Islamic Finance and the Indian Constitution

The concepts of Islamic banking and Islamic finance are yet to gain significant ground in India and attain the popularity they have witnessed in other countries. While there has been a debate about the need for a separate legal framework in India to promote the form of finance recognized under principles of Sharia law, the judiciary recently had the opportunity to test the validity of Islamic finance against the touchstone of the Constitution.

The case of Dr. Subramaniam Swamy v. State of Kerala involved a constitutional challenge mounted against the participation of the Kerala Government and the KSIDC in the formation of an Islamic investment company for attracting investment to finance projects in Kerala. The principal ground for challenge was that the state’s participation violates the principles of secularism enshrined in the Constitution. The rationale of the Government for using the Islamic investment vehicle was to tap the vast flow of funds generated by non-resident Indians in the Gulf countries. After considering the arguments of parties (almost entirely on issues of constitutional law), the Kerala High Court upheld the state’s action in establishing the Islamic financial institution. Please see this post on the Law-in-Perspective Blog for extracts and a link to the court’s decision.

Although the Kerala High Court’s decision may not directly propel Islamic finance activity in India, it goes to remove at least one obstacle in popularizing the concept.