Have you ever wondered how strictly the tenets of Islam are followed by its followers(i.e, Muslims). There are more then 30 Islamic countries globally, these nations work according to the Shariat law or the Islamic law which is based the holy text of Muslims ‘Quran’. One of the important tenets of Islam is ‘no Riba’ . In Islam, money has no intrinsic value – money, therefore, cannot be sold at a profit and is permitted to be used as per shariat only. The Islamic Law or Shariat prohibits paying any fee for renting of money (called riba) for specific periods of time. It also prohibits any sort of investment in businesses that are considered haraam or against the principles of Islam.
Following this principle of Islam ,the followers of Islam have introduced a new form of banking called as ‘ISLAMIC BANKING’.Islamic banking, also known as non-interest banking, is a banking system that is based on the principles of Islam or Sharia law and guided by Islamic economics. Two fundamental principles of Islamic banking are the sharing of profit and loss, and the prohibition of the collection and payment of interest by lenders and investors.
The first successful example of an Islamic Bank was perhaps a financial institution called Tabung Haji in Malaysia which originally came into being due to high demand of interest-free money for pilgrimage (Hajj) since this was not possible by way of conventional banking system. Thus, in 1963 Tabung Haji came into being with a total of 1,281 depositors which increased to 8,67,220 depositors and with deposits over one billion Malaysian dollars. This paved the way for creation of more Islamic banks especially in Egypt where small scale Islamic Banks existed in the 1960s, catering primarily to the rural areas. The success of these banks led to the formation of the Naseer Social Bank in Cairo in the year 1972. In the same decade an International Islamic Bank for Trade and Development was proposed, which led to the creation of Islamic Development Bank with a view to promote economic development of the Muslim community in accordance with the Shariat laws.
History of Islamic Banking :
The origin of Islamic banking dates back to the beginning of Islam in the seventh century. The Prophet Muhammad’s first wife, Khadija, was a merchant. He acted as an agent for her business, using many of the same principles used in contemporary Islamic banking.
In the Middle Ages, trade and business activity in the Muslim world relied on Islamic banking principles. These banking principles spread throughout Spain, the Mediterranean, and the Baltic states, arguably providing some of the basis for western banking principles. From the 1960s to the 1970s, Islamic banking resurfaced in the modern world.
How do Islamic Banks make Profits :
As we learned till now , the Islamic banks doesn’t take or give any riba or interest which makes the functioning of the bank almost difficult.Thus,to earn money without the use of charging interest, Islamic banks use equity participation systems. Equity participation means if a bank loans money to a business, the business will pay back the loan without interest, but instead gives the bank a share in its profits. If the business defaults or does not earn a profit, then the bank also does not benefit.
There are various products in Islamic Banking that cover the needs and requirements of the consumers. Some of them are Mudarbah (profit sharing – one party provides finances, the other provides expertise), Musharaka (joint venture – both parties share everything equally), Murabaha (cost plus profit), Ijara (letting on lease), Istisna amongst others.
Islamic Windows :
While Islamic Banking is prevalent and is common in Islamic countries, there are plenty of non-Islamic countries that are now opening Islamic “windows” in conventional banks. These are departments within the banks and they offer shariat compliant products to the customers. China, United Kingdom, United States, Germany are some of the countries that offer Islamic windows.
Islamic Banking @INDIA :
Introduction of Islamic Banking was mooted by Raghuram Rajan in his report on the Financial Sector in the year 2008 where 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, including those belong to economically disadvantaged section of the society.The following are some of the benefits of Islamic Banking. They are:
1. It helps the poor people of the society to get money without interest payment burden.
2.Majority of companies in the Stock Exchange are shariat compliant (this number is more than the shariat complaint companies on the Stock Exchange in Malaysia), thus this would result in attracting huge funds in the domestic market alone.
3.Islamic windows will attract deposits from Muslim community and as these windows work on Islamic principles the money will be directly invested in companies.Thus increasing rate of investments in India.
4.Under the present economic slow down with no effective investments and chaos in the society due to CAA and NRC , the introduction of Islamic banks and Islamic windows will help in showing India’s secular attitude towards Muslim community and will also help in attracting deposits from Muslims globally thus helping in increasing investments.
Constraints to Islamic Banking in India :
The Indian banking laws will have to be amended so as to incorporate the provisions relating to Islamic banking. For example, the Banking Regulation Act requires payment of interest which is against the principles of Islamic Banking. The Act also specifies “banking” to mean accepting deposits of money from public for lending or investment, thus excluding within its ambit the instruments of Islamic banking that promote profit and loss.