Islamic Banking in India

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OTHER ESSAYS Grey areas in the law relating to the use of force in dispersing an unlawful assembly Dr. N. C. Asthana (IPS) & Dr. Anjali Nirmal Plea Bargaining: A unique remedy Sidhartha Mohapatra & Hailshree Saksena Critical analysis of the law of adultery in India Bharat Chugh The ‘Maaza’ Trademark Battle- a brief study Vidya Sunderam Other alternatives to Imprisonment Puneet Shukla Judicial accountability as proposed under Judges Inquiry Bill, 2006 I. L. Prasanthi Judiciary and its role Raj Na
  EDITOR'S PICKBanking on faith: Islamic(sharia) banking and itsprospects in India   Priyanka Lal and Sneha Snehal  In this era where trends flourish aroundincreasing aspirations to identify withsocial conscious initiatives, it comes asno surprise that Islamic Banking isbooming. The concept of interest isfundamental to the business of banking.With this background it is veryinteresting that sharia[1]banking isworking without profits and is stillflourishing. They are not only profitablebut are also growing at an astonishingrate in sense of capital, assets andconsumers. From Jakarta to Jeddah toJordan, 280 Islamic banks operate inover 50 countries, with assetsestimated between $ 250 million and $300 billion.[2]Management ConsultantsMckinsey and Co. say in their worldIslamic Competitiveness Report, 2007that the value of assets managed byIslamic Banks will grow by 33 % by2010.[3]Keeping all this as background thisarticle explores Islamic Banking intotality: srcin, principles, growths andfuture and the possibility of the same inIndia. Historical Development It seems that the history of Islamicbanking could be divided into two parts.The earliest references to theorganization of banking on the basis of profit sharing rather than interest (Fiqhal-Muamalat-the fundamental principalof Islamic Banking) can be traced to thelate forties.[4]However In the next twodecades it attracted more attention,partly because of the political interestthat it created in Pakistan and partlybecause of the migration of muslims to OTHER ESSAYS Grey areas in the law relating tothe use of force in dispersing anunlawful assembly  Dr. N. C. Asthana (IPS) & Dr. Anjali Nirmal  Plea Bargaining: A unique remedy Sidhartha Mohapatra & Hailshree Saksena Critical analysis of the law of adultery in India  Bharat Chugh The ‘Maaza’ Trademark Battle- a brief study Vidya Sunderam Other alternatives toImprisonment  Puneet Shukla Judicial accountability as proposed under Judges InquiryBill, 2006  I. L. Prasanthi Judiciary and its role  Raj Nandini Singh Critical Analysis: Reflection of IPin Competition Law of India  Rahul Dutta Public accessibility to copyrightedorphan works Meenu Maheswary The Right to Information:“Facilitating people’s participationand state accountability towards”  Laxmi Sharma FDI Guidelines under Press Notes2, 3 and 4 (2009) Sharad Sharma Is the Regulatory framework for creating a Media Company inconsonance with the guarantee inArticle 19(1) (a)  Prashant R. Dahat  Patenting of microorganisms  Prashant R. Dahat  Enforcement of IntellectualProperty Rights: Customs andCross – Border Measures  Apurv Karmakar  Section 197 of Cr.P.C vis-a-vis‘Public servant’ u/s 21(twelfth) (b)IPC Ch. Amritalingam -  the western countries.The Islamic Development Bank, an inter-governmental bankestablished in 1975, was born of this process, being the first bank incorporating theprinciples of sharia banking.[5] The first private interest-free bank, the Dubai Islamic Bank, was also set up in 1975 by a group of Muslim businessmen from several countries. Twomore private banks were foundedin 1977 under the name of Faisal Islamic Bank in Egyptand the Sudan.In the same year the Kuwaiti government set up the Kuwait Finance House.In the ten years since the establishment of the first private commercial bank in Dubai, morethan 50 interest-free banks have come into being. Though quite a few of them are in Muslimcountries, thereare now spreading in other countries as well like in Denmark, Luxembourg,Switzerland and the UK.In most countries the establishment of interest-free banking has been by private initiative(mostly by migrant muslims). In Iran and Pakistan, however, it was by government initiativeand covered all banks in the country. Fundamentals of Islamic Banking All interest-free banks agree on the same basic principles. However, individual banks differ in their application. These differences can be because of several reasons including the lawsof the country, objectives of the different banks, individual banks circumstances andexperiences, the need to interact with other interest-based banks, etc.Some of the essential principles which are followed by all the banks practicing shariabanking are:[6] Deposit accounts All the Islamic banks have three kinds of deposit accounts: current, savings and investment. Current accounts Current or demand deposit accounts are virtually the same as in all conventional banks.Deposit is guaranteed. Savings accounts Savings deposit accounts operate in different ways. In some banks, the depositors allow thebanks to use their money but they obtain a guarantee of getting the full amount back fromthe bank. Banks adopt several methods of inducing their clients to deposit with them, but noprofit is promised. In others, savings accounts are treated as investment accounts but withless stringent conditions as to withdrawals and minimum balance. Capital is not guaranteedbut the banks take care to invest money from such accounts in relatively risk-free short-termprojects. As such lower profit rates are expected and that too only on a portion of theaverage minimum balance on the ground that a high level of reserves needs to be kept at alltimes to meet withdrawal demands. Investment account Investment deposits are accepted for a fixed or unlimited period of time and the investorsagree in advance to share the profit (or loss) in a given proportion with the bank. Capital isnot guaranteed. Modes of financing  Banks adopt several modes of acquiring assets or financing projects. But they can bebroadly categorised into three areas: investment, trade and lending. Investment financing This is done in three main ways:a) Musharaka where a bank may join another entity to set up a joint venture, both partiesparticipating in the various aspects of the project in varying degrees. Profit and loss areshared in a pre-arranged fashion. This is not very different from the joint venture concept.The venture is an independent legal entity and the bank may withdraw gradually after aninitial period;b) Mudarabha where the bank contributes the finance and the client provides the expertise,management and labour. Profits are shared by both the partners in a pre-arrangedproportion, but when a loss occurs the total loss is borne by the bank; andc) Financing on the basis of an estimated rate of return. Under this scheme, the bankestimates the expected rate of return on the specific project it is asked to finance andprovides financing on the understanding that at least that rate is payable to the bank. If theproject ends up in a profit more than the estimated rate the excess goes to the client. If theprofit is less than the estimate the bank will accept the lower rate. In case a loss is sufferedthe bank will take a share in it. Trade financing This is also done in several ways. The main ones are:a) Mark-up where the bank buys an item for a client and the client agrees to repay the bankthe price and an agreed profit later on;b) Leasing where the bank buys an item for a client and leases it to him for an agreedperiod and at the end of that period the lessee pays the balance on the price agreed at thebeginning an becomes the owner of the item;c) Hire-purchase where the bank buys an item for the client and hires it to him for an agreedrent and period, and at the end of that period the client automatically becomes the owner of the item;d) Sell-and-buy-back where a client sells one of his properties to the bank for an agreedprice payable now on condition that he will buy the property back after certain time for anagreed price; ande) Letters of credit where the bank guarantees the import of an item using its own funds for a client, on the basis of sharing the profit from the sale of this item or on a mark-up basis. Lending Main forms of Lending are:a) Loans with a service charge where the bank lends money without interest but they cover their expenses by levying a service charge. This charge may be subject to a maximum setby the authorities.  b) No-cost loans where each bank is expected to set aside a part of their funds to grant no-cost loans to needy persons such as small farmers, entrepreneurs, producers, etc. and toneedy consumers.c) Overdrafts also are to be provided, subject to a certain maximum, free of charge. Services Other banking services such as money transfers, bill collections, trade in foreign currenciesat spot rate etc. where the banks own money is not involved are provided on a commissionor charges basis. Prohibited lending Islamic Banking other than dealing with interest also prohibits any dealing in pork,pornography, and anything else which the sharia deems haram. Feasibility of Islamic banking in IndiaCurrent status of Islamic Banking in India Islamic banks in India do not function under banking regulations. They are licensed under Non Banking Finance Companies Reserve Bank Directives 1997 RBI (Amendment) Act1997, and operate on profit and loss based on Islamic principles. All the Islamic banks haveto be compulsorily registered with RBI. Reasons for non implementation of Islamic Banking in India In the straitjacket world of Indian banking, something as fascinating as Islamic banking is adistant dream. Nonetheless, countless advocates of Islamic banking have been trying their best over the years to propagate the concept. In furtherance of this propagation the ReserveBank of India (RBI) constituted a committee in 2007[7]to examine the issue but viewed thatIslamic banking cannot be offered by banks in India as well as the overseas branches of local banks under the present legal framework. Except a basic offering like current account,almost no other banking product in India can be modified to meet the conditions of Islamicbanking. As a genre of financial services, Islamic banking shuns the very idea of interestrates, and rests on profit-sharing principles. Based on the Sharia''''''''''''''''''''''''''''''''h law, itabhors the business of making money out of money, upholding the belief that wealth isgenerated through actual trade and investment.[8]The RBI has not put the report in the public domain.[9]While the final form of the report is not known, from the newspaper reports it can becollected that the members had pointed out how Indian banking laws come in the way of various Islamic banking principles. These are as follows:1. n Al Wadiah (for saving bank account): Section 21 of the Banking Regulation Act ( BRAct ) requires payment of interest on such deposits; thus, interest-free deposit and a simplecharging of premium or Hiba is not permissible.2. Mudarabah (for term deposit or investment): Here again, Section 21 of the BR Actdisallows such products where the bank can invest the money in equity funds (in India,equity exposure is determined by a separate set of rules), and the client has completefreedom in the management.
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