Islamic Banking is a comparatively new term for Indian economy because of the fact that not much debate has taken place regarding this. It is now pertinent to mention that RBI has mooted a proposal to introduce this system of banking in India in the coming years. Some people have welcomed the move whereas some have criticised the same vehemently.
What is Islamic Banking, by the way?
Well, we have talked too much about the new style of banking that will be introduced in the near future in a phased manner but the real nature of it is yet to be explained. Islamic Banking refers to the phenomenon of banking activity that complies with the Shariat law. It implies that the laws of the Shariat should be practically implemented in banking activities and Islamic finance. The more appropriate name for it should be ‘Shariat Compliant banking’.
The main principle of this type of banking is that it prohibits taking interest from people for loans given to them. That is considered Riba in Islam. On the other hand, something that is prohibited in Islam should not be financed through this banking system such as alcohol, pork etc.
Now the question arises is that the way this system runs since there is no interest income? Banks need to thrive on the profit they make from loans but here no such way is there. Actually, Islamic banking is based on the concept of profit and loss sharing. It says that you cannot earn undue interest but you can earn reasonable profits from an investment made with an element of calculated risk on the part of the investor. Thus Islamic banks are free to provide accounts where there is profit or loss instead of interest. The banks collect this profit and invest in something that is Sharia-compliant such as Sharia-bonds etc. This way, it earns and can sustain in the long run.
Islamic Banking: Tracing the development
Islamic banking has taken its root from a financial organisation called Tabung Haji in Malaysia which started this trend after seeing the demand for interest-free money needed for pilgrimage purpose. In 1963, this bank came into being with 1281 depositors which soon touched the 8 lakh mark. After that, the Islamic banks became popular in Egypt. In the recent years, Islamic Development Bank has seen its rise with a view to promoting Sharia-compliant banking in the world.
Islamic Banking and India: The way forward
RBI has recently floated an opinion that there should be a separate Islamic banking window in the conventional banks so that Islamic banking can be promoted in our country. But how is the concept relevant in our country? What are issues that may be faced by this type of banking in the future? These are the issues that need to be sorted out first before we can see this new type of banking taking the centre stage in India.
Islamic banking is a comparatively new concept for India. However, it should be noted that China, USA, UK etc have already made enough progress in this regard despite being non-Muslim countries. India is sitting on a pile of potential and Islamic banking is going to be beneficial for the country given the Muslim base and the untapped resources in the country. The move by the Central Bank is in the right direction and in the years to come, the modalities need to be formulated so that the going gets easier. Islamic banking is the future and India can reap rich dividends from it.