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Muhammad Umar Khan

student of National University of Juridical Sciences, (Batch 2007-2012) B.A/B.Sc.LL.B(Hons) NUJS,Kolkata

Posted On by &filed under Banking & Insurance Law, Legal Articles.


Economists have proven that the wider the freedom of choice is, the higher the level of social welfare. In addition, wider choice implies greater respect for human rights. When an alternate concept such as Islamic banking is introduced, a new choice is open to the market, with obvious social and economic benefits.

Competition, not just between Islamic banks, but between Islamic banks and traditional banks would ensure a promising future to the banking industry. The future of banking in India rests upon the ability of banks to continue facing challenges with resourcefulness and creativity. Islamic banks merit an entry into the Indian financial system precisely because they have proven to face challenges with resourcefulness and creativity within the framework of social and economic justice across the world.

Contrary to assertions that there is a gap between the theory of Islamic finance and its practical implementation vis-a-vis conventional banking, the fact that Islamic finance has functioned with remarkable success the world over, suggests that such assertions should not be taken to restrain the entry of Islamic banking in India. Indeed, the Wall Street Journal has described Islamic finance as “an international quasi-parallel financial system” that stretches from “the US, Europe, Africa and the Middle East into the Indian subcontinent to the Far East.” Strangely, despite the important role India plays in the world economy, it has not allowed Islamic banking to enter its financial system. 

It is to make participative and responsive banking. Overall, while the people will gain from the introduction of Islamic banking, it should not be obligatory. The people can voluntarily choose from the different mode of financial services.

Accordingly, in the recent Judgement of Surbahmaniam Swamy vs State of Kerala, the honourable Kerala High Court held that there is no doubt that acceptance of Shariah banking will not arise only from the religious consideration but also from the fact that Shariah banking has an added facet to it i.e. interest-free banking. Thus, apart from the religious aspect, the rational aspects of Shariah banking should be highlighted to bring about its acceptance. One must look beyond the word ‘Shariah’ or ‘Islamic’ and must focus on the rational aspects of Islamic banking.

A ‘socialist, secular, democratic republic’ must always strive for inclusive growth so that the poor benefits. This is in accordance with the socialist principles in our Constitution.

The Court emphasized Islamic banking cannot be ignored on a narrow interpretation of the ‘secularism’. Certainly, including Islamic banking would only be in accordance with the principle of ‘secularism’ in our Constitution. Indeed, perceptions of Islamic banking should not be based on myths that suggest a wholly religious motive behind introducing Islamic banking.

Justice is one of the ideals on which our Constitution of India is based, and government policies strive to achieve economic justice. Islamic banking is based on equity, justice and fairness besides ensuring mobilisation in both resources and investment of the resources.

Banking runs not on identities or convictions, it runs on finance. Thus, the financial aspect must be recognized and not merely the Islamic aspect of interest-free banking. Nevertheless, the essence of the message of all religion calls for setting up norms and standard for human behaviour which extent to economic arena too. The presence of this economic commonality amongst different faiths implies that the word ‘shariah’ should be considered in pure economic and social benefits it entail and not which signify one particular faith only.

However, the court did not go into question of feasibility of Islamic banking under the supervision of Reserve bank of India. The Indian banking regulatory system does not permit the establishment of Islamic banks per-se. However, it does provide for the establishment of a variety of bank-like activities which can include Islamic-compliant transactions. Hence, the Islamic financial institutions – like interest free credit associations, interest free financial companies, and Islamic investment funds- operate as bank substitutes in the existing scheme  nbmof Non Banking Finance Companies Reserve (NBFCs) Bank Directives 1997 RBI (Amendment) Act 1997. A separate legislation can offer ample flexibility to synchronize the Shariah principals and the prevailing banking and investment laws and regulations of the jurisdiction in the current financial institutional set-up of the country.

The question that the secular government need to ask itself is, is it serious about Islamic financial system? Does government want to carry on financial transactions – considering the boost it can give to the overall economy of the country – as much as possible on Shariah principles? If the answer is yes, then it must come up with a statue which provides credibility to this alternate system of banking.

It is suggested that government should pay heed to high level committees’ reports which ironically have not been made public. If assuming purpose of the committee is not solved to know insights into how Islamic Finance is developing around the world, as well as evaluating the opportunities and challenges ahead, it should be done.

In these conditions, there is urgency to successfully implement the optimistic advancements and reforms in the banking sector to maximise the substantial prospects that lie ahead in this hitherto untapped area of Islamic finance.


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1 Comment on "ISLAMIC BANKING – TUSSLE ENDS BETWEEN RELIGION AND ECONOMICS"

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Dadeech Jodha
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While I agree with the author that Islamic Banking should be given a chance in India, there are various aspects of the system that may need to be decodified. First of all, Interest free banking does not mean that the ‘finance’ is provided for free, there are sometimes heavier charges in an Islamic Banking scenario as opposed to conventional banking. Charges are not taken in the form of interest but are recovered as a markup on the price of the asset, purchased by the customer of the bank (in most cases). Additionally, this form of banking is certainly a religious… Read more »
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