No for Islamic banking in India

Context:

• The Reserve Bank of India has decided not to pursue a proposal for introduction of Islamic banking in the country.

Why it is in news?

• Islamic banking will not be introduced in India.
• The decision was taken after considering the wider and equal opportunities available to all citizens to access banking and financial services.
• The issue of introduction of Islamic banking in India was examined by the RBI and the government of India.
• RBI examined and excavated the legal, technical and regulatory issues for introducing interest free banking in India.

What is Islamic banking and finance?

• Islamic or Sharia banking is a finance system based on the principles of not charging interest, which is prohibited under Islam.
• Some of the modes of Islamic banking/finance include Mudarabah(Profit and loss sharing),  Wadiah (safekeeping), Musharaka (joint venture), Murabahah (cost plus) and Ijar (leasing).

Objectives:

Two basic principles behind Islamic banking are:

• Firstly, in order to be Islamic, the banking system has to avoid interest.
• Secondly, another Islamic principle is that there should be no reward without risk-bearing.
• This principle is applicable to both labour and capital.
• As no payment is allowed to labour unless it is applied to work, so no reward for capital should be allowed unless it is exposed to business risks.

How Islamic banking works?

• In order to earn money without charging interest, Islamic banks use equity-participation systems.
• This means that if bank loans money to a business, the business pays back the loan without interest, but it gives the bank a share in its profits.
• If the business defaults on the loan or does not earn any profits, the bank does not receive any profit either.

Salient features:

• Collecting interest or “riga” is not permitted under Islamic law.
• Since this system of banking is grounded in Islamic principles, all the undertakings of the banks follow Islamic morals.
• Financial transactions within Islamic banking are a culturally distinct form of ethical investing.
• For example, investments involving alcohol, gambling, pork, etc. are prohibited.

What are the advantages of Islamic banking?

• There are many advantages in introducing an Islamic window in the banks:
• Majority of companies in the Stock Exchange are shariatcompliant (this number is more than the shariat complaint companies on the Stock Exchange in Malaysia), thus this would result in attracting huge funds in the domestic market alone.
• India will be able to attract huge investments from West Asia and from those who invest only in shariat-compliant projects.
• An Islamic Banking window will encourage many from the Muslim community to come forward and invest in projects

What are the impacts of Islamic banking in India?

• India is a secular country by Constitution. Thus opening any financial institution with the name of a religion can raise question among other religious groups.
• There would be much of chaos for manpower. There is a lack of adequate work force trained in Sharia banking.
• The present banking rules and regulations in India do not allow the operation of Islamic Finance in India for it creates hurdle in achieving complete financial inclusion.
• Section 8 of Banking Regulation Act, mandates that a banking company cannot deal in the selling or buying or bartering of goods, which is prevalent in Shariah-compliant structures such as Murabaha in India.
• Islamic banking may pave the way for the entry for terrorist funding.