Islamic Banking In India: A Myth

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1. IJARSCT ISSN (Online) 2581-9429 ISSN (Print) 2581-XXXX International Journal of Advanced Research in Science, Communication and Technology (IJARSCT) Volume 2, Issue 2, February 2021 Impact Factor: 4.819 Islamic Banking In India: A Myth Dr. S. Deva Prasanna Assistant Professor, Department of Commerce Chevalier T. Thomas Elizabeth College for Women University of Madras, Chennai, Tamilnadu Abstract: Islamic Economics and Finance is a common terminology and philosophy at present. Due to the global financial crisis, great attention has been given to this subject by the economist. The Islamic financing ideas are developed due to the demand for social justice and economic opportunity. The unfamiliar concept of Islamic banking in the Indian economy has vast potential. In the Indian banking system, Islamic finance is misunderstood as infeasible and impractical, and a charitable venture restricted to its Muslim community. Besides, it is growing in other parts of the world, such as the Middle East, Malaysia, Indonesia, and Europe. This paper attempts to explain the underlying principles of Islamic banking in India. Keywords: Islamic Finance, Shariah, Indian Economy I. INTRODUCTION Economics is one of the most critical aspects of human life. The term Islamic Economics is used to refer to Islamic commercial jurisprudence and also to an ideology of economics. Based on the teachings of Islam, Islamic Economics takes a middle ground between the systems of Marxism and capitalism, mostly similar to the labour theory of value, which is "labour-based exchange and exchange-based labour. The guidelines for human beings' economic behaviour, including financial activities like production, distribution, and consumption of goods and services are provided by Islamic law. Islamic banking is the fastest-growing field in financial services. The main advantage of Islamic finance is transparency, cooperative ventures, risk sharing and ethical investing. Islamic banking is a banking system following the Shariat. Money has no intrinsic value in Islam. Therefore money cannot be sold at a profit and is permitted to be used as per Islamic law only. Paying any fee for renting of money (called riba) is not allowed by Shariat or Islamic law. It also prohibits any investment in businesses that are considered haraam or against the principles of Islam. These principles have been derived from Quran and have been in practice since then. Islamic banking and finance has been defined as a "system through which finance is provided in the form of money in return for either equity or rights to share in future business profits or in the form of goods and services delivered in return for a commitment to repay their value at a future date." During 1980’s the Islamic financial institutions started developing all over the world. The first Islamic Bank was established in MitGhamr, Egypt in 1963, but it did not last long. Islamic banking is prevalent in Gulf countries; now, it expands to nations with majority Muslim populations and other countries with minority Muslim populations. Significant banks like Citibank, Standard Chartered Bank, and HBSC are operating interest-free windows in West Asian countries, Europe, and the USA. The International Monetary Fund (IMF) initiated research on an economic system's macroeconomic implications using an interest-free basis. There is a growing awareness about this concept in India, and there is a vast potential market for Islamic banks.    II. OBJECTIVES OF THE STUDY To study the basic principles in Islamic Banking and Finance. To explore the Financial Products of Islamic Banking. To highlight the present status of Islamic banking in India. Copyright to IJARCST www.ijarsct.co.in DOI: 10.48175/568 1
2. IJARSCT ISSN (Online) 2581-9429 ISSN (Print) 2581-XXXX International Journal of Advanced Research in Science, Communication and Technology (IJARSCT) Impact Factor: 4.819 Volume 2, Issue 2, February 2021 III. RESEARCH METHODOLOGY This is an exploratory research. It is based on secondary data. The data are collected from the various journals, reports, articles collected from the websites, and articles from newspapers and magazines. IV. ISLAMIC BANKING – AN OVERVIEW During the forties, the basic approaches of Islamic banking were developed. Islamic banking has taken root from a financial organization called Tabung Haji in Malaysia, which started this trend after seeing the demand for interest-free money needed for pilgrimage purposes. In 1963, this bank came into being with 1281 depositors, which soon touched the 8 lakh mark. After that, the Islamic banks became popular in Egypt. In 1963 Sparkasse executed an interest-free financial system in Mit-Ghamar, Egypt, developed and is nowadays known as Islamic banking. The interest-free "Nasser Social Bank" was established by the Egyptian Government in 1971, and in 1973, with 20 member countries, the "Islamic Development Bank" was founded. This bank's objective was to support the social progress and economic development of member countries and Muslim communities. After this, many Islamic banks started functioning in different Islamic countries. The Dubai Islamic Bank is the first commercial Islamic Bank, established in 1979 and the Islamic Insurance Company of Sudan is the first Islamic insurance ( takaful) company based in 1979. The world's first Islamic mutual fund was Amana Income Fund (which invests only in sharia-compliant equities), created in 1986 in Indiana. By 1995, 144 Islamic financial institutions had been established worldwide, including 33 government-run banks, 40 private banks, and 71 investment companies. The US-based Citibank established the Citi Islamic Investment Bank in Bahrain in 1996. By 2008 Islamic banking was growing at a rate of 10–15% per year. Over 300 Islamic financial institutions spread over 51 countries and an additional 250 mutual funds were complying with Islamic principles. 4.1 Islamic Banking in India Kerala is the main state to begin Islamic NBFC (Al Barakah Monetary Administrations Ltd) in India during 2010. The Kerala State Industrial Development Corporation [KSIDC] has a 11% stake, and the rest would be raised by the NRIs and state Muslim population. Al Barakah makes direct investments into framework projects. These undertakings are not connected with pork, liquor, and other non Halal items. The benefits of these tasks were partaken as profits and not as interest. It won't work as a bank and expand credits. An undeniable Islamic bank is preposterous in India with the current banking. Subsequently to make it the primary Indian Islamic bank, they have begun it as a NBFC with the name Al-Baraka. Islamic banks in India don't work under financial guidelines, yet work on benefit and misfortune premise Islamic standards. They are authorized under Save Bank Mandates for NBFCs, RBI (Correction) Act 1997. There are a portion of the deterrents of Islamic banking with respect to these guidelines are:  The payment of interest under Sec 21 of the Banking Regulation Act is against Shariah.  Sec 5 and 6 of the Banking Regulation Act refuses banks to go into any profit sharing and association contracts  Sec 9 of the Banking Regulation Act disallows banks from claiming any steady property separated from private use (RBI, 1949). 4.2 Essential Principles of Islamic Banking and Finance A) Profit and Loss Sharing As per the principles of Islamic finance the partners will share their profit and loss according to the part they played in the business. There is no debtor-creditor role by the parties, and there will be no guarantee on the returns rate. This principle aims to safeguard the user of the money and the holder of the capital and to assume their responsibilities in the case of successes and risks. B) Riba It means any excess compensation (interest) above the principal without due consideration. As per the Islamic law Riba is prohibited. Riba occurs when there is an interest rate, whether positive or negative, fixed ex-ante, linked to the Copyright to IJARCST www.ijarsct.co.in DOI: 10.48175/568 2
3. IJARSCT ISSN (Online) 2581-9429 ISSN (Print) 2581-XXXX International Journal of Advanced Research in Science, Communication and Technology (IJARSCT) Impact Factor: 4.819 Volume 2, Issue 2, February 2021 time factor and the amount of the loan, regardless of economic activity. The person who gets the loan has to return the money and Riba to the lender. As per the Banking principle of Islam, taking advantage of the issues that others are facing is unjust. C) Shared Risk As per the Islamic banking the risk will be divided and reduced when two or more parties will share the risk. It promotes risk-sharing in economic transactions, and improve the economic activity of the country D) Gharar The principle of ban on Gharar concerns the characteristics and purposes of contracts of the Islamic financial instruments. Participation in ambiguous and uncertain transactions are not allowed to Muslims. As per Islamic principles, profit and loss of the business should be shared equally and both parties should have proper control over the business, loss equally. E) Gambling Gambling is prohibited in Islam. The securing of abundance through insidious methods is contrary to the standards of Islam. It will shield the Muslims from regular protection items since that is a kind of betting. On the other hand, Islamic banking and finance doesn't concede purported aleatory agreements described by the vulnerability of their belonging. F) Haram The industries that are harmful to society or threaten social responsibilities are prohibited in Islam. They are Pornography, Prostitution, Alcohol, Pork, and Drug. Thus, the use, consumption, and trading in such industries are forbidden. Islamic principles do not allow Muslims to invest in such sectors. They cannot even participate in the mutual funds that will help the industry to flourish. G) Zakat The property rules of Islam are known as Zakat, and It is the balanced distribution of wealth. According to their principle, the fair amount of Zakat is deducted from Muslims' accounts during the holy month of Ramadan. Islamic banks promote this social responsibility and distribute the amount among the needy. V. ISLAMIC BANKING PRODUCTS To establish social justice, Islam requires that both investors and entrepreneurs share involvement in economic activities that result in profit and loss. Islamic financial companies have developed many different products to meet customer needs and provide sharia-compliant alternatives to widely available conventional options. The following is a brief description of Islamic financial products: 5.1 Musharakah It is a joint endeavour, under musharakah, the two parties become associated with a joint endeavour undertaking or property by contributing capital and business venture. Benefits are partaken in a concurred proportion, yet misfortunes are partaken in the extent of cash contributed. Contributions can be made either in real money or in kind. 5.2 Mudarabah In a mudaraba contract, a lender gives cash-flow to a business visionary, and he will deal with all financial exercises, for example, property development, a business, or a joint endeavour. Under Mudarabah, one party gives 100% capital, and the other party deals with the speculation project. Benefits from the business are shared in a preCopyright to IJARCST www.ijarsct.co.in DOI: 10.48175/568 3
4. IJARSCT ISSN (Online) 2581-9429 ISSN (Print) 2581-XXXX International Journal of Advanced Research in Science, Communication and Technology (IJARSCT) Impact Factor: 4.819 Volume 2, Issue 2, February 2021 concurred proportion, while misfortunes accumulated are borne by the supplier of capital. Mudarabah is utilized for investments. 5.3 Qard Hasan It is a credit on goodwill basis. The debt holder is needed to reimburse just the sum acquired. It is a beneficent advance liberated from revenue and reimbursement by portions. A humble help charge is gathered from the borrower. 5.4 Wakalah This is similar to a power of attorney. In the interest of clients, a bank is approved to direct business. 5.5 Murabahah It is resource based and cost-in addition to financing. The Broker buys the product and exchanges it at a greater cost to the capital client, revealing the net revenue remembered for the business cost. The client pays for the products over an expressed portion period. If there should arise an occurrence of default, the customer is subject just at the deal cost of the resource. 5.6 Istithna It is an asset-based and commissioned manufacturing. Under this, the Investor embraces to create something particular as indicated by concurred determinations at a decided cost and fixed date of conveyance. An equal agreement for assembling is initiated by the Financier. The bank charges the purchaser the expense it pays to the producer in addition to a sensible benefit and faces the challenge of assembling of the resource. 5.7 Bay Bithaman al Ajil It is a repurchase agreement used in the hire-purchase or purchase of insurance. Under this concept, the bank provides financing for customers to own property or services by buying the assets belonging to clients or the 'vendor' of the cash price and reselling the customer's support with the purchase price plus a profit 5.8 Ijarah It is a lease agreement between the Islamic bank and its client. It is resource based leasing. The bank will have the asset\'s proprietorship and, , in case of a finance lease, is transferred on pre-determined terms. It was accessible under both working lease and account rent. 5.9 Takaful It was Islamic insurance. Takaful is protection dependent on shared co-activity, obligation, insurance, and help between gatherings of members. It is a sort to a helpful protection wherein individuals contribute a particular amount of cash to a shared pool. Each policyholder pays his membership to help those that need help. Misfortunes are isolated, and liabilities spread by the local area pooling framework.      VI. NEED FOR ISLAMIC BANKING IN INDIA The introduction of Islamic Banking in India by the Government and the RBI will make banking more inclusive. Muslims in India will invest in Islamic banking, and they amount to 15% of the total population, which is the largest minority in India. It will boost India’s economy by solving the problem of inflation and liquidity to an extent. Islamic Banking system can boost Entrepreneurial Development in India through the financial service system. More straightforward and cheap credit can be provided to many people with little or no collateral. Since the Islamic banking system works on the principle of equity, it has many advantages compared to the traditional banking system, which demands high rates of interest and foreclosures due to payment default. Copyright to IJARCST www.ijarsct.co.in DOI: 10.48175/568 4
5. IJARSCT ISSN (Online) 2581-9429 ISSN (Print) 2581-XXXX International Journal of Advanced Research in Science, Communication and Technology (IJARSCT) Impact Factor: 4.819    Volume 2, Issue 2, February 2021 The flow of Gulf Council funds will be an added advantage. An alternative system of banking could promote competition, innovation, and efficiency. Islamic Banking could open new doors for Muslims in India, enabling the betterment of this community and achieving financial inclusion for all. VII. SCOPE OF ISLAMIC BANKING IN INDIAN ECONOMY The scope of Islamic banking in India is tremendous in light of the fact that around 15 percent of the Indians are Muslims. Islamic Financial window will urge the Muslim people group to put resources into projects, along these lines preparing a lot of capital that they may not place in the banks. As indicated by Standard and Poor's Evaluations Administrations, the potential market is $4 trillion around the world. So it very well may be an apparatus for improving monetary improvement in India. Since Islamic banking is unique in relation to India's conventional financial framework, RBI doesn't uphold Islamic banking. The different kinds of ventures dependent on Islamic standards would help channelize the NRI reserves, especially in Kerala, which has a huge NRI population. There is a requirement for a different law to present Islamic Banking in India. Islamic banking and finance covers the requirements of the Muslims, however it is satisfying the need to build up all the local area. Appropriate help from the Public authority can support Islamic banking in India. It can work as a NBFC (Non-Banking Monetary Company), and the official language for the operation can be changed to English in Non-Islamic Countries, for example, our own.  Islamic Banking has the potential to contribute substantially to the economic growth of India.  Potential to boost entrepreneurship in India  Through Small and Medium Enterprise (SME) financing, it can contribute to poverty eradication.  Potential to contribute to rural and agricultural growth.  Potential to reduce inflation through less artificial money creation and less funding of speculative businesses. VIII. MISCONCEPTIONS ABOUT ISLAMIC BANKING In today's financial industry, Islamic banking is turning into a fundamental part of increasing market share of the overall industry across the globe. It is, subsequently, important to think about the misconceptions about this developing industry. To bring revenue free Islamic banking, misconception, and duplicity among the Indian public must be taken out. Many imagine that Islamic financial products are just for Muslims, yet there is no preclusion for non-Muslim people to utilize Islamic financial services. There is huge participation by non-Muslims in numerous nations, for example, the UK, US, Germany, Singapore and Hong Kong. There are a few business contrasts between customary banking and Islamic Financial institutions. The Islamic banking products are more appealing to clients. There is a contention that Islamic financial will destabilize the common idea of the financial arrangement of India. There is a misguided judgment that Islamic assets can likewise use for psychological militant exercises. Islamic banking has boundaries in India, yet it very well may be tended to for certain changes in guidelines, eventually relying on the political will.     IX. SWOT ANALYSIS OF ISLAMIC BANKING IN INDIA STRENGTHS WEAKNESSES Islamic Banking will improve the condition of the  The provisions of Indian banking laws make weaker and hapless segments of Indian society. Islamic banking almost an unviable option. The enormous potential market for Islamic banking  Lack of experts Modification in Banking products, Regulation Act needed Consistent with the religious beliefs of Muslims  Lack of business ethics inclusive growth will aggrandize the Indian economy Copyright to IJARCST www.ijarsct.co.in DOI: 10.48175/568 5
6. IJARSCT ISSN (Online) 2581-9429 ISSN (Print) 2581-XXXX International Journal of Advanced Research in Science, Communication and Technology (IJARSCT) Impact Factor: 4.819      Volume 2, Issue 2, February 2021 OPPORTUNITIES Large Muslims Population Attract investments from a cash surplus Gulf countries Inclusive growth Equity finance could resolve the inadequate labor capital in agriculture and manufacturing industries.      THREATS Microfinance may act as a competitor. Competition from conventional banking Implementation of the uniform civil code will affect the Shariah laws/ instructions. Conduit of terrorism Political Weapon X. CONCLUSION Islamic banking will uplift the financial activities of Muslims in India without harming any other religious faction. Interest-free and equity-based principles are more attractive, and it has the potential to increase financial inclusion. Islamic banking will improve India's labor-capital ratio, which will boost Indian agriculture and the informal sector. Islamic banking helps to percolate the profits to lower society levels and reduce the disparity due to the class aspect. Insufficient human capital and talent, lack of standardization and harmonization, and inadequate framework to address Islamic finance risks are some of the drawbacks of Islamic Banking, which need special concentration. To conclude, Islamic banking would be an alternative mode of conventional banking that would strengthen market efficiencies with innovations and competition. REFERENCES [1]. Majid, K. (2012), “Efficiency Analysis by Using Data Envelopment Analysis Model: Evidence from Indian Banks”. International Journal of Latest Trends in Finance and Economics Science, Vol. 2, No. 3, pp. 238-237. [2]. Al-Qudah, A. M., &Jaradat, M. A. (2013),“The Impact of Macro Variables and Banks Characteristics on Jordanian Islamic Banks Profitability”, Empirical Evidence. [3]. International Business Research Journal, Vol. 6, No. 10, pp. 153-162. [4]. Ibrahim, Mansor H. and Alam, Nafis, Islamic Economics and Islamic Finance in theWorld Economy (March 2018). The World Economy, Vol. 41, Issue 3, pp. 668-673, 2018. [5]. Tehelka. (2010). Islamic Finance and Banking, Halal in India, Exploring New Dimension. Available from: http:// www.halalinindia.com/ibf.php. [6]. Raqeeb, H.A. (2010). Problems and prospects of Islamic banking in India-road map ahead, 29th March 2010, Indian Muslim Relief and Charities (IMRC). Available from: http://www.twocircles.net/2010mar29/problems and prospects Islamic banking India road map ahead. html. Retrieved 4.03.2015, [7]. Halal in India. (2010). Islamic Banking in Kerala, Halal in India, Exploring New Dimension. Available from: http:// www.halalinindia.com/kerala.php. [8]. Dr. Showkat Hussain (2012) “Islamic Finance: Study, Analysis and Impact on the World Academia in the Present Century”. International Journal of Scientific and Research Publications, Volume 2, Issue 11, November 2012 1 ISSN 2250-3153 [9]. Iqbal, M. (2001),“Islamic and” Conventional Banking in Nineties: A Comparative Study”. Journal of Islamic Economic Studies, Vol. 8, No. 2, pp. 1-28. [10]. Othman Cole, Khaled Soufani , Terence Tse” Notes on Islamic economics and finance” J. Trade and Global Markets, Vol. 6, No. 1, 2013. [11]. Modigliani, F. and Miller, M.H. (1963) ‘Corporation income taxes and the cost of capital: a correction’, American Economic Review, Vol. 53, No. 3, pp.433–443. [12]. Iqbal, M. and Llewellyn, D.T. (Eds) (2000) Islamic Banking and Finance: New Perspective on Profit-Sharing and Risk, Edward Elgar Publishing, Cheltenham. [13]. Eshwari G Prasad1, Poojitha RC2 & Dr. Varsha Agarwal “A Study on Islamic Finance And Banking”. International Journal of Research and Analytical Reviews, [ Volume 5 issue 3 July– sept 2018] e issn 2348 – 1269, print issn 2349-5138. Copyright to IJARCST www.ijarsct.co.in DOI: 10.48175/568 6
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