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Raghuram Rajan report advocates introduction of Islamic banking

Sep 04 2008, 01:36 IST
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SummaryThe high-profile committee on financial sector reforms, headed by IMF former chief economist Raghuram Rajan, is likely to submit its final report to PM Manmohan Singh, who is also chairman of the Planning Commission, by the middle of the month.

The high-profile committee on financial sector reforms, headed by International Monetary Fund former chief economist Raghuram Rajan, is likely to submit its final report to Prime Minister Manmohan Singh, who is also chairman of the Planning Commission, by the middle of the month.

The committee, which was set up by the Planning Commission to recommend various ways to take the country’s financial sector reforms forward, has included a few points pertaining to Islamic banking. The final report has two pages referring to themes like equity financing in place of charging interest on lending—a key principle of Islamic banking—which is yet to be allowed by the government.

Speaking to FE from Hyderabad, Vijay Mahajan, chairman of Hyderabad-based micro finance organisation Basix and one of the members of the committee, said “While interacting with representatives of the Muslim community in Mumbai, we thought it proper to add these issues to ensure that the community also becomes part of financial inclusion in the country.’’

Another factor that motivated the committee to include suggestions on Islamic banking was the Sachar committee report, which has also outlined the Muslim community being a victim of financial exclusion, said Mahajan. “We have recommended that micro-equity financing as a product should be included in mainstream banking. All banks and microfinance institutions should offer these micro-equity financing products,” said Mahajan.

The report of the committee is significant, as it sets a time-table for opening up the domestic financial sector, building on the Percy Mistry and RH Patil committee reports. The Mistry report suggested ways to develop the bond currency and derivative markets in parallel with the equity markets to make Mumbai a global financial centre. The Patil committee offered a roadmap to develop bond markets.

The Raghuram Rajan report will give new RBI governor D Subbarao a blueprint for the several changes required in the financial architecture of the economy. It wants RBI to adopt a hands-off approach to the management of exchange rates.

The shortage of credit, financial services like savings, insurance and money transfer have also been highlighted in the Rajan report, which is based on three principles: inclusion, growth and stability. While inclusion means the participation of all the communities in the country’s economic growth, the committee is dead against the government offering any kind of subsidies.

“We have said that there should be no interference in the financial activities of the

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