What is Islamic Banking?
Islamic Banking in brief can be described as banking activity that is consistent with the principles of sharia and its Practical application through the development of Islamic Economics. The foundation of Islamic bank is based on the Islamic faith and must stay with the limits of Islamic Law or the sharia in all its actions and deeds.
The Major Governing principles of Islamic bank are:
- No Interest-based (in Islam is called Riba) transaction i.e., neither the interest is paid to the depositor nor it is charged from the borrower.
- No support to Economic activity involving oppression (Zulm)
- No Financing to Economic activities involving any kind of speculation (Gharar)
- The introduction of an Islamic tax, Zakat
- No financing for the production of Goods services which go against the Islamic value(Haram)
The word Riba means Interest rate, usury, excess increase or addition, which according to Sharia terminology, implies any excess compensation without due consideration (Time value of Money). Riba is indeed deemed as haram in Islam. For this reason, it is considered as exploitive in nature. It is unfair as Riba requires the lender to return the borrowed money, plus an extra amount. This requires borrower to work harder to return not just the principal, but also the interest or mark -up relevel levied on the amount.
After going through the above details, I am haunted by many questions in my mind which are as follows. How Islamic bank will generate revenue without any rate of interest rate charged?Who will pay the salaries of Islamic bank staff if there are no avenues of revenue generated?Will Rules & Regulations as applicable like commercial banks like CRR, SLR, BASEL3 norms applicable to such banks?
Will there be any guarantee for the depositors?
Likewise, many questions keep lingering into mind. For example, will different religious groups be allowed to start bank in the religion with their own norms, for example Sikhs have great business acumen & have huge earnings abroad & are always willing for charity, then will they be allowed to start Sikh banking? Will Christians & Hindus also allowed to start parallel banking? In a Democracy like India, can we two or three or four parallel banking systems be allowed to function, especially in free competitive world. The cost of production of a corporate who will take loans from commercial banks (mostly non-Muslim) will be more than the cost of production of corporate who will be able to avail loan from Islamic bank at free rate of interest. How will this system function in the free market? In case of this methodology or banking system, how will the senior citizens survive who are mainly dependant on interest income?
In case this system is adopted it can reduce interest rates drastically for depositors & old people will be left at the mercy of the existing bank balance which will not ear any interest at all.
Now we find that RBI proposes ‘Islamic window’ in banks – Sharia Banking.