This document provides an overview of Islamic banking principles. It explains that Islamic banking prohibits interest on loans and investing in businesses involved in activities prohibited under Islamic law. Instead of interest, Islamic banks use equity participation systems where they share in the profits and losses of financed businesses. The document discusses the growth of Islamic banking globally and in countries like the UK, US, and proposals to introduce it in India. It outlines some key differences between conventional and Islamic banking models in how they view money and the basis for earning profits. Overall, the document introduces the concept of interest-free banking according to Islamic principles.
3. INTRODUCTION
Islamic banking is also known as non-interest
banking.
It is a banking system that is based on the principles
of Islamic or sharia law.
The Islamic law or sharia prohibits the collection and
payment of interest (Riba) by lenders and investors.
It is also prohibits any sort of investment in business
that are considered haram or against the principles of
Islam.
In Islam, money has no intrinsic value. So, it cannot
be sold at profit.
4.
5. HOW IT FUNCTION WITHOUT
TAKING INTEREST;
In Islam, the investor should not make an undue
profit from hard work of the other.
So, to earn money without the use of charging
interest, Islamic banks use equity participation
system.
Equity participation means if a bank loans money to
a business ,the business will pay back the loan
without interest but instead gives the bank a share in
its profit. If the business defaults or does not earn a
profit, the bank does not benefits.
Islamic bank make available accounts which provide
profit or loss instead of interest rates.
6. SPREAD OF ISLAMIC BANKING IN
THE WORLD ;
There are plenty of non-Islamic countries that
are now opening Islamic windows in
conventional banks like China, Germany, etc.
UK was the first non-Islamic country to permit
a complete sharia compliant bank called the
Islamic Bank of Britain.
UK also issued Islamic Bonds known as SURUK
in 2014.
US has the American Finance House LARIBA.
7. ISLAMIC BANKING IN INDIA;
Introduction of Islamic banking was mooted
by Raghuram Rajan in his report on the
financial sector in the year 2008.
He recommended that interest free banking
techniques should be operated on a larger scale
so as to give access to those who are unable to
access banking services.
However, the India banking law will have to be
amended to incorporate Islamic banking. E.g.
Banking Regulation Act 1949.
10. CONVENTIONAL
BANK
ISLAMIC
BANK
It assures a pre-determined
rate of interest
It aims at maximizing
profit without any
restriction.
The relation to its clients is
that of creditors and
debtors.
It functions according to
Shariah Law.
it also aims at maximizing
profit but subjects to
Shariah restrictions.
The relation to its clients is
that of partners, investors
and traders, buyer and
seller.
11. CONVENTIONAL
BANK
ISLAMIC
BANK
Money is a commodity
besides medium of
exchange and store of
value.
Time value is the basis for
charging interest on
capital.
Interest is charged even in
case the organization
suffers losses.
Money is not a commodity
thought it is used as a
medium of exchange and
store of value.
Profit on trade of goods for
charging on providing
service is the basis for
earning profit.
Islamic bank operates on
the basis of profit and loss
sharing.