What is Islamic banking, riba meaning and principles governing the Islamic bank

What is Islamic Banking and major principles governing the Islamic bank, What does riba mean in Islamic law  : Islamic banking is banking or banking activity that is consistent with the principles of sharia and its practical application through the development of Islamic economics.

Islamic bank’s foundation is based on Islamic faith and must stay within the limits of the Islamic Law or Shariah in all of its action and deeds.  So a more correct name for Islamic Banking is Sharia Complaint finance.

Sharia prohibits the fixed or floating payment or acceptance of specific interest of fee for loan of money and on deposit of money respectively.

What is Islamic banking and its principles
What is Islamic banking and its principles

Major principles governing on Islamic bank are as below :

The principles behind the Islamic banking follows Sharia or Islamic laws based on the Quran and the Hadith, the recorded sayings and actions of the Prophet Muhammad. Here are some major principles behind Islamic banking.

  • The main principle behind Islamic banking is : No Interest (called RIBA in islam) based transactions e, prohibition of collection and payment of interest by lenders and investors. Neither the interest is paid to depositor nor it is charged from the borrower.
  • No support to economic activities involving oppression (zulm).
  • It prohibits financing to economic activities involving speculation (gharar).
  • The introduction of an Islamic tax, zakat.
  • It prohibits financing for the production of goods and services like alchol, pork products, firearms and tobacco as it contradict the Islamic value (haram).

What does RIBA mean ?

The Word RIBA in Arabic language mean “increment” or “addition”. In Islamic Banking it refers to charged interest. It is prohibited under Sharia or Islamic laws as It is thought to be unjustified when it is paid in form of money above the amount of loan, as a condition imposed by the lender or voluntarily by the borrower.  It is also known as “Usury”.

Why Islamic banking is not yet allowed in India ?

As we read about Islamic banking and following principles behind Islamic banking, It is clear that it is not consistent with existing bank laws in India. As per existing bank law, interest charged on transactions is the main source of income for banks and is necessary to conduct operations in India, because banks have to borrow on which it has to pay interest rate. So government which has to determine whether they want to permit Islamic Banking and if so they have to enact a law that is consistent with Islamic Banking.

Recent development in Islamic banking in India :

Islamic Banking is common in Hong Kong, the UK, US, Malaysia, Singapore, Bangladesh and Pakistan. recently Reserve Bank of India (RBI), India’s central bank has also proposed working with the government to introduce interest-free banking to tackle financial exclusion for religious reasons, potentially opening Islamic finance to the largest Muslim minority population in the world.

RBI opens door to Islamic finance after Raghuram Rajan departure
RBI opens door to Islamic finance after Raghuram Rajan departure

The Reserve Bank of India (RBI) made the proposal in its annual report last week, as departing central bank governor Raghuram Rajan hands over the reins to close ally Urjit Patel.

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