Functioning of Islamic Banking & Scope in India
Islamic banking is a banking activity which follows principle of Sharia law and its practical application through the development of Islamic economics. It is also termed as Sharia Compliant Finance. Islamic bank prohibits ‘Interest based Banking’ but permits ‘Profit sharing based Banking’. The concept is based on a verse of the Holy Quran that says ―Allah has allowed only legitimate trade and prohibits interest which states as Allah is against interest as it is believed to lead to exploitation and unproductive income.
Working of Islamic Banking
Islamic banking works on few laws which derive from Sharia Law practices as
1. If customer deposits money in bank, bank should guarantee the money should return to customer. 2. Customer can withdraw the money anytime. 3. Bank can charge you a fee for looking after customer money and may pay hibah(gift)to customer if it deems fit. Islamic banking module divided into four type of principle which derived from Holy Quran.
1. Mudharabah (Profit Sharing)
It is an Islamic contract which on one side provides capital and other side Labour. The profit must share in proportions agreed upon before implementation of contract.
2. Bai’ Bithaman Anjil- BBA (Deferred Payment Sale)
This module more concentrates on sale of goods where the buyer pays the seller after the sale together with an agreed profit margin
3. Murabahah (Cost Plus)
Murabahah id the transaction module which involves the sale of goods which include a profit margin after both parties agreed upon it.
4. Salam
This module enables the banks and farmers to contract with each other of the crop to get finance at appropriate time.
India is a good market for Islamic Banking due to its large size of Muslim population which is fourth largest in world. However it requires change in regulatory system and increase awareness of benefit of Islamic banking among Muslims. One study by renowned financial institution in India states that “India holds a promising growth for Islamic banking due to its favourable regulatory condition, whose asset base is expected to increase more than 1 trillion USD in coming year”.
According to Grail Research which is a leading marketing intelligence and data analysis provider states that “Islamic banking gains popularity and fast pace in market like USA and UK which has history of backdrop of the banking sector woes impacting the market”.
RBI (Reserve bank of India) also considering to implement and offer Islamic banking product to compete in emerging market for its overseas branches and subsidiaries.
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