onomi on epts and erminolo ies 22.27
Islamic law prohibits interest on both loans and all over the world from Africa to Europe to Asia
deposits. Interest is also called riba in Islamic and Australia and are regulated even within the
discourse. The argument against interest is that conventional banking system. The whole banking
money is not a good and profit should be earned system in Iran has moved over to the Islamic
on goods and services only not on control of system since the early 1980s and even Pakistan is
money itself. But Islam does not deny that capital, Islamising its banking system.
as a factor of production deserves to be rewarded. Many of the European and American Banks
It, however, allows the owners of capital a share in are now offering Islamic banking products not
a surplus which is uncertain. only in muslim countries, but also in developed
It operates on the principle of sharing both markets such as the United Kingdom. The concept
profits and risks by the borrower as well as the is also catching up in countries like Malaysia and
lender. As such the depositor cannot earn a Dubai.
fixed return in the form of interest as happens in As per the Islamic experts, with growing
conventional banking. But the banks are permitted indebtedness of many governments and with bulk
to offer incentives such as variable prizes or bonuses of the borrowing going to servicing of the past
in cash or kind on these deposits. The depositor, debt and payment of huge interests, it could be an
who in the conventional banking system is averse alternative to conventional banking as practiced
to risk is a provider of capital here and equally in the rest of the world. Wherever it is practiced,
shares the risks of the bank which lends his funds. studies have shown that the rate of return is often
Investment finance is offered by these banks comparable and sometimes even higher than the
through Musharka where a bank participates as interest rate offered by conventional banks to
a joint venture partner in a project and shares depositors.
the profits and losses. Investment finance is
India has no such full-fledged bank, though few
also offered through Mudabha where the banks
non-banking financial firms have been operating
contribute the finance and the client provides
in Mumbai and Bangalore on Islamic principles.
expertise, management, and labour, and the profits
We find the traces of such financial operations
are shared in a prearranged proportion while the
by co-operatives even during pre-Independence
loss is borne by the bank.
era, too. In 2015-16, an Expert Panel of the RBI
Trade finance is also offered through a recommended in favour of such banks. The panel
number of ways. One way is through mare up, suggested that commercial banks in India may be
where the bank buys an item for a client and the enabled to open specialized interest-free windows
client agrees to repay the bank the amount along with simple products like demand deposits by—
with an agreed profit later on. Banks also finance
by putting participation securities on their liability
on lines similar to leasing, hire purchase, and sell
side and deferred payment on the asset side. The
and buyback. Consumer lending is without any
RBI did not take any decision regarding it till late
interest, but the bank covers expenses by levying
May-2016.
a service charge. Besides, these banks offer a host
of fee-based products like money transfer, bill
collections, and foreign exchange trading where
isocost line
the bank’s won money is not involved. A line on the two-axis graph which shows the
Islamic banks have come into being since the combination of factor inputs that can be purchased
early 1970s. There are nearly 30 Islamic banks for the same money.