ahmad islam

8/9/2019 Ahmad Islam

1/19

Islamic Banking In India

1

TERM PAPER OF BANKING & INSURANCE

Submitted By:-

Ahmad Mustafa

Roll No.R1801A16

Reg. No. 10811688

MBA 4th semester

Submitted To:-

Ms. Anushital SinhaLecturer LSB


2/19


2

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 mandevours and he knows is greater than 36 fornications.

Hadith:- (Ahmed, Darqutni)


3/19


3

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 towork 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 afteranalysis 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 receivinginterest. 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 NBFCs that will

offer Islamic Banking products in india.2

3. Indias eminent Islamic clerics have pitched for introduction of Islamic banking andfinancial 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

1Reference:- http://www.business-standard.com/india/storypage.php?autono=391289

2Reference:- http://economictimes.indiatimes.com/news/economy/finance/Finmin-wants-NBFCs-to-start-

Islamic-banking/articleshow/5764811.cms3

Reference:-

http://twocircles.net/2010mar28/muslim_clerics_launch_islamic_investment_advisory_board_pitch_islamic_

banking.html


4/19


4

4. Notwithstanding the fact that the UPA government is not favoring the ideasaying conditions not suitable for Islamic Banking in India as of now, those

working for interest free finance system are not discouraged. It became visiblewhen 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 shariahlaw 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).56. 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

4Reference:- http://www.ummid.com/news/2010/March/26.03.2010/islamic_finance_board_conf_delhi.htm

5http://expressbuzz.com/cities/chennai/islamic-banking-may-solve-vidarbha-crisis/162857.html

6http://www.indianexpress.com/news/keralahcsaysnostatestakeinshariahfund/601865/


5/19


5

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


6/19


6

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 theqard (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.


7/19


7

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


8/19


8

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.


9/19


9

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 worlds 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.


10/19


10

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 Muslims 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 RBIs 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.


11/19


11

Investment framework favourable in India: Indias 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 doesnt pay any interest and may even charge

interest. Although it is illegal under Islamic law to pay interest, one can be compensated formaintaining 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 hasgreat 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.


12/19


12

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 applicants

reputation as a person of honour and second the availability of collateral in case of default.

But the poor people dont have any of the two for which they dont 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 haveincreased 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 collectionsystem.


13/19


13

Stock Market and Islamic Banking

The Indian stock markets could see huge inflows through Shariah-compliant funds as Islamic

investors are lured by the countrys 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 Exchanges 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 Shariahcompliant 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.


14/19


14

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


15/19


15

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 doesnt 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.


16/19


16

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.


17/19


17

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 thebank 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 andguaranteeing 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 establishingIslamic 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 Muslimcountries should pass on their findings to their countries like India to assist them in

establishing new Islamic banks and enhancing their existing capabilities.


18/19


18

4. Muslim scholars, bankers and economists should explain India the salient features ofIslamic 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 banksthroughout 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 gearthemselves 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 inaccounting treatment of various operations and products of Islamic banks.

8. Designing new and innovation services and products for financing on profit and losssharing basis.

9. Standardization of the systems, procedures, charge forms and other documents forhandling various banking transactions under Islamic banking system.

10.Providing solution to any problem or guidance on any matter referred to it, by anybank 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.


19/19


19

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/

ahmad islam

Documents