Kochi (Agencies): The Kerala High Court on Thursday gave the go-ahead to a company registered under the tenets of Islamic law, sharia, to start operating a financial institution based on the principles of Islamic banking with the participation of a state-run firm.

Such institutions cannot charge interest.

Rejecting the petitions of Janata Party leader Subramanian Swamy and others, a division bench headed by Kerala Chief Justice J. Chalameshwar gave the nod to Al-Baraka Company to begin the institution with Kerala State Industrial Development Corp as an investor.

Al-Baraka has 14 promoters who have contributed Rs.4.20 crore towards its capital and a 17-member board, with top Gulf-based businessmen P. Mohammed Ali as chairman and C.K. Menon as the vice-chairman.

Kerala State Industrial Development Corporation will have an 11-per cent stake in the firm which will have to abide by some strict rules that specify which areas or businesses money can be extended. The company also cannot charge interest as per sharia laws.

"We welcome the honourable court's order. We will very soon convene a meeting of our board of directors and discuss the future course of action to begin operations," member and another prominent businessman EM Najeeb said.

"The basic principle our company would follow is: There will be no interest charged, no interest taken. There are many people who are willing to put in their money and need no interest. We will pool this money and invest in infrastructure projects," Najeeb added.

Al-Baraka Company, accordingly, will not function as a bank and extend loans, but make direct investments into such projects, after which profits would be shared in the form of dividends and not as interest.

In its interim judgment in 2010 the bench had told the state government and agencies under it to keep off from the proposed bank but said in its final order that there was nothing wrong in granting permission.

The verdict also leaves some questions unanswered since the present set of laws do not permit Islamic banking in the country, because of which Prime Minister Manmohan Singh had told the Reserve Bank of India last October to study this issue in detail.

"There have been from time to time demands for experimenting with Islamic banking in the country," the Prime Minister had said in Malaysia during an official visit there in October last year.

As per estimates, nearly USD 1 trillion is being managed by about 400-odd Islamic banks throughout the world.

Islamic banking has been a major demand of Muslims in India, who are more than 160 million -- the third-largest such population in the world after Indonesia and Pakistan.

In Kerala, Muslims form the second largest community with close to 24 per cent of the 32 million population.