In 2011, shall we see the emergence of Islamic Banking?

Recent reports have indicated that the central bank will soon move to regulate an Islamic commercial bank. What exactly is involved in Islamic banking?

Globally, the assets of Islamic banks have been expanding at double-digit rates for a decade and Islamic banking is increasingly becoming a visible alternative to conventional banks in Islamic countries and countries with many muslims.
Islamic banks serve muslim customers, but are not religious institutions. They are profit-maximising intermediaries between savers and investors and offer custodial and other traditional banking services. The constraints they face are, however, different and are based on Shariah law. There are four main features that differentiate Islamic banking from the conventional banks.

Prohibition against interest (Riba) is the major difference between Islamic and traditional banking. Islam prohibits Riba on the grounds that interest is a form of exploitation and is inconsistent with the notion of fairness. This implies that fixing in advance a positive return on a loan as a reward for the use of one’s money is not allowed.

Prohibition against games of chance (Maysir) and chance (gharar): Islamic banking bars speculation – increasing wealth by chance rather than productive effort. Maysir refers to avoidable uncertainty; for example, gambling at a casino. An example of gharar is undertaking a business venture without sufficient information. Continue reading

Islamization of indices

Islamic finance will serve its purpose better if is propagated as a bouquet of products rather than as a category of banking.

Even as the Reserve Bank of India (RBI) and the finance ministry stand resolutely against the introduction of Islamic banking, market participants are trying to get a slice of the $1 trillion global Islamic finance pie. Last week, the Bombay Stock Exchange launched a shariah-compliant index that will “allow domestic and foreign investors to buy stocks in line with the investment guidelines derived from the shariah”.

The BSE TASIS Shariah 50 index follows the rival National Stock Exchange shariah index, which is linked to the Standard and Poor’s shariah-compliant index. In 1999, Dow Jones became the first to start an Islamic index, as a subset of the Dow Jones Global Index. Continue reading