Scope of Islamic Banking

By Durgesh Desai

Islamic banking is a type of a banking system which is in accordance with the Sharia law that prohibits paying any interest or fee for renting money. It also has rules about the type of businesses where money can be invested. These businesses have to function according to the principles of Islam. So investments cannot be made in companies or projects that deal with alcohol, drugs, war weapons etc.

Banking without interest

It is quite difficult to imagine any banking system functioning without paying or receiving interest on any transaction, but in Islamic banking, there is a concept of profit and loss sharing where banks invest the deposited money in Shariat compliant businesses and divide the profit and loss equally or as per the terms agreed with the depositor. Therefore Islamic banks act as a sort of equity funds. Islamic banks also provide many products like Musharaka (resources are equally shared), Mudarbah (finance provided by one party and expertise by the other) etc.

Islamic Banking in the World

The IMF in April 2015 endorsed the Islamic financial system saying that it could provide a safer alternative to conventional modes of finance. Islamic banking is common in Islamic countries and is starting to grow in other non – Islamic countries as well. The UK was the first non – Islamic country to issue license to the Islamic Bank of Britain which is in accordance with the Sharia law. The Dow Jones had started an Islamic Market Index in 1999 which had only Shariat compliant companies listed on it.

Islamic Banking in India

The RBI is mulling over the idea of introducing an Islamic window in conventional banks in India. This could help attract huge funds from Gulf countries and other investors who want to invest only in Shariat compliant businesses. It would also help in financial inclusion among the members of the Indian Muslim community who possibly shied away from investing in conventional banks due to its non – compliance with Sharia Law. State Bank of India had launched an Islamic equity fund in December 2014 with the mandate to only invest in Shariat compliant companies. To open an Islamic window in banks, the Banking Regulation Act needs to be amended. This will require Parliament’s approval which could be difficult in light of the political nature of this subject.  Islamic Banking offers an alternative investment option for investors. It would help broaden the Indian financial system.

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