Islamic Banking In India

TERM PAPER OF BANKING & INSURANCE

Submitted By:-
Ahmad Mustafa
Roll No.R1801A16
Reg. No. 10811688
MBA 4th semester

Submitted To:-
Ms. Anushital Sinha
Lecturer LSB

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 Islamic Banking In India

Need and scope of this topic “Islamic Banking In India”

Since the base of Indian banking system is on usury or interest, so Quran and Hadith says,

"Those who devour usury will not stand except as stands one whom the Satan by his touch
has driven to madness. That is because they say, "trade is like usury", but Allah has
permitted trade and has forbidden usury",

Quran:- Surah Al-baqarah verse no.275

"Allah will deprive usury of all blessing, and will give increase for deeds of charity, for he
does not love any ungrateful sinner."

Quran:- Surah Al-baqarah verse no. 276

Hazrat Jabir radiyallahu anhu has reported that the Messenger of Allah sallallahu alaihe
wasallm cursed the devourer of usury, its payer, its scribe and its two witnesses. He also said
that they were equal (in sin).

Hadith:- (Sahee-Muslim)

Hazrat Umar bin Al-Khattab radiyallahu anhu reported: the last of what was revealed was
the verse of usury. The Messenger of Allah sallallahu alaihe wasallm was taken and he had
not explained it to us. So, give up usury and doubt.

Hadith:- (Ibn Majah, Darimi)

Hazrat Abdullah bin Hanzalah radiyallahu anhu (who was washed by the angels) reported
that the Messenger of Allah sallallahu alaihe wasallm said: A dirham of usury that a man
devours and he knows is greater than 36 fornications.

Hadith:- (Ahmed, Darqutni)

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 Islamic Banking In India

Why Islamic Banking

“Islamic banking system deal with money and not deal in money”

First is the choice and then suggestion of respected Mam that i was given this opportunity to
work on this topic. Then being a Muslim and very eager to start Islamic banking business in
long run, wish of my life, was the matter of concern which compelled me to go for such task.

In development of Muslim community investment, now Indians companies like Reliance

India Insurance Company are targeting specific communities to get first-mover effect. Gone
are the days when said community people were deprived of financial facilities.

I would like to validate the above points from following news articles,

1. State Govt. Of kerala has shown green signal to establish Islamic bank there after
analysis of the project. Now central Govt. Is also of the view to go for it as the basic
consept of Islamic banking is to keep interest of its customers with the investment as
per Islamic Shariah and working without Usury system.1
2. Islamic banking is based on the principle that money cannot be lent for receiving
interest. Money can be used to generate wealth through legitimate trade and
investment in assets. After rejection of commercial banks not to sell Islamic bank-
products, Finance ministry of India has considered new category of NBFC’s that will
offer Islamic Banking products in india.2
3. India’s eminent Islamic clerics have pitched for introduction of Islamic banking and
financial system in the country while opening to the public the Islamic Investment &
Finance Board, an advisory committee headed by clerics to assist both corporations
and markets as well as common people regarding Shariat-compliant investment and
finance.3

1
Reference:- http://www.business-standard.com/india/storypage.php?autono=391289
2
Reference:- http://economictimes.indiatimes.com/news/economy/finance/Finmin-wants-NBFCs-to-start-
Islamic-banking/articleshow/5764811.cms
3
Reference:-
http://twocircles.net/2010mar28/muslim_clerics_launch_islamic_investment_advisory_board_pitch_islamic_
banking.html

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4. Notwithstanding the fact that the UPA government is not favoring the idea
saying conditions not suitable for Islamic Banking in India as of now, those
working for interest free finance system are not discouraged. It became visible
when Islamic Investment and Finance Board (IIFB) and ‘Islami Tijara’
decided to organise an Islamic Investment and Finance Conference March 28
in New Delhi.4
5. Vidharba crisis may not have happened if Islamic banking based on shariah
law would have been implemented prior this time. In vidharba the exorbitant
lending rates charged by money lenders had created a vicious cycle of debt
and suicide in the region, which leads to suicide of farmers at large rate (30 on
6 April, 2010).5
6. No doubt kerala High court has suggested the state govt. and kerala state
industrial development coporation not to invest or take stake in shariah based
Islamic banking as they think it is meant for only Muslim minority
community. Even the non-muslim businessmen show interest for Islamic
banking as they think it will and is definitely working sound in Gulf countries
and in india as well.6

4
Reference:- http://www.ummid.com/news/2010/March/26.03.2010/islamic_finance_board_conf_delhi.htm
5
http://expressbuzz.com/cities/chennai/‘islamic-banking-may-solve-vidarbha-crisis’/162857.html
6
http://www.indianexpress.com/news/keralahcsaysnostatestakeinshariahfund/601865/

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 Islamic Banking In India

Islamic Banking

Islamic banking refers to a system of banking or banking activity that is consistent with
the principles of Islamic law (Sharia) and its practical application through the
development of Islamic economics. Sharia prohibits the payment or acceptance of interest
fees for the lending and accepting of money respectively, (Riba, usury) for specific terms,
as well as investing in businesses that provide goods or services considered contrary to its
principles (Haraam, forbidden). While these principles were used as the basis for a
flourishing economy in earlier times, it is only in the late 20th century that a number of
Islamic banks were formed to apply these principles to private or semi-private
commercial institutions within the Muslim community.

Principle of Islamic Banking

For millions of Muslims, banks are institutions to be avoided. Islam is a religion which keeps
Believers from the teller's window. Their Islamic beliefs prevent them from dealings that
involve usury or interest (Riba) Yet Muslims need banking services as much as anyone and
for many purposes: to finance new business ventures, to buy a house, to buy a car, to
facilitate capital investment, to undertake trading activities, and to offer a safe place for
savings. For Muslims are not averse to legitimate profit as Islam encourages people to use
money in Islamically legitimate ventures, not just to keep their funds idle (Nida'ul Islam
1995).

However, in this fast moving world, more than 1400 years after the Prophet (s.a.w.), can
Muslims find room for the principles of their religion? The answer comes with the fact that a
global network of Islamic banks, investment houses and other financial institutions has
started to take shape based on the principles of Islamic finance laid down in the Quran and
the Prophet's traditions 14 centuries ago. Islamic banking, based on the Quranic prohibition
of charging interest, has moved from a theoretical concept to embrace more than 100 banks
operating in 40 countries with multi-billion dollar deposits world-wide. Islamic banking is
widely regarded as the fastest growing sector in the Middle Eastern financial services market.
Exploding onto the financial scene 29barely thirty years ago, an estimated $US 70 billion

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worth of funds are now managed according to Shari'ah. Deposit assets held by Islamic banks
were approximately $US5 billion in 1985 but grew over $60 billion in 1994.

The best known feature of Islamic banking is the prohibition on interest. The Quran forbids
the charging of Riba on money lent. It is important to understand certain principles of Islam
that underpin Islamic finance. The Shari'ah consists of the Quranic commands as laid down in
the Holy Quran and the words and deeds of the Prophet Muhammad (s.a.w.). The Shari'ah
disallows Riba and there is now a general consensus among Muslim economists that Riba is
not restricted to usury but encompasses interest as well. The Quran is clear about the
prohibition of Riba, which is sometimes defined as excessive interest. "O you who believe!
Fear Allah and give up that remains of your demand for usury, if you are indeed believers."
Muslim scholars have accepted the word Riba to mean any fixed or guaranteed interest
payment on cash advances or on deposits. Several Quranic passages expressly admonish the
faithful to shun interest.

The rules regarding Islamic finance are quite simple and can be summed up as follows:

a) Any predetermined payment over and above the actual amount of principal is prohibited.
Islam allows only one kind of loan and that is qard-el-hassan (literally good loan) 30whereby
the lender does not charge any interest or additional amount over the money lent. Traditional
Muslim jurists have construed this principle so strictly that, according to one commentator
"this prohibition applies to any advantage or benefits that the lender might secure out of the
qard (loan) such as riding the borrower's mule, eating at his table, or even taking advantage of
the shade of his wall." The principle derived from the quotation emphasizes that associated or
indirect benefits are prohibited.

b) The lender must share in the profits or losses arising out of the enterprise for which the
money was lent. Islam encourages Muslims to invest their money and to become partners in
order to share profits and risks in the business instead of becoming creditors. As defined in
the Shari'ah, or Islamic law, Islamic finance is based on the belief that the provider of capital
and the user of capital should equally share the risk of business ventures, whether those are
industries, farms, service companies or simple trade deals. Translated into banking terms, the
depositor, the bank and the borrower should all share the risks and the rewards of financing
business ventures. This is unlike the interest-based commercial banking system, where all the
pressure is on 31the borrower: he must pay back his loan, with the agreed interest, regardless
of the success or failure of his venture.

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The principle which thereby emerges is that Islam encourages investments in order that the
community may benefit. However, it is not willing to allow a loophole to exist for those who
do not wish to invest and take risks but rather content with hoarding money or depositing
money in a bank in return for receiving an increase on these funds for no risk (other than the
bank becoming insolvent). Accordingly, under Islam, either people invest with risk or suffer
loss through devaluation by inflation by keeping their money idle. Islam encourages the
notion of higher risks and higher returns and promotes it by leaving no other avenue available
to investors. The objective is that high risk investments provide a stimulus to the economy
and encourage entrepreneurs to maximize their efforts.

c) Making money from money is not islamically acceptable. Money is only a medium of
exchange, a way of defining the value of a thing; it has no value in itself, and therefore should
not be allowed to give rise to more money, via fixed interest payments, simply by being put
in a bank or lent to someone else. The human effort, initiative, and risk involved in a
productive venture are more important than the money used to finance it. Muslim jurists
consider money as potential capital rather than capital, meaning that money becomes capital
only when it is invested in business. Accordingly, money 32advanced to a business as a loan
is regarded as a debt of the business and not capital and, as such, it is not entitled to any
return (i.e. interest). Muslims are encouraged to purchase and are discouraged from keeping
money idle so that, for instance, hoarding money is regarded as being unacceptable. In Islam,
money represents purchasing power which is considered to be the only proper use of money.
This purchasing power (money) cannot be used to make more purchasing power (money)
without undergoing the intermediate step of it being used for the purchase of goods and
services.

d) Gharar (Uncertainty, Risk or Speculation) is also prohibited. Under this prohibition any
transaction entered into should be free from uncertainty, risk and speculation. Contracting
parties should have perfect knowledge of the counter values intended to be exchanged as a
result of their transactions. Also, parties cannot predetermine a guaranteed profit. This is
based on the principle of 'uncertain gains' which, on a strict interpretation, does not even
allow an undertaking from the customer to repay the borrowed principal plus an amount to
take into account inflation. The rationale behind the prohibition is the wish to protect the
weak from exploitation. Therefore, options and futures are 33considered as un-Islamic and so
are forward foreign exchange transactions because rates are determined by interest
differentials. A number of Islamic scholars disapprove the indexation of indebtedness to
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inflation and explain this prohibition within the framework of qard-el-hassan. According to
those scholars, the creditor advances the loan to win the blessings of Allah and expects to
obtain the reward from Allah alone. A number of transactions are treated as exceptions to the
principle of gharar: sales with advanced payment (bai' bithaman ajil); contract to manufacture
(Istisna); and hire contract (Ijara). However, there are legal requirements for the conclusion
of these contracts to be organized in a way which minimizes risk.

e) Investments should only support practices or products that are not forbidden in Islam.
Trade in alcohol, for example would not be financed by an Islamic bank; a real-estate loan
could not be made for the construction of a casino; and the bank could not lend money to
other banks at interest.

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Islamic banking – the scenario

worldwide
Islamic finance has grown at a pace of 15 to 20 percent annually for the last five years and
banking has been an important part in that. There are approximately 300 Islamic banks
throughout the world with an estimated asset of $270 billion. According to experts, in the
face of Globalisation, Islamic banks rank among top three in their markets. The largest
markets for Islamic finance are Saudi Arabia, USA, Turkey – this is considering Muslim
population and per capita income. The fastest growing markets are Bahrain, Malaysia, and
Indonesia. The potential for growth of Islamic finance is tremendous with estimates
suggesting that within eight to ten years, half of saving of world’s 1.5 billion Muslims will be
in Islamic banks. This means $905 billion assets in Middle East alone. When considered
Muslims living outside Middle East, like in India, Indonesia, the assets base can grow
significantly. International banks like HSBC, BNP Paribas have branches in Arab region.
Many other institutions are doing the same but have separate Islamic branches.

Reasons for having Islamic banking in

India

Islamic Banking for Inclusive Growth: The structural changes in India during post
independence are no parameter for equitable growth. Islamic banking can give inclusive
growth along with control over inflation. It is well known that the SCBs extend debt finance.
The interest component ipso facto becomes part of GDP. Interest rate sensitivity to inflation
is well known. However, equity finance if extended with far lower costs of credit has
potential to restrict inflation and there is enough evidence from West Asia in this regards.
Then the distribution of dividend among equity holders helps in equitable distribution. In the
agricultural sector, due to small loans, it has the capability of growth of infrastructure. Also
Islamic banking can lend to small loans to unorganised sector due to its non-insistence on
collateral as a precondition for lending even small sums of money. This would help to
improve condition of states of desperate labour capital ratio like U.P. and Bihar.

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Islamic Banking and Financial Inclusion of Muslims: Muslims are the most
disadvantaged community in financial sector according to Sachar Committee. Due to interest
based deposit and credit from commercial banks, 80% of Muslims are inancially excluded.
The worker participation of Muslims in financial sector is also less; Muslims have just
0.78% and 2.2% employment with RBI and SCBs. Similarly in other financial institutions
like SIDBI, NABARD Muslim’s presence is negligible. Hard to believe but true, that even
Institutions like National Minority Development and Finance Corporation (NMDFC) have
no Muslim managers. According to RBI’s report, Muslims loose around Rs. 63700 crores
annually because they have a credit deposit ratio of 47% against national average of 74%.
With 31% Muslims living under poverty line and 40% Muslim workers as own account
workers, this big deficit can be covered by Islamic banking. It will not only please 150
million Muslims living in India, the second largest community of India, it will give
advantage to attract trillions of Arab petro dollars.
Corporate Sector and Islamic banking: The total investment in infrastructure in 2006-07
has been 5% of GDP, and it needs to be 9% by 2011-12. The total investment amounts to Rs
20,56,150crores for the 11th five year plan of which Rs. 1436,559 crores is supposed to be
met from Public Investment while Rs. 6,19,591 from private investments. Islamic banking
through equity financing can help to reduce the burden of keeping current account and fiscal
account deficit under control.
Islamic banking to counter terrorism: With greater inclusion of Muslim youths in
financial sector, they can contribute in a better way. One of the main reasons of terrorism is
poverty and Islamic banking can alleviate the condition. Also stringent norms of Islamic
banking can help in stopping money laundering.

Islamic banking and entrepreneurship: In his book Entrepreneurship and Indian

Muslims, Dr. M. Akbar indicates the results of a study he conducted: “…most surprising
was the positive association between the degree of religious observance and level of
entrepreneurship. Higher orders of entrepreneurs displayed higher degree of religious
observance, as they wanted to establish in their society that they were not only better
entrepreneurs but were better Muslims as well.” This positive correlation between
entrepreneurship and religiosity reflects well in Islamic banking among poor Muslims. It
means the more the religious one person is the more likely that he will use the service of
Shariah complaint banks.

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Investment framework favourable in India: India’s legal framework, which is the best in
the region which protects foreign investors. Also India has abundant managerial and
technical skill which will bring in more Arab money. Also the economies of other
neighbouring Islamic countries like Pakistan and Indonesia have limited opportunities for the
huge Arab money.

Islamic banking and bankruptcy: As Islamic banking adheres to strict credit rating by
disallowing indebted people to take on more debt, and as they go for equity financing, they
screen the project more strictly, thus reducing the chances of bankruptcy. The credit rating
under Islamic Finance has nothing to do with up and rise in asset values, instead it depends
on actual business, thus also increasing entrepreneurial skills. Thus there is no fear of
subprime mortgage under Islamic banking principles. Also due to right of ownership, in case
of bankruptcy, the banks have higher chance of recovery.

Islamic Banking System For Developing

Nations Like India
Sources of fund: Islamic banking over the years has identified two kinds of accounts:
Demand deposit or transaction accounts which doesn’t pay any interest and may even charge
interest. Although it is illegal under Islamic law to pay interest, one can be compensated for
maintaining purchasing power. This can be paid monthly or quarterly based on wholesale or
consumer price index. The other type is investment account (Modarabeh) where the bank
provides equity capital to companies. The account holders become indirect shareholders with
no guarantee on the value of their account. This set of accounts resembles mutual fund. Also
it helps generate huge amount of information generation of credit history. The transaction
account will have the most senior claim against the bank.

Investment of funds: Mainly in equity contracts. Debt can be given only when the bank has
great deal of confidence in the project or management or the liquidation value of the
collateral. By this way the banks will not strictly focus on equity participation; it will offer
conventional deposit accounts which has safety and return; this will help in money generation
and satisfy the transaction need of economy.

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Islamic Banking and Microfinance

Under normal banking system, there must be trust between borrower and lender so that a
transaction takes place. There are two components for that trust: first the applicant’s
reputation as a person of honour and second the availability of collateral in case of default.
But the poor people don’t have any of the two for which they don’t have access to credit
market, except the loans from greedy moneylenders. With passage of time, the orientation of
Islamic banking has shifted somewhat towards profit maximisation where banks vie for
countless billions of Arab petrodollars. But on a whole Islamic banking is not only refraining
from charging interest. Its aim to contribute positively towards the fulfilment of the
socioeconomic objectives of Islamic society inscribed in Maqasid al Shariah.

What some Indian Muslim Funds in North India are doing

Since 1960s, there have been efforts in India to run interest-free credit societies for the
welfare of Muslims. In 1961, at Deoband, Jamiet-e-Ulema-e-Hind established the Muslim
Fund Deoband, which inspired many similar funds to set up. Currently there are more than
100 Muslim funds in the country and many of them are member of the Federation of Interest
Free Organization (FIFO). These funds are registered as Charitable Trusts. These funds
provide financial assistance to needy people, both Muslims and non-Muslims on the basis of
strong collateral in the form of ornaments. In the last 4 decades, their balance sheet have
increased but they have not succeeded in following the Islamic norms as far as their lending
and borrowing is concerned as their bulk earning consists of bank interest. The running of
these funds is ambiguous, both in context of the Shariah and also in adopting the rules
prescribed by Government. The fund managers are not much aware of the recent
developments in the Islamic finance. These funds accepts collateral in the form of ornaments
which they keep in their own lockers, thus the problem of safety is there. They have to devise
way of recovering their costs apart from the fixed earning from bank. They have successfully
inculcated the savings behaviour among low income Muslims by introducing daily collection
system.

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Stock Market and Islamic Banking

The Indian stock markets could see huge inflows through Shariah-compliant funds as Islamic
investors are lured by the country’s rising economy. These will also auger the need of Islamic
banking system so that these funds can perate smoothly.
The number of Shariah-compliant stocks in India is much higher than that of all Muslim
countries put together, thus providing an immense scope for parking money, according to
experts. For instance, 61 per cent if the listed companies in India are hariah-compliant,
against 57 per cent in Malaysia, 51 per cent in Pakistan and a mere 6 per cent in Bahrain. In
terms of the number of stocks, 283 of Bombay Stock Exchange’s BSE-500 constituents, 214
BSE small caps, 39 NSE-50 (Nifty) and 23 Sensex stocks are Shariah-compliant.
There would be 8-10 funds in the Indian markets in 2-3 years and these would attract at least
Rs 3,000 crores from domestic sources alone, he added. The German-based Baader Service
Bank is coming in with a corpus amount of 30 million Euros for its “First India Islamic
Fund” in Germany. The fund is awaiting FII status from the Reserve Bank of India. The
Shariah stocks would encompass sectors such as telecom, IT/ITES, automobile, FMCG and
real estate. Taurus Parsoli Ethical Fund – the maiden Islamic fund in India -- The Fund, as the
offer document states, is a five-year closed ended fund, which is not listed on the exchange.
Mumbai S&P CNX Shariah on February 20th 2008 announced the launch of S&P CNX 500
Shariah and S&P CNX Nifty Shariah in a move to capture the movement of Shariah
compliant stocks in the Indian stock market for Islamic investors. The S&P CNX 500 Shariah
comprises 263 companies while the S&P CNX Nifty Shariah comprises 40 firms.

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Indian banking laws and Islamic banking

“Indian Banks are regulated by the Indian Banking Regulation Act (1949), The Reserve Bank
of India Act (1935), The Negotiable Instruments Act and the Cooperative Societies Act
(1866). Some of the obstacles of Islamic banking regarding regulations are:
a) Section 21 of the Banking Regulation Act requires payment of interest which is against
Shariah.
b) Section 5 & 6 of Banking Regulation Act disallows banks to enter into any profit sharing
and partnership contract – the very basis of Islamic banking.
c) Section 9 of the Banking Regulation Act prohibits banks to own any sort of immovable
property apart from private use – this is against Ijarah (for home finance).
Thus to allow Islamic banking considerable amount of changes on law have to be made. One
way is to keep the current legislation applicable for existing banks and amend specific
legislations applicable for interest free banks. A new regulatory body will oversee them and
help them make and enforce accounting and auditing standards. One specific change to be
made includes the requirement that NBFCs would have to invest at least 15% of their total
investment in interest based Government securities. An easy alternative is to allow them
invest in equity of public listed companies. Another change required is the heavy taxation of
return on equity investment as opposed to interest income.

Other hindrances in the way of Islamic banking

Standards non-uniformity: The interpretation of Shariah differs between regions and even
between institutions. This gives rise to unequal products. Also regulatory oversight needs to
be developed further.

Manpower shortage in Islamic Banking: With Islamic banking at its nascent stage, there is
acute shortage of trained Islamic bankers as well as scholars. Recently three institutes
offering Islamic finance and management has been set up in Kerala, Hyderabad and
Bhubaneswar, offering postgraduate diploma in Islamic banking and finance. Also Aligarh
Muslim University is planning to open such a course.

Need of more products: The industry needs to work on innovation. Due to many rules, the
instruments tend to become more complex and there are many instruments like corporate
treasury is missing

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Islamic Banking System For Developing

Nations Like India
Sources of fund: Islamic banking over the years has identified two kinds of accounts:
Demand deposit or transaction accounts which doesn’t pay any interest and may even charge
interest. Although it is illegal under Islamic law to pay interest, one can be compensated for
maintaining purchasing power. This can be paid monthly or quarterly based on wholesale or
consumer price index. The other type is investment account (Modarabeh) where the bank
provides equity capital to companies. The account holders become indirect shareholders with
no guarantee on the value of their account. This set of accounts resembles mutual fund. Also
it helps generate huge amount of information generation of credit history. The transaction
account will have the most senior claim against the bank.

Investment of funds: Mainly in equity contracts. Debt can be given only when the bank has
great deal of confidence in the project or management or the liquidation value of the
collateral. By this way the banks will not strictly focus on equity participation; it will offer
conventional deposit accounts which has safety and return; this will help in money generation
and satisfy the transaction need of economy.

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Future Outlook
The country where the Muslim population is more than Pakistan, after 60 years of
Independence should think about reform in banking sector to introduce Islamic banking.
Raghuram Rajan Committee on Financial Sector Next Generation Reforms made a reference
to this aspect. There has never been any public committee analyzing the effects of Islamic
banking in India. This can be attributed to the fact that Muslims in India have never
demanded Islamic banking in a prominent manner. And we never delivered it to them for
which Muslims in India have only 9% of total bank accounts although they make up 12% of
the population. Islamic banking can boost Indian economy by boosting real sector economy
rather than only financial sector. There are many advantages of Islamic banking but the main
reason is that the Muslims are so poor today that we truly owe it not only to our forefathers
and our current generation to make things better, we also owe it to future generations of
Indians. There are certain costs in implementing Islamic banking, but the expected value of
such a reform is quite high. Many new Shariah compliant financial instruments are being
developed throughout the world from which Indian regulators can learn and inculcate. India
should take help to make regulatory framework from foreign banks which have operations in
Islamic banking environment. Taking all these points into consideration, India should open
up for Islamic banking so that Indian Muslims are benefitted and huge amount of FDI from
Muslims worldwide comes in the country.

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Recommendations

It, however, appears that although tremendous efforts for Islamization of banking system and
for streamlining and enhancing the scope of the activities of Islamic banks are being made in
many Muslim countries and India as well but effective steps for reformation of the societies
in the respective countries are not being taken up with the same zeal and enthusiasm. This is
an essential prerequisite for the success of Islamic banking in India and deserves serious
considerations by all those who are involved in the process of Islamic banking, be it Govt.
either state or central or the political parties and also the central bank of India i.e. RBI.

The following are the suggestions for future growth and success of Islamic banks in India
Which be successful and produce full dividends, if the society in which it operates, is geared
on Islamic principles. It is, therefore, of utmost importance that sincere and effective efforts
are simultaneously made to transform the existing societies, in the Muslim countries, into
truly Islamic societies.

1. A basic tenet of commercial banking is capital guarantee. The capital entrusted to the
bank by a depositor must be returned to him in full. Conventional banking system
fully complies with this requirement. While Islamic banking as practised today does
not provide capital guarantee in all its deposit accounts. In many countries, this is one
of the two main objections to permitting the establishment of Islamic banks. There is
no objection to paying zero interest on deposits. Thus, by paying zero interest and
guaranteeing capital, the proposed system satisfies both the riba-prohibition rule of
Islam and the capital guarantee requirement of conventional Banking Acts. This
enables it to obtain permission to set up and operate as a deposit bank in all countries
of the world including India, while obeying the riba-prohibition rule and qualifying to
be an “Islamic” bank.
2. All relevant laws in India who have established or are in the process of establishing
Islamic banks should be reviewed so as to bring them in conformity with the Shariah.
Necessary laws also need to be framed for providing legal cover to the transactions,
services and products developed under the Islamic banking system.
3. The research and training centers for Islamic banking established in various Muslim
countries should pass on their findings to their countries like India to assist them in
establishing new Islamic banks and enhancing their existing capabilities.

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4. Muslim scholars, bankers and economists should explain India the salient features of
Islamic banking. It should also be a good idea to invite their suggestions for achieving
the objective of socio-economic justice, in the context of Islamic baking.
5. There is an urgent need for more extensive cooperation among Islamic banks
throughout the world. There should, therefore, be more organized and systematic
meetings, seminars, conferences and workshops to exchange experiences and
expertise and to foster closer cooperation in all spheres of operations.
6. Islamic Development Bank has to adopt a very innovative approach to gear
themselves for assuming a global role on the footprints of The World Bank. It has
accordingly to establish a number of affiliates and subsidiaries for carrying out the
multi dimensional functions and responsibilities, under the Islamic banking system.
7. Developing of uniform accounting systems and standards for providing consistency in
accounting treatment of various operations and products of Islamic banks.
8. Designing new and innovation services and products for financing on profit and loss
sharing basis.
9. Standardization of the systems, procedures, charge forms and other documents for
handling various banking transactions under Islamic banking system.
10. Providing solution to any problem or guidance on any matter referred to it, by any
bank say public or private bank of India.
11. Finally, conclusion is that, being a Muslim and beneficent for Non-muslims as well,
we should discontinued the interest based Financial and banking system. So that we
may be saved from the punishment of “Riba" described in Quran and Hadith. E.g.The
Prophet peace be upon him said as follows “on the night of ascendance to The
Heavens, I passed by a group of people who had tummies as big as houses, filled with
snakes that could be seen from outside. I asked The Arch-Angel Jibrael as to who they
were. He said that they were the people who ate “Riba.” And the earlier it is realized
better it would be for all.

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 Islamic Banking In India

Reference
1. A dissertation on “Islamic banking In India” By S. Majumdar ,
Management Developement Institute, Gurgaon.
2. en.wikipedia.org/wiki/Islamic_banking
3. www.islamic-banking.com/
4. www.islamicbankingandfinance.com/

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