ISLAMIC BANKING

It is banking practiced as per the Islamic principle as prescribed in the shariah known as Fiqh al-Muamalat (Islamic rules on transaction). The Islamic law prohibits interest on both loans and deposits. Interest is also called riba in Islamic discourse. The argument against interest is that money is not a good and profit should be earned on goods and services only not on control of money itself. But Islam does not deny that capital, as a factor of production deserves to be rewarded. It, however, allows the owners of capital

a share in a surplus which is uncertain.

It operates on the principle of sharing both profits and risks by the borrower as well as the lender. As such the depositor cannot earn a fixed return in the form of interest as happens in conventional banking. But the banks are permitted to offer incentives such as variable prizes or bonuses in cash or kind on these deposits. The depositor, who in the conventional banking system is averse to risk is a provider of capital here and equally shares the risks of the bank which lends his funds.

Investment finance is offered by these banks through Musharka where a bank participates as a joint venture partner in a project and shares the profits and losses. Investment finance is also offered through Mudabha where the banks contribute the finance and the client provides expertise, management, and labour, and the profits are shared in a prearranged proportion while the loss is borne by the bank.

Trade finance is also offered through a number of ways. One way is through mare up, where the bank buys an item for a client and the client agrees to repay the bank the amount along with an agreed profit later on. Banks also finance on lines similar to leasing, hire purchase, and sell and buyback. Consumer lending is without any interest, but the bank covers expenses by levying a service charge. Besides, these banks offer a host of fee-based products like money transfer, bill collections, and foreign exchange trading where the bank’s won money is not involved.

Islamic banks have come into being since the early 1970s. There are nearly 30 Islamic banks all over the world from Africa to Europe to Asia and Australia and are regulated even within the conventional banking system. The whole banking system in Iran has moved over to the Islamic system since the early 1980s and even Pakistan is Islamising its banking system.

Many of the European and American Banks are now offering Islamic banking products not only in muslim countries, but also in developed markets such as the United Kingdom. The concept is also catching up in countries like Malaysia and Dubai.

As per the Islamic experts, with growing indebtedness of many governments and with bulk of the borrowing going to servicing of the past debt and payment of huge interests, it could be an alternative to conventional

banking as practiced in the rest of the world. Wherever it is practiced, studies have shown that the rate of return is often comparable and sometimes even higher than the interest rate offered by conventional banks to depositors.

India has no such full-fledged bank, though few non-banking financial firms have been operating in Mumbai and Bangalore on Islamic principles. We find the traces of such financial operations by co-operatives even during pre-Independence era, too. In 2015-16, an Expert Panel of the RBI recommended in favour of such banks. The panel suggested that commercial banks in India may be enabled to open specialized interest-free windows with simple products like demand deposits by— by putting participation securities on their liability side and deferred payment on the asset side. The RBI did not take any decision regarding it till late May-2016.