As per economics theory, money is having a value. It is called ‘Time Value Of Money’.
A man wants the value of money he possesses today is sustained until the next year. So Islam suggests that the money which is not in use should be put into some economic activity than to retain it with you. Islam is not in favor of its retention but stresses on circulation.
When you put your money into economic activity, it generates profit. This is not the interest. Because if you had given this money to anyone who put it into a transaction that could have earned some income, and such income is not counted as interest. This is the process where money sustains its ‘Time Value’, and through this process, one can take part in ‘Profit Sharing’.
Islamic banking goes into a few types of transactions. One is very simple. That is called ‘Profit Sharing’. In this type of transaction, a person takes part with someone and share profit and loss. In another type of trade transaction, Islam asks whatever the transaction is there that should have something to trade. That means, there should necessarily be some trade involvement in every transaction.
Now a question arises as to how it can deal or cope up with the expenditure incurred on rent of the building and salaries when Islamic banking works on ‘no interest’ basis? When Islamic bank takes money from people they are made informed about their sharing the profit or loss. Since the money goes in a large pool where all types of big and small depositors have invested, so the bank works out it’s ‘Vested Average Cost’. That means, whatever the money has come in the pool that all is taken into account for earnings on it.
When economic crises gripped Indonesia, some circles believed it was the outcome of the capitalist system of economy. So many bankers and people adopted the economic system based on Islamic principles. Later, the same plan was adopted at the national level. In the first instance, two such banks were brought into existence, and finding them running successfully, four more banks including Bank Denomon, Bank Bokopan, Bank Rakyat Indonesia and Bank Nayaga came into existence.
Islamic banking is actually known as non-interest banking. It is a banking system based purely on the principles of Sharia law and guided by Islamic economics. Islam prohibits interest, which in Islamic terminology is called “Riba”.
The first Islamic Bank was brought to existence in Malaysia in 1963. Initially, the number of its depositors was less than 1300, which later swelled up to almost one million, with deposits of over one billion dollars. Such type of tremendous success encouraged others to create more Islamic Financial Institutions. Perhaps, Egypt was the next country where Islamic Banking came into being in 1972 and an Islamic Financial Institution was established in Cairo.
Witnessing the great success of Islamic Banking in Islamic Countries, some non-Muslim developed Countries too ventured into this activity. The United Kingdom was the first non-Muslim country to permit an Islamic Bank to operate. Perhaps, it was in 2014 when Islamic Bank Of Britain came to existence. Later, many other non-Muslim countries opened “Islamic Windows” in their conventional Banks. United States, China, Germany are a few among them.
In India, no such program is in the light as yet. Some time back, I read a report wherein it was revealed that the introduction of Islamic banking was recommended in “Raghuram Rajan” report in 2008 A.D., but that was never translated into practice. Experts say that the introduction of Islamic banking in India would have many advantages and result in attracting huge funds in the domestic market alone. They had observed that an Islamic Banking Window will attract Muslims to invest in different projects with the money they may not be willing to put in conventional Banks. But, in order to give such an aspiration a practical shape, Indian Banking laws will have to be amended so as to incorporate the provisions concerning Islamic Banking. It is said that the proposal of RBI for the opening of an Islamic Banking Window took a political angle instead of a financial one.
Long ago, I wrote a cover story for a reformative Weekly Journal “Muballig”, published in Kashmir, wherein I had stressed upon the elite class of our community to make strenuous efforts for establishing an Islamic Banking in Kashmir. Unfortunately, many people have wealth but many have not a vision or lack initiatives. Our governments too could have approached the government of India in this regard and convinced them to establish an Islamic Banking Window in this Muslim majority state. Jammu And Kashmir Bank too can play a vital role in creating such activity in its Institution.
Nazir Jahangir is a freelance writer and columnist.