This is a banking system based on Shariat in which fundamentally money has no value of its own. Therefore, it can not be sold for any profit and has not be used only as per the rules of Shariat. 

 

This banking system prohibits a fee for renting money (which is interest rate) and also prohibits investment of money in any business that is against Islam or considered haraam. 

 

So, how do these banks make a profit? 

 

Islamic law allows reasonable profit and return on investment wherein the investor takes calculated risk as opposed to an interest rate which is undue profit. 

 

Under this banking system, the banks have accounts that provide profit or incur a loss and not interest rates. These Islamic banks invest the deposit in places that are permissible by Islam or are not haraam and do not involve high risks.  

 

In short, Islamic banks takes the money, invest them in Islamic-compliant business for low risk and share profit or loss with the investor without any interest rate. 

 

Where does this system stand outside Islamic countries?

 

There are a number of non-Islamic countries where they have Islamic banking system without their existing banks. People can avail the Islamic banking system within such banks that have this special provision. 

 

Islamic banking system and India:

 

In 2008, Raghuram Rajan for the first time mentioned about Islamic banking in India in his Financial Sector report. Rajan recommended it on the ground that this interest-free banking will allow better access to banking services since financially backward people will also be able to be a part of the banking system. 

 

Apart from making banking accessible, Islamic banking system will also help Indian economy in multiple ways. This will encourage the Muslim population in the country to actively invest in various Islamic compliant project through Islamic baking, open newer window for West Asian investors and also since many companies registered in Stock Exchange follow Shariat rules, there is good possibility that adopting Islamic banking system will attract more funds. 

 

Interestingly, for Muslims investing in the Shariat compliant projects through this banking system is a mandate which means adopting this system will prove beneficial for our economy. 

 

The obstacles in adopting Islamic banking system:

 

RBI recently proposed having an Islamic banking window, but it invited mixed reactions, and the matter got entangled with the whole Uniform Civil Code debate meaning politicisation of an economic matter.