Contribution of Islamic Banking in India

Indian financial system has witnessed lot of changes in recent past. The most important of them all are deregulation of Indian banking sector and the opening of new banks. Islamic bank is a new global phenomenon, which India should recognize in developing Indian financial system. This study is carried out to evaluate the developments and to measure the prospects as well as the challenges faced by the movement of Islamic banking in India. This paper reveals that Islamic banking in India has real potential to grow along with the conventional banking system. Our aim is to draw the attention of Indian regulators, Islamic finance scholars and business activists to think over the measures to be adopted in developing Islamic banking in India. It also provides necessary measures to allow conventional banks to carry on Islamic banking business using the existing financial infrastructure. In this paper I propose to discuss the concept of Islamic banking in India. Islamic banking differs from the conventional banking. The difference lies in the fact that Islamic banks operate on an equity participation system in which a predetermined rate of return is not guaranteed. Whereas in conventional banking, operations are based on both equity and debt system that are mainly driven by interest (riba). Islamic banking is a system of banking with Shari'ah 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. 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. In case of India, Banking regulation Act 1949 needs to be suitably modified to introduce Islamic Banking. The Sachar Committee report highlighted that approximately 50% Muslims are financially excluded. The long held issue of financial inclusion can be taken care of by introducing Islamic Banking. Reserve Bank of India is looking at options to bring the much debated Islamic Banking in India. RBI has initiated correspondence with the center, seeking the possibility of amending the Banking regulation Act or bringing in new rules to pave way for the establishment of Islamic Banking in the Country.