New Delhi, Jan. 19: The Centre is being urged to introduce “interest-free” banking so that Muslims can organise savings and investments without falling foul of Shariat laws. The Shariat forbids earning and paying interest.

The demand has come from Muslim MPs cutting across party lines. One group, led by K. Rahman Khan, deputy chairman of the Rajya Sabha and a chartered accountant, recently wrote to Prime Minister Manmohan Singh seeking a Shariat-compliant savings and investment system.

They cited Malaysia’s Tabung Haji scheme and some forms of Islamic banking in the West as examples.

Khan said the timing of his request had nothing to do with the recommendations of the Sachar Committee, which had stressed the need for micro-credit — where the poor get funds in proportion to an initial contribution — in its report on the status of Muslims in India.

“We approached the Prime Minister much before the Sachar report was made public. On banking, we are asking the Reserve Bank of India to amend laws,” said Khan. The Prime Minister’s reply: the RBI has to be convinced.

S.Q. Rasool Ilyas, a member of the Muslim Personal Law Board and the Jamiat Islami-e-Hind, said Islamic banking — the sort of banking where no interest is offered — would help India get more investments from West Asia.

Such a system was introduced in the UK in August 2004, when the Islamic Bank of Britain was set up in London. With an approval from the country’s financial services regulator, the bank’s eight branches now offer Shariat-compliant accounts and financial services to British Muslims, though non-Muslims are also allowed.

According to Shariq Nisar, a Mumbai-based investment consultant and co-editor of Islamic Economics Bulletin, other than riba (interest), maysir (gambling and unqualified speculation) is on the list of forbidden practices.

That would rule out loans to buy shares (because interest has to be paid) and investments in hedge, arbitrage and leveraged buyout funds.

Investments in companies making liquor and pork products are banned under the Shariat, as are gambling, lottery and pornography, said Nisar. Firms where debts make up more than 33 per cent of its capital are out of bounds to Muslims as equity investment options, said Nisar.

Despite the tough norms, Idafa Investments, a Shariat-compliant investment firm in Mumbai, has listed 500 Indian companies in which Muslims can invest.

Tata Mutual Fund’s Select Equity Fund also passes the test. Launched in April 1996, the fund doesn’t invest in firms making liquor, tobacco, consumer goods, finance and banking. The scheme has also stayed off interest-bearing securities.

However, given the divergent practices among Muslim sects, Islamic banking in India would need closer scrutiny on thorny issues like loans for shares as the community’s jurists have different views.

Waqar Ansari, a Delhi-based cost accountant, is impressed with the UK model of Islamic banking. In this, money deposited is returned at maturity, but customers can choose not to take full repayment for religious reasons.

Khan roots for the Malaysian Tabung Haji model, which invests in halal (Islam-sanctioned) activities. Profits are returned as bonuses. The initial sum grows enough to afford villagers a Haj trip.

“If we have a similar scheme in India, Haj subsidies can stop. Muslims needn’t stash money under pillows and in trunks,” he said.