Islamic banking is banking or banking activity that is consistent with the principles of sharia and its practical application through the development of Islamic economics. As such, a more correct term for “Islamic banking” is “Sharia Compliant finance”.
Sharia prohibits the fixed or floating payment or acceptance of specific interest of fee for loan of money.
- It is different from regular banking in that it prohibits earning of interest (or riba) through the business of lending.
- It also prohibits direct or indirect association with businesses involving alcohol, pork products, firearms and tobacco.
- It also does not allow speculation, betting and gambling.
Islamic banking is following five ways:
- Mudarabah, a profit-sharing agreement,
- Wadiah, a safe keeping arrangement,
- Musharakah, or a joint venture for a specific business,
- Murabahah, cost plus arrangement where goods are sold with a pre-determinedmargin of profit, Ijirah, a leasing arrangement.
Why Islamic Banking is Not Permitted in India?
According to the RBI, Islamic banking is not consistent with current banking laws in India. Islamic banking which does not allow charging interest or taking of interest is inconsistent with our existing laws, Charging of interest is necessary to conduct banking operation in India because banks have to borrow on which it has to pay interest rate. So government which has to determine whether they want to permit Islamic Banking and if so they have to enact a law that is consistent with Islamic Banking”.