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
     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.