Islamic finance is based on principles of shariah, or “Islamic law.” Major principles of shariah are a ban on interest, a ban on uncertainty, adherence to risk- sharing and profit sharing, promotion of ethical investments that enhance society, and asset backing. The international market for Islamic finance has grown between 10% to 15% annually in recent years. Islamic finance historically has been concentrated in the Persian Gulf countries, but has expanded globally to both Muslim and non-Muslim countries. There is huge and growing market potential for Islamic finance in the India. Through international and domestic regulatory bodies, there has been effort to standardize regulations in Islamic finance across different countries and financial institutions, although challenges remain.
Islamic banking is essentially banking in consonance with the ethos and value system of Islam and governed in addition to the conventional good governance and risk management rules, by principles laid down by Islamic law, Shariah. It is, however, not confined to interest free banking, which is a narrow concept. In addition to non-acceptance of interestbased transactions, the fundamental tenet is that of fairness. It envisages ethical practices, contributions towards a more equitable distribution of income and wealth and active participation in achieving the goals and objectives of an Islamic economy.
Need for Islamic Banking
The collapse of major Wall Street institutions, notably Lehman Brothers, and the subsequent global financial crisis and economic recession, Islamic banking is seriously being considered and has emerged as a possible alternative to the conventional banking because of the following reasons:
• It is based on Ethical and Socially Responsible Investments (SRI) • It aims at Equity and Justice and leads to poverty alleviation
• It acts to new imension to assets andactual projects aiming to support real economic growth instead of financial engineering
• It provides services to under banked populations ignored by conventional banks
Basic Tenets of Islamic Banking and Finance
The basic tenets of Islamic banking and finance can be put down as under;
1. Prohibition of interest-based (riba) transactions;
2. Ban on speculation and excessive risk taking (gharar);
3. Islamic tax system (zakat);
4. Discouragement of the production of goods and services which contradict the value pattern of Islam (haram)