Islamic Banking In India

Islamic banking is based on the principles of Shariah. Though at today's context it is not acceptable in India but tomorrow it may find its supporter.

• Islam, just like any other religion believes in the theory of peace and co-operation in all the good deeds.
• Islam also have it's restrictions on gambling, consumption of alcohol and pork.
• Their holy book The Quran suggested that human beings are created to represent the God on earth.

The above mentioned points are some of the basic rules of Islam. The concept of Islamic Banking is built based on these principles.

What is Islamic Banking?

As I have already mentioned in the introductory part, that Islamic Banking activities are very much in consistence with the principles of Islam rulings (Shariah). The principles more or less emphasizes on the moral and ethical values.

Islam says those who have wealth should share that with the needy ones with the sole purpose to please the God. By doing this, they can enhance the wealth of the society. It also means one should not lend money by charging interest. Based on this, the most basic and the important feature of the Islamic Banking have been formed, "prohibition of interest". Now the concern is, if no interest has been charged against any loan than why some one will lend you. Bankers are very much confident in putting the statements like, if no interest has been provided for any investments than the investments would dry up!

Everyone knows interest is the reward for saving. So, the question is how the banking system would function if the interest is abolished by law? To understand this, we need to know the Islamic principles in a much detailed way. There are two more Islamic words, we should understand fully in order to know more about this banking system. One is "RIBA", the other is "MUDARABAH".

Riba is the payment of charges for renting of money. When somebody borrows money from other, after a certain period he has to pay back the principle to the money lender as well as he has to pay an additional charge to him as compensation. This particular amount is calculated based on a pre-determined rate. This particular payment is a compulsion on the borrower irrespective of the loss or gain he made from that amount. Here the money lender has nothing to lose. This is completely forbidden by Islamic holy book. So, Islamic Banking completely outlaws the use of Riba.

Islam suggests that reward should be there only for bearing the risk of the business. So, Mudarabah is the reward for bearing the business risk. So, if some one borrows money for a particular use and gains from that than he should pay a share of profit to the money lender. It is a kind of business partnership. Though the money lender will not use his business skills but he bears the risk of loss. This is the principle of Mudarabah, which is completely acceptable by Islamic rules.

Now consider this further; when you deposit money in bank's investment account and agree to share the profit, the bank got its fund for investment. And when the business owner takes loan from the bank, the underlying condition is he has to share the profit that he will get from business in a mutually agreed proportion. But any loss from the business will be solely borne by the bank. So, the bank will function as a capital provider and the borrower as manager.

It can be stated as the difference between the regular banking and Islamic banking is reward on a predetermined rate and reward as a share of profit respectively.

Islamic banking also does not allow investing in any activities which is prohibited under Islamic rules.

Islamic Banking In India

In the year 2005, RBI has been ordered by Indian Govt. to look into the feasibility of the Islamic banking system in India. After a year long research and observation, RBI concluded that with the current banking framework, it is not possible to implement the Islamic banking system in India. So, in order to bring in the concept of Islamic banking, there need to be made certain amendments in banking regulation act of India.

Post this announcement, a group of Islamic experts and bankers chalk out a plan of action by taking the suggestions from UK, Malaysia and Singapore.
RBI on 20th May 2010 announced that with the current banking principles it is not possible to adopt Islamic banking system but it can be done through a separate legislation.

In Septemeber'10, Govt. of India once again makes its stand clear while informing the Kerala high court that under the present scenario it is not feasible to implement the Islamic banking system in place.


As far as my opinion goes there is nothing controversial creating a banking system based on some particular religious law. The interesting part is this kind of banking system is not restricted to the Muslims only. Anyone who follows the basic principle of Islam can take part in this system. And legally speaking, a contract of money lending with an intention to share the profit is not wrong at all. We have seen these kinds of practices in most of rural areas.

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