Islamic Banking

The following article is based on my own interpretation of the said events. Any material borrowed from published and unpublished sources has been appropriately referenced. I will bear the sole responsibility for anything that is found to have been copied or misappropriated or misrepresented in the following post.

Mohit Jalan, MBA 2015-17, Vinod Gupta School of Management, IIT Kharagpur

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The Reserve Bank of India (RBI) has almost paved the way for Sharia-compliant, interest-free or Islamic banking in the country. An RBI committee on “Medium-Term Path for Financial Inclusion”, headed by Deepak Mohanty, has recommended “interest free windows” in existing conventional banks. If implemented it is expected to boost Indian economy and increase financial inclusion.

Islamic banking is banking or banking activities that are persistent with the principle of Shariah laws and its practical application through the development of Islamic economics. Shariah law prohibits fixed or floating payment or acceptance of specific interest of fees for loans of money. Developed between 8th to 12th centuries, total Islamic assets were estimated around $ 2 Trillion, which has grown more than 10 folds in last decade outperforming many conventional assets.

The central concept in interest-free banking and finance is justice, which is achieved mainly through the sharing of risk. Stakeholders are supposed to share profits and losses and charging of interest is prohibited. This type of banking has four important features — Riba, Haram/Halal, Ghararar/Maysir and Zakat. Riba is the most important aspect of interest-free banking, and means prohibition of interest. Haram/Halal is a strict code of “ethical investments” for interest-free financial activities. Such investment gives priority to the production of essential goods which satisfy the needs of the population such as food, clothing, shelter, health and education. Under Ghrarar/Maysir, gambling in all forms is prohibited. Zakat is an instrument for the redistribution of wealth in the form of a compulsory levy. Another feature condemned under interest-free banking is economic transactions involving elements of speculation.

Islamic banking due to its inherent concept of risk sharing is very important in the wake of financial crisis which the world is witnessing frequently. Vatican has also suggested that “The principle of Islamic finance may represent a possible cure for ailing markets”. India has witnessed a lukewarm response to Islamic banking although it has been widely accepted not just by Islamic states but also by non islamic states. Islamic banks have more than 300 institutions spread over 51 countries as well as 250 mutual funds that comply with Islamic principle.

Though India is little late to accept the Islamic finance but it is a welcome change in Indian economy which can help bring even the fringes into ambit of financial inclusion.

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