The RBI has strictly prohibited use of terms like interest-free finance, participatory finance, profit-sharing and Islamic banking, either explicitly or implied.
The Kerala State Industrial Development Corporation (KSIDC) has an equity share of 11 % in Cheraman Financial Services, which obtained the NBFI status in July 2.
State industries minister PK Kunhalikutty and APM Mohammed Hanish, MD of CFSL, have said on record that the business model of the NBFI is based on interest-free financing, based on the economic principles of Sharia.
RBI in a reply to an RTI application filed by BJP leader Subramanian Swamy stated the central bank has not given licence to any financial entity in Kerala to run an Islamic Bank, according to the religious Sharia code. All entities registered with the RBI have to comply with RBI Act, 1934, and Banking Regulation Act, 1949.
Islamic teaching encourages trading, investment and charitable giving, but frowns on the giving or receiving of interest, or riba, which it categorises as usury.
Sharia stipulates against earning fixed returns such as interest, warns against excessive speculation and shares the risk of the business. Currently, there are about 400-500 Islamic banks that are managing close to $1 trillion worldwide and this figure is expected to touch $4 trillion by 2020.
London and Paris are the leading financial centres of Islamic banks and funds.
Subramanian Swamy has been consistently opposing the efforts of the Kerala government in establishing a Sharia-compliant NBFC.
The state government took its first effort during the rule of Left Front in 2010, when they tried to form a company in the name of Al Baraka Financial Services Company with KSIDC being the prominent promoter. The firm had plans to invest in Indias infrastructure through a product called Ijara, or leasing.
Al Baraka would buy capital equipment and receive rent in return for leasing it out. The promoters were also hoping to turn the NBFC into a global Islamic bank as soon as the Banking Regulations Act, 1949, is amended to accommodate Islamic banking.