Mumbai, India - February 18, 2019 : Bank of India building built by British in South Mumbai

Traditional or Conventional Banking is a part of the financial system.  It is not an entire  financial system.  However, when we discuss  Islamic Banking we desire  that all Shariah allowable financial transactions  should be fulfilled by a bank.

The basic difference between benefical  mode of investment in banking and Islamic finance is that trading is forbidden  for the former and it is must for the later.

There are some grounds for this prohibitions.  In the past,  when banking in combination of trading was worked together  with  bankers who  became  merchants, as well.  The economic disaster of 1929-32 showed  that  this combination of banking with trading  to be deadly  for a lot  of banks.  Later on,  banking laws  were rectified to limit  banking  activities to risk-free interest type   loaning.  This type of  trading is now strictly forbidden  for a bank.  By remembering  this historical fact we should take precautions  for  this kind of disaster.

Any kind of affair in interest base loaning is strictly forbidden, in Islamic finance.  Thus, for an Islamic financial foundation trading is the only choice  for making productive  investment.

Because of the above mentioned conflict of fundamentals of the two Islamic banking, it is impossible to be successful  without bringing about a radical  change in the legal framework  in a secular and multinational  society like India.  To succeed our aims we should consider  in terms of Islamic financial system of  banking forms.  We should not focus  on combination of trading with the banking. Because both  can be achieved independently.

Thus, Islamic banking will remain limited up to the activities which do not disobey  banking law such as mobilizing deposits in current accounts,  making interest-free advances on actual service charge basis, collection of bills and cheques, safe deposits vaults, transfer of funds, agency services like payment of bills, payment of pension, collection of taxes etc.

Under these conditions as mentioned before,  we may propose following solutions: 

For the reason of strict  prohibition against any kind of involvement in interest,  a devout  muslim is unwilling to keep his/her  savings even in current account with a bank which would use his/her funds for earning interest.v In order to make deposits in current account fully appropriate  with Shariah we may recommend  that deposits mobilized from Muslims in current accounts  should be used in making interest-free lendings especially  to Muslims and the government.  Deposits in these accounts ought to  be treated by the dealing bank as government business like PPF.  The required  liquidity reserve as is suitable  to the conventional bank deposits in terms of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) may be saved in government account as interest-free loan.  Rest of the amount may be paid out  to public in general and Muslims in particular as interest- free loans.   The cost of handlings for deposits and advances may be divided between  government and borrowers proportionally.

Security for Advance 

Interest-free loans to the individuals may be made against sufficient indirect / personal guarantee.  Post dated cheques may also be taken  according to repayment programme.


The lendings to the people  might  be protected under state governments recovery act wherever suitable.  All the payables should be treated as government dues and preference ought to  be given in the matter of hearing in recovery suits as also in case that any action would be performed  against bouncing of cheques.

Provision for Bad-debts

With some  experiences of the banks in the difficulty  of failures in such type of loans, enough  provision should be  made by supplying a charitable fund provided by the government and the borrowers proportionally.

When we think of the mobilization of savings for investment on profit or loss sharing (PLS) basis, a lot  of chances are obtainable outside the banking industry.  The format of personal  fund manager fits most to this type of trade.  Existing communal  and personal  reciprocal funds may also fit  Islamic financial practices expose  relief  in the rules governing their trades.  The funds can  be mobilized in the form of securities like units issued by the fund manager for different  plans altered to suit the need of investors.  Collecting  funds might  be made in mass  sum are in repetitive payments (under systematic investment plan).  Likewise the repayment of principal( + -) Profit or Loss (PL) might  be made in mass  sum are payment (under systematic withdrawal plan).  An offer  can be made to government for lengthening the position  of reciprocal funds to the trade of fund managers.  Reciprocal  funds ought to  be allowed to access goods  exchange, foreign Exchange,  capitalizing of government projects and communal  and personal  industrial and housing projects.

In terms  of PLS (Profit and loss sharing),  financing efficient distribution  rather mobilization of funds is a hard job.  To defeat  this problem,  offers can be made to government for investing in  their various  projects by means of Islamic methods  under its current  policy  “Public-Private-Partnership (PPP)”.  Different  government projects can be financed by means of  Musharaka, Murabaha, Istisna, Ijarah methods  in a win-win position.  Crop lending  to farmers and buying  farm products at minimal  support price (MSP) minus return on funds under administrative price mechanism (APM) can be made by means of  Salam.  Likewise,  food credit to the government can be made available on cost (+) mark-up basis by means of  Murabaha.

To enable Islamic financial system participation of agent of experts of Islamic finance, investors, fund manager including communal  and personal reciprocal  funds, banks, farmers, industrialists and specialized project financing institutions appear to be unavodiable.  Broad  discussions among all the viewpoint parties with regard to their needs, hopes and restraints in the matter of mobilization of funds and their efficient deployment to use  all the possibilities in various  markets like capital market, goods  exchange, foreign exchange and government projects ought to be held before submitting a realistic scheme to the government for constitution and growth of Islamic financial system.


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