Islamic banking combines morality with commerce: merinews

Sharia prohibits the payment of fees for the renting of money (riba, usury) for specific terms, as well as investing in businesses that provide goods or services considered contrary to its principles (haraam, forbidden). All forms of interest is prohibite.

CJ: Vishnu Mohan

ISLAMIC BANKING system seems to be catching up in many parts of the world. Perhaps, it is time India should also welcome the concept of Islamic banking, which seems to adequately address the issue of solid economic growth.

First, let’s understand the concept of Islamic banking: Islamic banking refers to a system of banking or banking activity that is consistent with the principles of Islamic law (Sharia). Sharia prohibits the payment of fees for the renting of money (riba, usury) for specific terms, as well as investing in businesses that provide goods or services considered contrary to its principles (haraam, forbidden). All forms of interest is prohibited, whether it is simple or compound, low or high rate, personal or institutional, private or public. The question obviously which would arise is how then is the bank going to make a profit if it is not going to charge any interest based on Sharia!

To avoid interest or riba, Islamic banks have introduced instrument such as Mudaharba and Musharka. Mudaharba means that bank as a rab-ul-mal will provide the funds to an entrepreneur to do business.

But the bank has no right to interfere in the business. The entrepreneur has responsibility to run business and provide whole information to bank. In this kind of contract the bank will share the profit of business according to percentage fixed in contract. In case of loss the bank will bear all loss. In Musharka, both will share the loss and profit. This type of contract is called partnership.

A few special characteristics of an Islamic bank are as follows:

a) Firstly, Islamic finance involves a system of equity sharing and stake-taking. It works on the principle of a variable return depending on the actual productivity and how well theproject performs. The project can be in different forms such as specific or general, individual or institutional, private or public. However, the Islamic principle remains of equity and reward sharing unlike the western concept of loan-interest relationship.

b) Social and ethical aspects are a part of the Islamic economic system. It will ask question such as: What are the objectives for which money is being acquired? Will it benefit individuals, society and humanity? Will it lead to the establishment of a just, honourable, sustainable society; or will it result in exploitation, moral degeneration, social tensions and inequalities? These questions will be as relevant as the profitability and economic viability of the project in the Islamic system.

c) Islamic banking is entrepreneurial driven. It is directed not just towards financial expansion but also towards physical expansion of economic production and services. In the Islamic economy money will not produce money; it is expected to finance talent, innovation and new ideas, skills and opportunities. Whereas, conventional banking operates predominantly on the basis of financial collateral, therefore the more money you have, the more you can get. This means that the viability of a project mainly depends on the financial worth of the borrower; meaning that low collateral can reduce the chance of getting a loan, even if the project is viable and the person has impeccable character.

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