Group Members :Janesh Grover (B29) Amandeep Hanspal (B30)

INTRODUCTION
The term Islamic banking refers to a banking activity or a system of banking that is in consonance with the basic principles of Islamic Shraiah. The islamic banking is also known as Interest Free Banking. As Shariah disallows the acceptance of Riba or Interest rate for the accepting and lending of money.

HISTORY
The first model of Islamic Banking system came into the picture in 1963 in Egypt. Ahmad AL Najjar was the chief founder of the bank and key features are profit sharing on the non interest based philosophy of the Islamic Shariah.

EVOLUTION OF ISLAMIC BANKING

In 1974, the Organization of Islamic Countries (OIC) had established the first Islamic bank called the Islamic Development Bank or IDB. The basic business model of this bank was to provide financial assistance and support on profit sharing. By the end of 1970, several Islamic banking systems have been established through out the Muslim world, including the first private commercial bank in Dubai(1975), the Bahrain Islamic bank(1979) and the Faisal Islamic bank of Sudan (1977).

MODELS OF ISLAMIC BANKING SYSTEM

MURABAHA :Murabaha is actually a request which is set by the client to the Islamic bank to leverage certain services or goods for him and in return, the bank provides a definite profit to the client over the cost of the services or goods.

IJARAH:-

It is the contract or the legal right against a lawful or a specified return for the effort or work which is proposed to be expended and for the benefits that are proposed to be taken.

MUSAWAMAH:-

It is the regular or general sales of goods in which the price of the goods or commodity is bargained between the buyer and the seller.

NEED FOR ISLAMIC BANKING IN INDIA

An alternative finance and banking system based on equity, justice and fairplay instead of debt financing and toxic products used in sub-prime mortgage. The ethical principles on which Islamic finance is based may bring banks closer to their clients and to the true spirit which should mark every financial service. The country should call for an alternative global financial architecture, which is built on the real economy and not on the paper economy.

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For the real development of India we have to focus on two aspects: 1. Inclusive growth of the entire population. Islamic banking may be the solution to the farmers suicide crisis in Vidarbha. Even yesterday we heard news about 30 farmers who committed suicide in Vidarbha. Islamic banking, which propagates zero interest lending, could hold the key to solving this crisis.

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2. Infrastructure development.
The countrys Twelfth Five-Year Plan for the period 2012-2017 targets on removing some of these roadblocks and creating a framework for private-sector participation, but it depends on the ability of Indias leaders to execute these plans, according to Standard and Poors.9 In its draft for the Twelfth Five-Year Plan for 2012-2017, the government proposes to invest US $ 1 trillion to upgrade infrastructurealmost double that in the earlier Plan, which ended in March 2012.

To get rid of this menace and save the nation from the clutches of interest, suitable amendments should be made in the Banking Act. Indira Gandhis slogan, Garibi Hatao and Roti,Kapda Aur Makaan as enunciated by Zulfikar Ali Bhutto are still relevant today as it was in the early seventies. Yet even today, horrendous disparities exist between different segments of the Indian society. The majority of the unorganized sector; workers, semi-skilled persons, small farmers are all non-bankable. Government must provide the disadvantaged classes with the tools they need to improve their condition. Islamic banking is one way to ameliorate the disadvantaged classes. The potential benefits of allowing Islamic banking include; decreased economic disparity between the haves and the have nots, better integration, and consequently accelerated economic growth.

LEGAL ISSUES RELATED TO ISLAMICA BANKING IN INDIA

SWOT ANALYSIS
Strength
A bank in India cannot raise deposits without promising a specified rate of return to depositors, but under Sharia, returns can only be determined post-facto depending on profit. Also banks have to maintain a Statutory Liquidity Ratio (SLR), which involves locking up a substantial portion of funds either as cash, gold or in government securities. Such cash will not get any return, keeping it in gold is risky as it could depreciate and government securities come with interest. Moreover, Islamic banking can eliminate unaccountable economic activities, as every economic activity has to be financed through legal contract and physical verification of real assets under contract. There is no room for diversion of funds. Therefore, investment in consonance with Islamic banking principles will surely boost the engine of economic growth in our country.

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Weakness
Monitoring of data about firms in which Islamic bank invests would involve exorbitant cost. Islamic banking needs to introduce corporate governance with transparent accounting standards. It needs to perform detailed evaluation before embarking Profit Loss Sharing Scheme, which demand a pool of highly trained professionals. The imparting of professional training is costly. Many small-time businessmen do not keep any accounts, leave alone proper accounts. And large conglomerates do not like to disclose their real accounts to anybody. The widespread lack of business ethics among certain business community will be another major hurdle in the path of Islamic banking in India.

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Opportunities
India with a 15% Muslim population. After 9/11, most of these countries started pulling out their investments from the US and Europe because of the fear of freezing of assets. Eleventh Five Year Plan envisages inclusive growth with development in all sectors of economy. Moreover with introduction of Islamic banking, Indian government will certainly gain diplomatic advantages to make financial dealings with Muslim dominated nations especially to attract trillion dollars of equity finance from the gulf countries.

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Threats
Islamic banking could be a huge political issue. Certain parties might abhor the use of the word Islamic and could term it as anti-Indian. They might argue that the very concept of Sharia banking would go against the secular fabric of our country.

CONCLUSION
Islamic banking is at an incipient stage. The existing legal framework does not permit Islamic Banking. Only selective activities like equity investment is possible, while trade finance aspects like taking title to goods is not possible.