Curious About Islamic Banking Rules? Seeking Insights on Business Impacts and Outcomes

Outcome of Accepting Islamic Rules in Banking and Business Transactions

What will be the outcome if we accept Islamic rules for banking and other business transactions? I have a lot of confusion about this, but I want business experts to help me out.

Dear Arifshah, Islamic banking or otherwise, the main challenge facing humanity is bridging the gap between the rich and the poor. Day by day, this gap is increasing rather than decreasing. The disparity is clearly evident in the member countries of the Organisation of Islamic Cooperation (OIC).

The Taliban rule in Afghanistan from 1996 to 2002 did not succeed in narrowing this gap. Not only in banking but in all aspects—social, political, economic, etc.—they imposed a 100% Islamic rule. Their governance turned ordinary citizens into paupers.

What about India? Consider the banks where all the board members are Muslims. The history of these banks, like many others, is rife with scandals, fraud, corruption, and so on. A classic example is the famous and very old bank in Bangalore. Therefore, before focusing on Islamic banking, let us first assess our ability to run conventional banks efficiently.

On a related note, JK Bank, headquartered in Srinagar, has a Gross NPA of 1.61%. What does this indicate?

You may find my views a bit harsh, but the truth often requires a candid assessment!

Thanks,

Dinesh V. Divekar

Dear Arif Shah, The renowned jurist and economist Nani Palkhivala once said that the rules of economics are like the rules of electricity. They are good servants, no doubt, but very bad masters. This means that as long as we rule over the economy, it serves us well, but when it starts ruling over us, it just ruins us.

Regarding your query, I suggest you refer to two Nobel Award winners, incidentally, both related to the economics of underdeveloped countries: Dr. Amartya Sen and Dr. Muhammad Yunus. It is difficult to understand the theory they have propounded in a single reading. However, once you grasp the central idea, you begin to understand some of it.

The Idea of Islamic Banking

The idea of Islamic Banking is certainly commendable. The problem does not lie with the idea itself but with its administration. If the players of the bank are prompt, fair, and judicious, the game of banking survives both in good and bad days. However, if the players are corrupt, then the consequences for the bank are clear. There is nothing wrong with any law, principle, system, or concept; the wrong lies with the players, administrators, and implementers.

This is a different kind of topic, other than HR-related, but interesting for reading as well as updating knowledge. I tried to gather some information on what it actually is; however, I could not understand much about the positives in Islamic banking, if there are any.

I would be thankful if any fellow reader could write, in simple language, only the highlights of this banking system (whether bad or good).

If any financial institution/bank decides to operate under Islamic banking rules, is it allowed in India, since we are strictly operating under RBI Directives?

My paragraph-wise replies are given in *italics*:

1. Shall be thankful if any fellow reader writes, in simple language, only the highlights of this banking system (whether bad or good).

*To know more about Islamic Banking, you may [click here](http://en.wikipedia.org/wiki/Islamic_Banking). "Good or bad" are relative terms, and the outcome depends on how it is executed. Nevertheless, as written in my first post, it is not a solution to bridge the gap between the rich and the poor, that is for sure.*

2. If at all, any financial institute/bank decides to operate under Islamic banking rules, whether it is allowed in India, since we are strictly operating under RBI Directives.

*In the present set-up, Islamic banking is not permitted as per RBI rules and regulations. However, RBI is working on it, and in the future, it may be permitted. However, nothing can be said about whether existing banks can have exclusive products for Islamic banking or if a new bank itself needs to be developed. The outcome is worth watching, but we will come to know it a couple of years after the commencement of their operations.*

Thanks,

Regards

To answer Mr. Arif Shah's original question, suffice it to say that we in India are not replacing our existing system with Islamic banking or an economic system. The current debate is about allowing those who want to opt for it to have that option. Current RBI rules do not permit other options. Hence, even if Islamic banking is allowed in the future, those who do not want it are under no compulsion to opt for it. The impact of moving to Islamic banking will be felt only by those who voluntarily opt for it.