Waseem Ahmed, Islamic Banking in the United Kingdom: Opportunities and Challenges, Kingston Business School, London, p.14




[5] Abbas Mirakhor, Iqbal Zaidi, Profit and Loss sharing contracts in Islamic finance , Chapter 4,  Handbook of Islamic Banking, Edward Elgar Publishing Limited, 2007, p.49




[6]Zubair Iqbal, Abbas Mirakhor, Islamic banking, Occassional Papers of International Monetary Fund, 1987.p.4

[7] See HM.Sharawy, Understanding the Islamic Prohibition of Interest: A guide to Aid Economic Cooperation Between the Islamic and Western World, 29 Ga.J.Int’l & comp. L.153, 170 (2000), S Chinoy, Interest Free Banking: The Legal Aspects of Islamic Financial Transactions, 10 J.Int’l Banking L.517, 521 (1995), HA Hamoudi, Jurisprudential Schizophrenia: On form and Function in Islamic Finance, 7 Chi.J.Int’l L.605(2007)




[8] See Preamble of The Constitution of India- ‘WE, THE PEOPLE OF INDIA, having solemnly resolved to constitute India into a SOVEREIGN SOCIALIST SECULAR DEMOCRATIC REPUBLIC and to secure to all its citizens:

JUSTICE, social, economic and political; LIBERTY of thought, expression, belief, faith and worship; EQUALITY of status and of opportunity;

and to promote among them all FRATERNITY assuring the dignity of the individual and the unity and integrity of the Nation;

IN OUR CONSTITUENT ASSEMBLY this twenty-sixth day of November, 1949, do HEREBY ADOPT, ENACT AND GIVE TO OURSELVES THIS CONSTITUTION’.




[9] Dr. Subramanian Swamy v State of Kerala, 2011(1)KLT807




[10] Art.27, Constitution of India- ‘Freedom as to payment of taxes for promotion of any particular religion.- No person shall be compelled to pay any taxes, the proceeds of which are specifically appropriated in payment of expenses for the promotion or maintenance of any particular religion or religious denomination’.




[11] See para 10, Dr. Subramaniam Swamy v State of Kerala, 2011(1)KLT807




[12] See para 19, Dr. Subramaniam Swamy v State of Kerala, 2011(1)KLT807




[13] See para 20, Dr. Subramaniam Swamy v State of Kerala, 2011(1)KLT807 & RBI Act, Chapter III B of the Reserve Bank of India Act, 1934 was introduced by the * amendment Act 55 of 1963. It deals with various aspects of the regulation of the business of "non-banking financial institutions"




[14] See para 4, Dr. Subramanian Swamy v State of Kerala, 2011(1)KLT807& website of KSIDC, 

Established in 1961, Kerala State Industrial Development Corporation Ltd. (KSIDC) is a wholly owned company of Government of Kerala "to promote, establish and execute industrial projects and enterprises for the economic and industrial development of the State of Kerala" and also "to aid, assist and finance any infrastructure projects or enterprises or other projects and to promote and establish companies and associations of private or public character"




[15] See Dr. Subramanian Swamy v State of Kerala, 2011(1)KLT807




[16] Para 11, Dr. Subramanian Swamy v State of Kerala, 2011(1)KLT807




[17] Para 29, Dr. Subramanian Swamy v State of Kerala, 2011(1)KLT807




[18] Pare 36, Dr. Subramanian Swamy v State of Kerala, 2011(1)KLT807




[19]Para.4 of the counter affidavit filed by Union of India reads as follows:

‘Government of India have always maintained that in the current statutory and regulatory frame work, it is not legally feasible for banks in India to undertake Islamic Banking activities in India or for branches of Indian Banks abroad to undertake Islamic Banking outside India. This has been the stance of the Government of India even while giving reply to Questions in the Parliament as well as in response to various VIP correspondences on the subject. The said stance of the Government of India is applicable mutatis mutandis to the activities of NBFC’s also’. See para 55, Dr. Subramanian Swamy v State of Kerala, 2011(1)KLT807




[20] See paras 56,57 & 58, Dr. Subramanian Swamy v State of Kerala, 2011(1)KLT807




[21] Preamble of Banking Regulation Act, 1949- ‘An Act to consolidate and amend the law relating to banking.

WHEREAS it is expedient to consolidate and amend the law relating to banking It is hereby enacted as follows-‘




[22] Section 5(b), Banking Regulation Act, 1949 – ‘ "banking" means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise;’




[23]6. Forms of business in which banking companies may engage —(1) In addition to the business of banking, a banking company may engage in any one or more of the following forms of business, namely: — (a) the borrowing, raising, or taking up of money; the lending or advancing of money either upon or without security; the drawing, making, accepting, discounting, buying, selling, collecting and dealing in bills of exchange, hoondees, promissory notes, coupons, drafts, bills of lading, railway receipts, warrants, debentures, certificates, scrips and other instruments and securities whether transferable or negotiable or not; the granting and issuing of letters of credit, traveller's cheques and circular notes; the buying, selling and dealing in bullion and specie; the buying and selling of foreign exchange including foreign bank notes; the acquiring, holding, issuing on commission, underwriting and dealing in stock, funds, shares, debentures, debenture stock, bonds, obligations, securities and investments of all kinds; the purchasing and selling of bonds, scrips or other forms of securities on behalf of constituents or others, the negotiating of loans and advances; the receiving of all kinds of bonds, scrips or valuables on deposit or for safe custody or otherwise; the providing of safe deposit vaults; the collecting and transmitting of money and securities; (b) acting as agents for any Government or local authority or any other person or persons; the carrying on of agency business of any description including the clearing and forwarding of goods, giving of receipts and discharges and otherwise acting as an attorney on behalf of customers, but excluding the business of a managing agent or secretary and treasurer of a company;

(c) contracting for public and private loans and negotiating and issuing the same; (d) the effecting, insuring, guaranteeing, underwriting, participating in managing and carrying out of any issue, public or private, of State, municipal or other loans or of shares, stock, debentures, or debenture stock of any company, corporation or association and the lending of money for the purpose of any such issue; (e) carrying on and transacting every kind of guarantee and indemnity business; (f) managing, selling and realising any property which may come into the possession of the company in satisfaction or part satisfaction of any of its claims; (g) acquiring and holding and generally dealing with any property or any right, title or interest in any such property which may form the security or part of the security for any loans or advances or which may be connected with any such security; (h) undertaking and executing trusts; (i) undertaking the administration of estates as executor, trustee or otherwise; (j) establishing and supporting or aiding in the establishment and support of associations, institutions, funds, trusts and conveniences calculated to benefit employees or ex-employees of the company or the dependents or connections of such persons; granting pensions and allowances and making payments towards insurance; subscribing to or guaranteeing moneys for charitable or benevolent objects or for any exhibition or for any public, general or useful object; (k) the acquisition, construction, maintenance and alteration of any building or works necessary or convenient for the purposes of the company; (l) selling, improving, managing, developing, exchanging, leasing, mortgaging, disposing of or turning into account or otherwise dealing with all or any part of the property and rights of the company; (m) acquiring and undertaking the whole or any part of the business of any person or company, when such business is of a nature enumerated or described in this sub- section;(n) doing all such other things as are incidental or conducive to the promotion or advancement of the business of the company; (o) any other form of business which the Central Government may, by notification in the Official Gazette, specify as a form of business in which it is lawful for a banking company to engage. (2) No banking company shall engage in any form of business other than those referred to in sub-section (1).




[24] Section 8 of Banking Regulation Act,1949-Prohibition of trading — ‘Notwithstanding anything contained in section 6 or in any contract, no banking company shall directly or indirectly deal in the buying or selling or bartering of goods, except in connection with the realisation of security given to or held by it, or engage in any trade, or buy, sell or barter goods for others otherwise than in connection with bills of exchange received for collection or negotiation or with such of its business as is referred to in clause (i) of sub-section (1) of section 6:

Provided that this section shall not apply to any such business as is specified in pursuance of clause (o) of sub-section (1) of section 6.

Explanation — For the purposes of this section, "goods" means every kind of movable property, other than actionable claims, stocks, shares, money, bullion and specie, and all instruments referred to in clause (a) of sub-section (1) of section 6’.




[25] Section 9 of Banking Regulation Act- Disposal of non-banking assets. — Notwithstanding anything contained in section 6, no banking company shall hold any immovable property howsoever acquired, except such as is required for its own use, for any period exceeding seven years from the acquisition thereof or from the commencement of this Act, whichever is later or any extension of such period as in this section provided, and such properly shall be disposed of within such period or extended period, as the case may be:

Provided that the banking company may, within the period of seven years as aforesaid deal or trade in any such property for the purpose of facilitating the disposal thereof:

Provided further that the Reserve Bank may in any particular case extend the aforesaid period of seven years by such period not exceeding five years where it is satisfied that such extension would be in the interests of the depositors of the banking company.




[26] Definition as per AAOIFI (Accounting and Auditing organisation for Islamic Financial Institutions) - A form of partnership between the Islamic bank and its clients whereby each party contributes to the capital of partnership in equal or varying degrees to establish a new project or share in an existing one, and whereby each of the parties becomes an owner of the capital on a permanent or declining basis and shall have his due share of profits. However, losses are shared in proportion to the contributed capital. It is not permissible to stipulate otherwise. Available at http://www.aaoifi.com/aaoifi/IslamicFinancialDefinitions/tabid/209/language/en-US/Default.aspx




[27] Definition as per AAOIFI (Accounting and Auditing organisation for Islamic Financial Institutions) - “It is a partnership in profit between capital and work. It may be conducted between investment account holders as providers of funds and the Islamic bank as a mudarib. The Islamic bank announces its willingness to accept the funds of investment amount holders, the sharing of profits being as agreed between the two parties, and the losses being borne by the provider of funds except if they were due to misconduct, negligence or violation of the conditions agreed upon by the Islamic bank. In the latter cases, such losses would be borne by the Islamic bank. A Mudaraba contract may also be concluded between the Islamic bank, as a provider of funds, on behalf of itself or on behalf of investment account holders, and business owners and other craftsmen, including farmers, traders etc. Mudaraba differs from what is known as speculation which includes an element of gambling in buying and selling transactions. (It is to the former that this standard applies)”. 




[28]ICICI Bank Limited v Official Liquidator of APS Star Industries Ltd. and Ors, AIR2011SC1521

[29] Para 13, ICICI Bank Limited v Official Liquidator of APS Star Industries Ltd. and Ors, AIR2011SC1521




[30] Supra

[31] See Para 15, ICICI Bank Limited v Official Liquidator of APS Star Industries Ltd. and Ors, AIR2011SC1521- ‘When a borrower who is under liability to pay to secured creditors, makes default in repayment of secured debt or any instalment thereof, the account of borrower is classified as Non-Performing Asset (NPA)’




[32] See Ali Adnan Ibrahim, The Rise of Customary Businesses in International Financial Markets: An Introduction to Islamic Finance and the Challenges of International Integration, American University International Law Review, Volume 23, Issue 4 Financial Innovations in the Muslim World, pp.670-671




[33] Para 14; ICICI Bank Limited v Official Liquidator of APS Star Industries Ltd. and Ors, AIR2011SC1521




[34] H. Derbel, T. Bouraoui, N. Dammak, Can Islamic Finance Constitute a Solution for Crisis? , International Journal of Economics and Finance, Vol. 3, No. 3; August 2011,p.75




[35] Para 15; ICICI Bank Limited v Official Liquidator of APS Star Industries Ltd. and Ors, AIR2011SC1521




[36]Kabir Hassan, Mervyn Lewis, Handbook of Islamic Banking, Edward Elgar Publishing Limited, 2007, p.38




[37] Article 246 of the Constitution of India - Subject-matter of laws made by Parliament and by the Legislatures of States.- (1) Notwithstanding anything in clauses (2) and (3), Parliament has exclusive power to make laws with respect to any of the matters enumerated in List I in the Seventh Schedule (in this Constitution referred to as the “Union List”)

(2) Notwithstanding anything in clause (3), Parliament, and, subject to clause (1), the Legislature of any State also, have power to make laws with respect to any of the matters enumerated in List III in the Seventh Schedule (in this Constitution referred to as the “Concurrent List”).

(3) Subject to clauses (1) and (2), the Legislature of any State has exclusive power to make laws for such State or any part thereof with respect to any of the matters enumerated in List II in the Seventh Schedule (in this Constitution referred to as the “State List”).

(4) Parliament has power to make laws with respect to any matter for any part of the territory of India not included in a State notwithstanding that such matter is a matter enumerated in the State List.

[38] See article “Islamic Finance: ‘Between faith and law’ dated 15th September 2010, The Economic Times

Vipin



Vipin Warrier is currently engaged as the Group Legal Counsel of a Finnish MNC and in this capacity he manages the legal affairs of the Finnish group globally. He has an LLM in Corporate Finance Law from University of Westminster, London to his credit. He has studied Islamic Finance as part of his LLM programme.