Islamic Banking: Importance, Growth and Future with special reference to Indian Economy

Islamic Banking is a banking activity that is consistent with the principles of sharia (Islamic Law) and its practical application through the development of Islamic economics. Basic tenets of Islamic banking are the prohibition of payment/receipt of interest (known as Riba); business based on profit/loss sharing; prohibition of certain industries such as adult entertainment, alcohol, gambling etc. and prohibition of investment in assets that are not in possession at the time of transaction i.e. investment in derivatives. First Islamic bank in the world was found in Egypt in 1963 and since then, the phenomenon has grown slowly but steadily. In 1995, the Dow Jones Islamic Markets Index (DJIMI), a listing of sharia compliant portfolios, was launched. Islamic banks are open to all i.e. Muslims and Non-Muslims. Islamic banks also face periodic audits and stringent rules on transparency as do conventional banks. Unlike conventional banks which have to follow the Banking Regulation Act, 1949 and RBI Act, 1934, Islamic banks need to follow the ‘Accounting and Auditing Organization for Islamic Financial Institutions’ (AAOIFI). There are three main types of players in the Islamic banking industry: full-fledged Islamic banks, Islamic windows of conventional banks and Islamic finance companies. Full-fledged Islamic banks are either fully independent entities or subsidiaries of conventional banks, holding banking licenses. Islamic windows are secluded Islamic banking departments within conventional banks. Islamic finance companies focus on supplying sharia-compliant financing products such as auto and home finance and are not allowed to take deposits. This paper attempts to highlight the growth trajectory of Islamic banking, Importance of Islamic Banking in India, what challenges does it face and suggestions on how it can prosper in the Indian economy. The paper throws some light on How Islamic is Islamic Banking.