Islamic Banking – Burning Issues – Free PDF Download

WHAT IS ISLAMIC BANKING?

• Islamic banking is also known as non-interest banking.
• It is a banking system that is based on the principles of Islamic or Sharia law.
• In Islam, money has no intrinsic value.
• Hence, it cannot be sold at a profit.

WHAT THE ISLAMIC LAW SAYS?

• The Islamic Law or Shariat prohibits the collection and payment of interest (RIBA) by lenders and investors.
• It also prohibits any sort of investment in businesses that are considered haram or against the principles of Islam.
• It is largely believed that these principles have been derived from the Quran.

MODERN ISLAMIC BANKING

• The 1st successful example of an Islamic Bank was seen in Malaysia.
• In 1963 Tabung Haji came into being with a total of 1,281 depositors which increased to 8,67,220 depositors, with deposits over one billion Malaysian dollars.
• It came into being due to high demand of interest-free money for pilgrimage (Hajj).
• The success of led to the formation of the Naseer Social Bank in Cairo in the year 1972.
• Later, the Islamic Development Bank with a view to promote economic development of the Muslim community in accordance with the Shariat laws.

HOW CAN BANKS FUNCTION WITHOUT TAKING INTEREST?

• In Islam, the investor should not make an “undue” profit from the hard work of the other.
• But it is permitted to follow a system of reasonable profit and return from investment where the investor takes a risk.
• Thus, Islamic banks make available accounts which provide profit or loss instead of interest rates.

WHERE THE MONEY IS INVESTED?

• The banks use this money collected by them and invest in something that is shariat compliant, that is not haram and does not involve high risks.
• Thus, businesses involving alcohol, drugs, war weapons etc. as well as all other high risk activities are prohibited.
•  Islamic Banking, therefore, acts as an agent by collecting the money on behalf of its customers, investing them in shariat compliant projects and sharing the profits or losses with them.
• The Dow Jones Islamic Market Index came into being in the year 1999 for investors willing to invest in shariat compliant projects.

SPREAD OF ISLAMIC BANKING IN THE WORLD

• There are plenty of non-Islamic countries that are now opening Islamic “windows” in conventional banks. Like– China, Germany etc.
• UK was the first non-Islamic country to permit a complete shariat compliant bank called the Islamic Bank of Britain.
• UK also issued Islamic Bonds known as SURUK in 2014.
• US has the American Finance House LARIBA.

 ISLAMIC BANKING IN INDIA

• Introduction of Islamic Banking was mooted by Raghuram Rajan in his report on the Financial Sector in the year 2008.
• He recommended that interest-free banking techniques should be operated on a larger scale so as to give access to those who are unable to access banking services
• However, the Indian banking laws will have to be amended to incorporate Islamic banking. E.g.- the Banking Regulation Act, 1949

ADVANTAGES

• Encourage many from the Muslim community to come forward and invest in projects which they may not be willing to put in the banks.
• India will be able to attract huge investments from West Asia.
• This could result in attracting huge funds in the domestic share market.

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