Over the past decade, the Islamic finance sector has erupted into a vibrant and growing industry. Although, it remains just a small portion of the total global financial sector, its influence is expanding. Islamic Banking refers to a system of Banking or Banking activity that is based on the principles of the Shari’ah (Islamic rulings). The principles of Shari’ah prohibit entering into any act that involves payment or acceptance of interest or riba and is considered as ‘haraam’. The prohibition on paying or receiving fixed interest is based on the Islamic tenet that money is only a medium of exchange; 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 by lending to someone else.

So one question that pops to our minds is that, do these banks run without profit?

No, Islamic banks actually has the same purpose as conventional banks i.e. of earning a profit. Islamic financing is based on the ‘profit-sharing principle’. 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 any interest, but instead, it would give the bank a share in its profits. If the business defaults or does not earn a profit, then the bank in this case thus, does not benefit.

The key notion here is risk sharing—the banks make a profit on the transaction as a reward for the risk they took with the customer. Islam argues that there is no justifiable reason why a person should enjoy an increase in wealth from the use of his money by another, unless he is prepared to expose his own wealth to the risk of losses. Islam views true profit as a return for entrepreneurial efforts. The global Islamic banking market in this respect thus, covers different aspects, like Islamic Banking, Takaful (Islamic Insurance), Sukuk (Islamic Bonds), and Shariah Capital Market (Islamic funds).

Islamic banks come in all shapes and forms: banks and non-banks, large and small, specialized and diversified, traditional and innovative, national and multi-national, successful and unsuccessful, prudent and reckless, strictly regulated and free-wheeling, etc. Some, particularly the “Islamic windows” of conventional banks are virtually identical to their conventional counterparts, while others are markedly different. Some are driven by real religious considerations, while others use religion only as a way of attracting customers.

Since 2000, Islamic banks have become a force to be reckoned with. “Islamic banks’ capital grew from $200 billion in 2000 to close to $3 trillion in 2016,” said Ibrahim A. Warde, professor of international business at the Fletcher School of Law and Diplomacy at Tufts University. This figure is expected to go up to $ 4 trillion in the 2020’s. There are now more than 300 banks and 250 mutual funds around the world complying with Islamic principles.

The majority of Islamic finance focuses on the Gulf Cooperation Council (GCC) countries, plus Iran and Malaysia, major reason being the religious composition of these countries, but the sector is increasingly assuming a global presence. Research by Thomson Reuters found that Cyprus, Nigeria, and Australia were among the sector’s fastest-growing locations in 2017. There are serious political barriers preventing the development of Islamic finance. It is true that there are some remarkable examples of Islamic finance in western countries, but these examples are rather in the category of exceptions than the rule.

Many proponents of Islamic finance assume that should western countries accept Islamic finance, its success is guaranteed. This is wishful thinking because even if all regulatory and tax burdens disappear in the west, it is not certain that customers, Muslims or not, would embrace Islamic finance. The industry has been lauded for returning to the path of “divine guidance” in rejecting the “political and economic dominance” of the West, and noted as the “most visible mark” of Islamic revivalism, its most enthusiastic advocates promise “no inflation, no unemployment, no exploitation and no poverty” once it is fully implemented. However, it has also been criticized  for  failing  to develop profit and loss sharing or more ethical modes of investment promised by early promoters. They instead are focusing on selling banking products that “comply with the formal requirements of Islamic law”, use “ruses and subterfuges to conceal interest”, and entail “higher costs, bigger risks” than conventional banks.

Islamic banking is a comparatively new concept for India, the Indian banking laws will have to be amended so as to incorporate the provisions relating to Islamic banking, like 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 the public for lending or investment, thus, excluding within its ambit the instruments of Islamic banking that promote profit and loss. However, it should be noted that countries like China, USA and UK 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 if any would be in the right direction in the years to come. No doubt, the modalities need to be formulated so that the going gets easier. Islamic banking can be an essential part of the future and India can reap rich dividends from it.

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