As Rajan departs, RBI opens door to Islamic finance

The Reserve Bank of India (RBI) has proposed working with the government to introduce interest-free banking to tackle financial exclusion for religious reasons, potentially opening Islamic finance to the largest Muslim minority population in the world. India's central bank made the proposal in its annual report last week, as departing RBI governor Raghuram Rajan hands over the reins to close ally Urjit Patel.

The proposal marks a shift in stance by the RBI, which has previously said Islamic finance could be offered through non-bank channels such as investment funds or cooperatives.

That has meant an estimated 180 million Muslims in India, the country's second-largest religious group, have been unable to access Islamic banking because of laws that require banking to be based on interest, which is forbidden in Islam.

The RBI said it would explore introducing interest-free banking products in consultation with the government, a key detail as this opens the prospects of supportive legislation.

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