What is Islamic Banking ?

Islamic Banking in brief can be described as a 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 within the limits of Islamic Law or the Shariah in all of its actions and deeds.

The literature available at present indicates that the major governing principles of an Islamic bank are:-

* No interest-based (In Islam is is called Riba) transactions i.e. neither the interest is paid to depositor nor it is charged from the borrower;

* No support to economic activities involving oppression (zulm)

* No financing to economic activities involving speculation (gharar);

* The introduction of an Islamic tax, zakat;

*No financing for the production of goods and services which contradict the Islamic value (haram)

The word "Riba" means interest, usury, excess, increase or addition, which according to Shariah terminology, implies any excess compensation without due consideration (consideration does not include time value of money).    Riba is indeed deemed haram in Islam, for the reason that it is ‘unfairly’ exploitive in nature. It is ‘unfair’ because Riba requires the lender to return the borrowed money, plus an extra amount. This requires the borrower to work harder to return not just the principal, but also the interest or mark-up levied on the amount.

A reading of the above details has left me unanswered for some of the questions, which I am giving below and invite our readers to give their views or additional information in comments so that we can create a good document on this new concept :-

(a)             How Isalamic Bank will generate revenue in the absence of interest received?  Who will pay for the salaries of the staff in the Islamic Banking when there will not be revenue.  The majority income of banks is always from interest.   Thus, in this era of high salaries and high rent for bank buildings, how Islamic Banks will pay for their staff and establishment expenses?   Do they will involve something like Kar Seva as is done by Sikhs at their religious places?  Will there be permanent employees;

(b)            Will rules and regulations as applicable for commercial banks like CRR, SLR, Basel III norms applicable to such banks?

(c)             Will there be any guarantee for depositors?  Will there be restrictions on withdrawal of funds by depositor on demand?

(d)  Will government all religions to open separate Banking systems with different set of regulations?  For example, Sikhs are great businessmen and have huge earnings abroad and are always ready to contribute for religious chartiable organisations.  Will they too be allowed to start Sikh Banking?  On similar lines, will Christians and Hindus (may be VHP or RSS) also allowed to start parallel banking? 

In a democracy like India, can two / three / four  parallel  banking system work, specially in free competition world.   The cost of production for corporate who will take loans from commercial banks (mostly non-Muslims) will be more than the cost of production of corporate who will be able to avail loan from Islamic Bank at free of interest.   How will they compete with each other in the free market.

In case this methodology or banking system is adopted across India, how will senior citizens, who are mainly dependent on interest income will survive?  Will government provide social security for them?   In case, this system is partially adopted, it can reduce interest rates drastically for depositors and thus old will be at the mercy of the existing bank balance which will not earn any interest.

With above ideas, I through this discussion open for our bankers to ponder on these issues and give their views and how does two parallel system will be compatible since we will soon see first institution based on Islamic Banking.

[I would like our readers here to give comments purely based on logic without any communal bias as it will allow everyone to understand this new concept in better way.   I am sure that our matured readers will follow these guidelines.  Remember not to give any communal comments. It should be health discussions based on facts. ]