Not to pursue Islamic banking: RBI

The Reserve Bank of India has decided not to pursue a proposal for introduction of Islamic banking in the country. The central bank said the decision was taken after considering “the wider and equal opportunities” available to all citizens to access banking and financial services.

Islamic or Sharia banking is a financial system based on the principles of not charging interest, which is prohibited under Islam.

Sharia banking refers to banking activity that conforms to Islamic law or Sharia. The fundamental principle of Islamic finance is the rejection of usury, along with the requirement that there must be no engagement in immoral businesses. Usury is seen as the levying of unreasonably high-interest rates while lending money. Interest is Riba, which in its current interpretation, covers all interest — not just excessive interest. Under Islamic law, a Muslim is prohibited from both paying and accepting interest. Thus, Sharia banking means money can only be parked in a bank without interest — and this money cannot be used for speculative trading, gambling, or trading in prohibited commodities such as alcohol or pork.

Need for Islamic Banking:

Certain faiths prohibit the use of financial instruments that pay interest. The nonavailability of interest-free banking products results in some Indians, including those in the economically disadvantaged strata of society, not being able to access banking products and services due to reasons of faith. This non-availability also denies the country access to substantial sources of savings from other countries in the region.

Therefore, the introduction of Sharia or Islamic banking could bring more Muslims into the banking system, and help in the inflow of institutional wealth from entities operating in the Islamic world to the Indian economy. Sharia banking is not restricted to Muslims alone, and other communities who are interested in other forms of banking like ethical banking could be allowed to participate.

How does India benefit from Islamic banking?

Introduction of Islamic Banking was mooted by Raghuram Rajan in his report on the Financial Sector in the year 2008 where he recommended that interest-free banking techniques should be operated on a larger scale so as to give access to those who are unable to access banking services, including those, belong to the economically disadvantaged section of the society.
There are many advantages in introducing an Islamic window in the banks.

For instance, the majority of companies in the Stock Exchange are Shariat compliant (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.

An Islamic Banking window will encourage many from the Muslim community to come forward and invest in projects thereby mobilising a huge amount of capital which they may not be willing to put in the banks. This also means that India will be able to attract huge investments from West Asia and from those who invest only in Shariat compliant projects.

Sharia banking globally:

A 2015 World Bank report estimated Sharia-compliant financial assets to be in the range of US $ 2 trillion, covering bank and non-bank financial institutions, capital markets, money markets and insurance. The Islamic Finance Industry has been expanding at a rate of 10%-12% annually. According to the World Bank, in many Muslim countries, Islamic banking assets have been growing faster than conventional banking assets. There has also been a surge of interest in Islamic finance in non-Muslim countries such as the UK, Luxembourg, South Africa, and Hong Kong.

Please follow and like us:

Leave a Reply

Your email address will not be published. Required fields are marked *