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MAHAMMAD SHAHID
LECTURER IN COMMERCE
THE YENEPOYA INSTITUTE OF ARTS, SCIENCE, COMMERCE AND MANAGEMENT
YENEPOYA (DEEMED TO BE UNIVERSITY)
MANGALORE, KARNATAKA, INDIA.
Email Id: shahidm@yenepoya.edu.in.
JEEVAN RAJ
LECTURER IN COMMERCE
THE YENEPOYA INSTITUTE OF ARTS, SCIENCE, COMMERCE AND MANAGEMENT
YENEPOYA (DEEMED TO BE UNIVERSITY)
MANGALORE, KARNATAKA, INDIA.
Email Id: jeevanrajkuthar@gmail.com.
ABSTRACT:
Islamic banking is the fastest growing feild in financial services, and opportunity abounds.
The main focus of Islamic finance is on transparency, cooperative ventures, risk sharing and
ethical investing which attracts a wide range of both Muslims and non-Muslims alike. Today,
Islamic banking has become one of the fastest growing segments of the international banking
and capital markets. Islamic banking is found in most parts of the world. Islamic Banking has
a huge market potential in India as India is the third largest Muslim populated country in the
world. Islamic banking is a system of banking with Shariah laws, which is against the
collection or payment of interest, commonly called ‘riba’. Islamic law also prohibits investing
in business that are considered unlawful or Haraam. The basic principle of Islamic banking is
based on risk sharing, which is a component of trade rather than risk-transfer which is seen in
conventional banking. This paper attempts to explain the basic principles and various
important products of Islamic banking. This paperfurther highlights SWOT analysis,
advantages of introducing Islamic banking in India and also identifies the limitations of
Islamic Banking in India.
KEYWORDS: Financial inclusion, Islamic banking, Muslims, Riba, Shariah, SWOT
analysis.
INTRODUCTION:
Islamic banking is the banking activity that follows the principles of Islamic law
(Shariah) and its practical application through the development of Islamic economics. Islamic
banking is also known as interest free banking which promotes profit sharing. Shariah
(Islamic Law) prohibits the charging and paying of interest which is Haraam (forbidden) in
Islam. It is very interesting that sharia banking is working without interest and is still
flourishing. They are not only profitable but are also growing at an astonishing rate in sense
of capital, assets and consumers. The biggest phase of development of Islamic financial
institutions occurred in 1980s. In 1985, the High Council of Organization of Islamic
Conference (OIC) declared takaful/Islamic insurance as Shariah compliant. The first Islamic
bank was established in 1963, in MitGhamr, in Egypt, but it did not last for long. In Gulf
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countries Islamic banking is common now. Islamic banking is steadily moving into an
increasing number of conventional financial systems. It is expanding not only in nations with
majority Muslim populations, but also in other countries where Muslims are a minority. As a
concept Islamic banking has gained momentum world over and in India over the past few
years. Several foreign banks operating in India, like Citibank, Standard Chartered Bank,
HBSC are operating interest-free windows in some of the West Asian countries, Europe, and
The USA.The IMF has shown great interest in bringing about macroeconomic and financial
stability for its members who have adopted Islamic banking. There is also a growing
awareness about the concept among Indian banks and it is generally felt that there is a huge
potential market in India for Islamic banking products. Several banks in the country
haveshown an inclination to undertake this form of interest-free banking. However, unless
proper regulations are in place to oversee this form of banking, it will not be possible for
scheduled commercial banks to follow the Islamic rules of banking even in a small way.
RESEARCH METHODOLOGY:
The study is mainly based upon the collection of secondary data. The secondary data
was collected from various sources of publications such as Magazines, Journals, Research
articles, Internet and un-published thesis.
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d) Takaful
Takaful is commonly referred to as Islamic Insurance. It is based on the principle of
cooperation and separation between operations of shareholders and the funds. The ownership
of takaful fund and operations are passed to the policyholders. The policyholders are joint
investors with the takaful operator who acts as a manager for policyholders. All policyholders
agree to guarantee each other and contribute to a pool of funds (takaful fund) instead of
paying premiums. Any claims made would be met out of the fund and surpluses will be
distributed among policyholders. Takaful operator would be paid a fee only for managing the
fund and covering the costs.
e) Ijarah
The bank would buy an asset as per the client and allow the client to use the asset for
a specified lease period and a lease fee. It is a lease agreement between the Islamic bank and
its client. The bank will possess the ownership of the asset.
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f) QardHasan
Islamic banks lend loans keeping goodwill as the base. These loans are not charged
with profit or interest.The borrower is required to pay only the amount borrowed. These loans
do not charge the borrower the time value for the money. These loans are consistent with the
principle of prohibition of interest.
g) Halal Activities
Investing in any sinful (haram) activities are prohibited by Islamic Banks. . According
to Shariah Law, it prohibits business projects related to gambling, pork products, weapons,
defense, alcohol, pornography and any speculative activates.
h) Sukuk
An Islamic equivalent bond is termed as Sukuk. The investor of sukuknot only gets
share of an asset but also the cash flows and the risk. As interest bearing bond structure is not
permissible, the investor shall get a proportionate ownership in tangible asset of the project.
i) Wadiah
It is the acceptance of the sum of money for safe keeping. The sum of money
accepted will be repaid. Here banker is the keeper and trustee of funds. Bank is liable for safe
keeping of funds and on the demand of the customer it should be returned. As an appreciation
for keeping the funds with the banks, banker as its discretion shall reward the customer as an
appreciation (hibah).
j) Salam
It is equivalent to a forward sale contract in which the payment is made in advance
and the goods are delivered at a specified date in the future. This mode often used in the
agricultural sector in which without charging interest, the banks advances the money for
inputs and in return shall get a part of produce which will be sold after its delivery.
k) Waqf
It refers to a voluntary dedication of one’s property and wealth. This
voluntarydedication should be exclusively for religious purposes.The waqfproperty can
neither be sold nor inherited or donated to anyone. It should be used for Shariah compliant
projects only.
a) Financial Inclusion
A focus on financial inclusion has led to RBI and Government under Jan DhanYojna
to bring the unbanked and financially excluded population under the formal banking system.
Conventional banking system may be for some Muslims unacceptable as it is not in
conformity with the Islamic law. Thus they remained excluded from conventional banking
system. For the Muslims Islamic Banking could open new doors, enabling the betterment of
this community and achievement of the goal of financial inclusion for all.
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b) Inclusive Growth
The goal of Inclusive growth can be fostered with Islamic banking as easier and cheap
credit can be provided to large number of people with little or no collateral which can help to
penetrate the banking facilities to lowest strata.
c) SubstantialFlow of Funds
Substantial flow of fundsIslamic banking will open avenues for flow of substantial
funds in the market. It will help in mobilize large amounts of money from Muslims who
participate very little or not at all in conventional banking system.
g) Niche Market
Islamic banking is tailor made to meet the requirements of Muslim community which
does not participate in conventional banking system due to their religious beliefs. As the
demand for niche products is increasing in India, Islamic banking could prove to be
beneficial for India.
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CONCLUSION:
The benefits highlighted in the paper suggests that Islamic banking has many
advantages over conventional banking and the major being that it has the potential to increase
financial inclusion which is crucial if India wants to become an economic giant in the near
future. India, however, has been shying away from Islamic banks. The reason for the same is
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probably more political than economic.The SWOT analysis undertaken for Islamic banking
in India also reveals that India should open its doors to Islamic banking as the strengths and
opportunities far out-weigh the weaknesses and threats. Thus, Islamic banking would be
another alternative mode of banking that would strengthen market efficiencies with
innovations and competition.
REFERENCES:
Viverta, B. K.andSkully, M. (2007), “Efficiency Analysis of Islamic Banks in Africa,
Asia and the Middle East”, Review of Islamic Economics, Vol. 11, No. 2, pp. 5-16.
Bhat, A. S. & Dar, A. M. (2015), “Islamic banking an emerging global industry: its
scope in Kashmir.”
Retrievedfrom: http://muslimmirror.com/eng/islamicbanking-an-emerging-global-
industry-itsscope-in-kashmir on November 11, 2016.
Khan, M.A. &Hussin, N., 2013. Islamic Banking in India: Developments, Prospects
and Challenges.
Retrieved from: http://papers.ssrn.com/abstract=2223935 on December 1, 2016.
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