HC warnings on Islamic Banking, Huge Setback to CPM

published on April 8, 2010

HC asks Kerala Govt not to have links with Islamic bank

VR Jayaraj | Kochi – Daily Pioneer

The CPI(M)-led LDF Government in Kerala suffered a huge setback on Thursday with the Kerala High Court issuing an interim order asking it not to cooperate with the Islamic bank it had planned to start with public-private participation basis (PPP). Experts said that the court order might force the Government not to go ahead with the project.

While considering petitions filed by former Union minister Subramanian Swamy and Babu, a native of Ernakulam district, challenging the legality of the Government plan for the Islamic bank, a division bench of Chief Justice J Chelameswar and Justice CN Ramachandran Nair said that neither the Government nor any of its institutions should cooperate with the project financially or by any other means. However, the court allowed the other participants in the project to go ahead with it.

As per the Government’s plan, its industrial promotion vehicle Kerala State Industrial Development Corporation (KSIDC) was to hold 11 percent stakes in the non-banking financial company –Al Barak Financial Services – based on the no-interest Sharia financial principles while the remaining 89 percent was to be held by private investors, mostly Gulf-based NRIs. The Government had decided that the corporation would also be the executive agency of the banking project.

Chief Minister VS Achuthanandan responded to the High Court’s court order with a statement that an appropriate decision would be taken after studying it in detail. However, he said there would be no action from the part of the Government that went against the interests of the people. The banking project was a brainchild of Finance Minister TM Thomas Isaac and Industries Minister Elamaram Kareem, two strong advocates of the neo-liberalist faction in the Kerala CPI(M).

The interim order of the court was pursuant to an order it had passed on March 5 staying the procedures for the establishment of the financial company based on the petition of Swamy. He had argued that the Sharia-based interest-free banking system of the proposed institution was contradictory to the banking laws of the country and was a violation of the secular principles upheld by the Constitution.. The High Court would now hear the arguments in detail in June.

Swamy had argued that an Islamic bank based on Sharia principles was equivalent to giving prominence to a particular religion and that this was against the spirit of the Constitution. According to the former minister, an interest-free system of banking was also against the Reserve Bank’s financial rules. He said running an interest-free bank, which amounted to encouraging communal spirit, was not at all appropriate for a CPI(M)-led Government.

The concept of an Islamic bank, through which hefty sums could be attracted as investments needed for the development works in the cash-strapped State, was first put forward by Kerala Finance Minister TM Thomas Isaac, a former economics professor. The idea had drawn flak from several quarters with criticisms coming up to the effect that the proposed institution would make the existing banking laws of the country a scare-crow.

The idea of Isaac, Kareem and their neo-liberalist colleague in the CPI(M) was to mainly target non-resident Indians who could invest in Kerala. The non-banking institution working on the basis of Islamic principles was not to earn or give out interest on deposits and also not to indulge in speculative trade and other “unethical” (Haram) practices.

Banking and legal experts said that the Islamic bank, proposed to be started with an initial capital base of Rs 1,000 crore, was unlikely to move ahead now as there was no reason for the Government to feel interested in it. “The whole idea was to attract investments from NRIs and to direct them into development projects on a profit-sharing basis. With the court order putting an end to the PPP possibilities, the Government has chance to have any stake in it,” said Ramkrishna Iyer, a banking expert.

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