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India central bank allows non bank islamic finance firm

Aug 20 India's central bank has allowed a firm in the southern state of Kerala to operate as a non-banking financial company (NBFC) that follows Islamic principles - a small step towards developing sharia-compliant finance in the country. An estimated 177 million Muslims in India, the largest Muslim minority population in the world, are unable to use Islamic banks because laws covering the sector require banking to be based on interest, which is forbidden in Islam. But some companies, especially in Kerala which has a large Muslim population and an overseas diaspora of workers who remit money back from the Gulf, are nevertheless trying to develop Islamic financial products outside the banking sector. Cheraman Financial Services, based in Kerala's city of Kochi, plans to offer leasing and equity-finance products under Islamic principles. It said it had obtained approval to operate from the Reserve Bank of India and would follow the Islamic ban on interest; it will not take deposits from customers."We propose to roll out the products by the end of August," a spokesman for Cheraman, formerly known as Al Barakah Financial Services, told Reuters. He did not elaborate on the design of the products. Instead of interest, Islamic finance uses structures such as asset buy-backs and agency agreements to provide returns to investors. The RBI did not respond to a request for comment on Cheraman's case. But its decision appears to open the door to the possibility of more NBFCs offering Islamic non-interest products in future, even though full-fledged Islamic banks are expected to remain banned.

RBI governor Duvvuri Subbarao, who will step down in September, has said Islamic banking is not possible in the country but sharia-compliant products could be delivered through alternative means. LEGAL CHALLENGE

Last year, the RBI directed Kochi-based Alternative Investments and Credits Ltd (AICL) to stop its non-interest NBFC business almost a decade after the firm was launched. This prompted an ongoing legal challenge by AICL."The grant of an NBFC licence should have an impact on the AICL proceedings and there are good chances that the matter may get settled soon," said Suprio Bose, Mumbai-based lawyer at Juris Corp, a law firm which previously represented AICL."The event reflects a significant and welcome change in RBI's attitude towards sharia-based NBFCs and sets a precedent for others to follow suit."However, many analysts think that unless and until full-fledged Islamic banks are permitted in India, an Islamic finance sector will find it hard to develop.

"I don't think there is going to be a rush for NBFC applications. RBI's attitude towards the sharia-compliance concept is yet to be tested," said Shariq Nisar, director of research and operations at Mumbai-based Taqwaa Advisory and Shariah Investment Solutions. Running a sharia-compliant financial institution under Indian regulations is still difficult and other firms are likely to stay on the sidelines pending the success of existing schemes before deciding to join in, he added. Islamic equity and venture capital products have attracted little demand in India and NBFCs could face the same fate, said Nisar. "NBFC business overall has been declining over the years."The RBI issued guidelines for NBFCs in June, cracking down on debt issuance by an industry that relies heavily on capital markets to fund its business but has faced less regulatory oversight than banks. According to central bank data, credit extended to NBFCs increased by 1.9 percent from a year earlier in June, compared with an increase of 43.9 percent in June last year. There are over 12,000 registered NBFCs in India. A handful of politicians have been lobbying for years to start Islamic banking in India, but they have met strong opposition from bureaucrats in the finance ministry and banking circles. Some politicians, especially from the main opposition Bharatiya Janata Party, say they fear Islamic banking could be used by militants and might strengthen the hold of clergy over India's Muslim community. ; var median = (relatedItemsTotal / 2); var $relatedContentGroupOne = $(' ul'); var $relatedContentGroupTwo = $(' ul'); $.each($relatedItems, function(k,v) { if (k + 1 = median) { $relatedContentGroupOne.append($relatedItems[k]); } else { $relatedContentGroupTwo.append($relatedItems[k]); } }); } else { $('.third-article-divide').append($('div class="related-content group-one"h3 class="related-content-title"Also In Financials/h3ul/ul/div')); $('.related-content ul').append($relatedItems); } },500); } Next In Financials Greece's NBG likely to sell its insurance unit this year -CEO SOFIA, Jan 4 National Bank of Greece (NBG) expects to sell its subsidiary National Insurance this year and plans other sales as part of its restructuring, its chief executive said on Wednesday. BRIEF-Ford Motor Credit files for notes offering * Ford Motor Credit Co LLC - files for notes offering; size not disclosed - SEC filing UPDATE 1-U.S. LIBOR breaks above 1 pct for first time since 2009 Jan 4 The rate banks charge each other to borrow dollars for three months rose above 1 percent on Wednesday for the first time since May 2009 as global interest rates extend their climb on expectations of accelerating growth and inflation. MORE FROM REUTERS window._taboola = window._taboola || []; _taboola.push({ mode: 'organic-thumbnails-a', container: 'taboola-recirc', placement: 'Below Article Thumbnails - Organic', target_type: 'mix' }); Sponsored Content @media(max-this site) { #mod-bizdev-dianomi{ height: 320px; } } From Around the Web Promoted by Taboola window._taboola = window._taboola || []; _taboola.push( { mode: 'thumbnails-3X2', container: 'taboola-below-article-thumbnails', placement: 'Below Article Thumbnails', target_type: 'mix' } ); window._taboola = window._taboola || []; _taboola.push

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Money markets ecb funds ease financial stress, dangers ahead

* Dangers to over-reliance on ECB funding flagged* ECB and banks taking on more risk on balance sheets* Feb LTRO seen easing financial stress in money marketsBy Ana Nicolaci da CostaLONDON, Feb 1 European Central Bank liquidity has helped to lower the level of financial stress in the inter-bank market and improve sentiment towards risk, but analysts are beginning to flag the dangers of a banking system over-reliant on cheap central bank funding. The three-month spread between Libor rates and overnight index swap rates has narrowed since the ECB injected money in the financial system in December and is seen tightening further as the central bank is set to offer another round of three year loans this month. There is a widespread view that the ECB's liquidity operations have been successful in averting a credit crunch which would have accentuated the euro zone debt crisis. But there are concerns banks may get too comfortable and the ECB may struggle to wean them off cheap lending."The worry is this a temporary life-support or is this something that is going to be hard to reverse in future?" Richard McGuire, senior fixed income strategist at Rabobank said. Even with three-month euro zone Libor interbank lending rates at their lowest since March 2011 at 1.04943 percent , traders say banks have remained reluctant to lend to each other.

"We don't think that it actually tackles the root of the problem which is one of solvency and at its heart a lack of fiscal union in the euro zone," McGuire added. European leaders agreed to a pact of stricter budget discipline, a step towards tighter fiscal integration, helping to fuel risk appetite in financial markets already benefiting from ample ECB liquidity. The injection of nearly half a trillion euros of three-year ECB funding in December has seen the spread between three-month Libor rate and overnight Eonia rates - a measure of counterparty risk - tighten more than 20 basis points since December. The spread last stood at 69 bps, unchanged from the day prior.

Simon Smith, chief economist at FxPro expects that gap to narrow another 20 basis points after the second round of three-year funding this month. The ECB is expected to allot 325 billion euros in its second three-year refinancing tender due in late February so long as money markets remain stressed, a Reuters poll of traders showed this week. DAY OF RECKONING

The problem was how to wean the banks off such attractive funding conditions and what impact it could be having on the ECB's growing balance sheet, analysts said."If you give banks the easy option it sort of blunts the need to make the harder choices," Smith said. Given the ECB has eased its collateral requirements quite significantly, "from having a very liquid, stable balance sheet, the ECB has gone to having a very large and less stable balance sheet by nature of the risks that it is taking on in terms of the paper it is receiving."The ECB's long-term refinancing operations (LTRO) have allowed domestic banks to borrow at relatively attractive rates with the ECB to buy high-yielding bonds, making a profit but also increasing these banks' exposure to riskier sovereign debt."Banks become increasingly vulnerable to a turn in peripheral sentiment because they will be more heavily invested in peripheral bonds so any decline in the value of those bonds is going to hurt balance sheets an awful lot more if they have loaded up on them via the LTRO process," McGuire said. It also delayed the "day of reckoning" which will ultimately involve a solution that transfers some of the risks to Europe's paymaster Germany and other so-called "core" countries either via greater fiscal union or quantitative easing by the ECB, he added."At the moment this three-year (cash) is helping the carry trade. So banks are going out and buying a huge amount of government debt for anything under three years and using the ECB to fund it," a trader said. "It's great in the short-term ... but what happens in three years' time when the ECB stops that?"