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Islamic Banking in India?

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Principles of Islamic Banking

Islamic Banking is based on the principles of Islamic law which is also known as Shariah and is guided mainly on the principles of Islamic economics.

Two of the most basic principles of Islamic banking are as under:

  • Sharing of profit and loss
  • Prohibition of the collection and payment of interest.

Collection of interest is not allowed under Islamic law. Under Islamic banking, the borrower needs to pay only the principal borrowed and no interest is paid on the borrowed amount. The borrower also pays a certain amount as gratuity to the lender. This small amount paid to the lender serves the purpose of gratuity.

The principle of banking is grounded on the principle of Islam, all the banks follow Islamic morals. It is also said that the financial transactions within Islamic banking are distinct form of ethical investing. Investments in alcohol, gambling, pork, etc. are prohibited under the law. Dubai Islamic Bank is the world’s first full-fledged Islamic bank which was formed in 1975.

Assets grew to $ 1.3 trillion in 2011 and have the potential to reach the mark of $ 1.8 trillion in 2013. A growth of over 17% is recorded in the Islamic Banks.

Read more about Top Ten Banks in India.

Islamic Banking in India

As far as Islamic Banking is concerned, India being the 3rd largest Muslim populated country in the world has a good market and opportunity to grow in this front. Islamic Banking can create a feel good factor among the Muslims in India by addressing the key issue of Financial Inclusion. This will further help the community come out of isolation and as a matter of fact, terrorism could be curbed to a greater extent in several states across the country.

A Shariah Supervisory board needs to be set up to monitor the activities in India. The Islamic Banks in India can work on the principle of Two-Windows approach or Two-Tier Principle. As far as the development of Islamic Banking is concerned, the lack of experts in the field leads to difference in interpretation and compliance in Shariah Laws. This results in low penetration in the country. There is an urgent need to publicize the Islamic Banking norms among the individuals (non-Muslims), so that financial segregation is not created in the country. The move will help protect the political exploitation of the law and a double digit growth (as seen in Asian countries like Singapore etc.) could be seen in India too.

In a famous book titled “Future of Money” by Bernard Lietar, a well description on the intrinsic dangers of interest is mentioned. The book has also talked about the admirable representation of last bastion resistance in Islam. However the RBI governor in 2012 last year ruled out the introduction of Islamic Banking in India. However he said the other methods of channelizing funds based on the principles of Islamic Law can be looked at in future.

Islamic Banking will also help in the continuous rolling of liquid cash among the minorities as well and a new development towards investment will be seen. This will not only help improve the stature of the backwards, but will also help the country to grow a rapid pace in the long term.


At last to conclude it can be said that Islamic Banking has grown over these years but the development is not sufficient when it comes to potential. Islamic banking definitely has good prospects of success in the country; however it is important to set up strong, dedicated, unbiased committee which can look after the development and expansion of such banking policy. India having a diverse canvas holds good development prospects from different communities.


Niraj Satnalika

Niraj is an MBA in International Business (Finance). Prior to this he completed B.Tech in Electronics and Instrumentation. He is currently working with Confederation of Indian Industry (CII), Kolkata in capacity of Consultant. Satnalika is actively involved with an NGO and works towards promoting education among the underprivileged.

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