Kerala High Court Judgement on Islamic Banking

Public Interest Litigation petition was filed in the court comprising the following contentions; I. The forming of an Islamic Financing Company by KSIDC “is a clear instance of the State favouring particular religion”. II. Formation of a Shari’a board composed of Muslim scholars “shows the identification of KSIDC with Islam, to the exclusion of all other faiths” III. The prohibitions of interest, alcohol, eating of pig, etc. are against the constitution. On January 5, 2010 a Division Bench of the High Court of Kerala, taking suo mot cognizance of the matter, ordered stay on the company’s operations. The stay order was modified by an order dated April 8, 2010 which removed the stay on the company’s operation, but the State was still prohibited from participating in the business of the company in any manner. The Court also requested submissions from a number of parties including the Union of India through the Ministry of Finance and the Reserve Bank of India (RBI). After hearing the arguments of all the parties involved the High Court of Kerala dismissed all the petitions filed against the company in February 2011. Some interesting aspects of the case 1) The Reserve Bank of India in its affidavit to the court submitted that with the current statutory an regulatory framework it is not legally feasible for banks in India to undertake Islamic Banking activities and the same holds true for Islamic NBFCs as well. The High Court dismissed this assertion of the Reserve Bank. The Court in its order said that interpretation of the law is subject of the judiciary not the executive. 2) On the question whether an Islamic NBFC can function in India, the Court left the matter to the Reserve Bank of India on the pretext that the Court did not want to preempt the RB I from examining the matter. Many reports appeared in the media mistakenly reporting that the High Court had allowed Islamic banking in the country.