The conduct of borrowing programme of State Governments is, however, posing several problems. While the market borrowing programme of states in aggregate is well below a quarter of centre’s market borrowings, in a liberalized environment, banks cannot be compelled to subscribe to the programme. It was necessary to provide investors a premium for states’ paper over the centre’s paper of a comparable maturity.
BoU accordingly undertook a study on the Islamic Banking model to explore its fit in the existing legislative framework. The study revealed that the Financial Institutions Act, 2004 (FIA 2004), contained prohibitions, which could not facilitate the operation of Islamic Banking.