Should RBI introduce Islamic Banking in India??

@Mir, I told you to consider only the islamic banking portfolio - not the total portfolio of the bank. Since you are a Principal Consultant of Infosys, I thought you will understand this.  But even then let me explain with an example.

For eg., assume the total portfolio of a Bank consists of USD 1 billion and the Islamic Banking portion is USD 100 million.  Out of this  total USD 100 million, what is the share of Murabahah?

Now I hope you will do the analysis yourself because I dont want you to say that I have cooked up the figures.

You will be surprised to see that every muslim opting for Islamic Banking (because non-muslims are not allowed to open Islamic accounts in Gulf, I dont know about other regions), 95% is Murabahah - meaning - nobody wants to take risk.  They want an assured profit which is given by Murabahah.

For personal reasons, I will not be participating in any debate for sometime - so please bear wtih me.

@All... Will be Posting more God Willingly...

@Raju:

Most of the Islamic Banks are not 100% Islamic. There is a small percentage of the 100%Islamic Banks. Musharaka Is Safe and 100% Islamic - Yes Mudarabah is kinda mixed up with the conventional banking i most of Islamic banks....BUT What i want to tell you is that it does not mean Islamic Banking is not Possible.It is Possible and it can be 100% Islamic and which in some small percentage of banks does exist...

What you are  referring to might be the case with the bank which isnt 100% folowing Islamic Sharia.

@Mir, take out all the technicalities from Murabahah. What do you see? A person gets profit (assured profit) - markup on the goods. What is this profit? We call it 'interest' in conventional banking.

Now I know you are going to say that there are three parties, all are honest, etc., etc.  These are only technicalities.  In reality, the underlying goods might not exist.  And even if they exist, they are not moved from one party to another.  Go to the essence. 

Mudaraba and Musharika are the same as Venture Capital which exists in Convetional also and you yourself admitted it.  So there are no differences about that.  Correct?

And I wanted you to give the share of each of these schemes in the total Islamic Banking Portfolio of a Bank.  You will be surprised to see that over 95% is Murabahah.  Which means, the investors want a locked profit upfront. 

And how do they calculate this profit?  Dont tell me that the cost is assumed to be correct.  He gives a markup margin and all that terminology again.  The investor calculates the interest he wants on his capital and gives a number.

Now please find all the holes in my views above.  And dont take shelter in the terminology or procedures.  Take out all the terminology and procedure, if you please.

@Mir and Kaisar, Once you have explained the different schemes of Islamic Banking, please give the share of each scheme in Islamic Banking in the present day world. You can take it from the balance sheets of Banks which have islamic banking schemes.

I can give them but I dont want to because you will call me prejudiced if I give them.

I want the statistics from the horses' mouth.

IJARA                                                     Ijara is an exchange transaction in which a known benefit arising from a specified asset is made available in return for a payment, but where ownership of the asset itself is not transferred. The ijara contract is essentially of the same design as an instalment leasing agreement. Where fixed assets are the subject of the lease, such can return to the lessor at the end of the lease period, in which case the lease takes on the features of an operating lease and thus only a part amortisation of the leased asset's value results. In an alternative approach, the lessee can agree at the outset to buy the asset at the end of the lease period in which case the lease takes on the nature of a hire purchase known as ijara wa iqtina (literally, lease and ownership). Some jurists do not permit this latter arrangement on the basis that it represents more or less a guaranteed financial return at the outset to the lessor, in much the same way as a modern interest-based finance lease. The terms of ijara are flexible enough to be applied to the hiring of an employee by an employer in return for a rent that is actually a fixed wage. Some generally agreed conditions for ijara are as follows :

a) the leased item should be transferred to the lessee on completion of the lease agreement and should be of a condition that is fit for performance of the required tasks. The lessor should transfer the leased items to the lessee in their completed form.
b) the usufruct of the leased item should have value.
c) the amount and timing of the lease payments should be agreed in advance, though the agreed schedule and amount of those payments need not be uniform. 
d) the lease payment schedule becomes active upon complete acquisition of the usufruct of the leased goods, whether such usufruct is in fact enjoyed by the lessor or not.
e) the period of the lease must be specified.
f) the conditions of usage of the leased items must be stated.
g) the lessor must have full possession and legal ownership of the asset prior to leasing it.
h) the leased asset must continue to exist throughout the term of the lease. Items which are consumed in the process of usage, ammunition for instance, cannot be leased.
i) in contrast with most conventional finance leases, the responsibility for maintenance and insurance of the leased item under ijara remains that of the lessor throughout.
j) a price cannot be pre-determined for the sale of the asset at the expiry of the lease. However, lessor and lessee may agree the continuation of the lease or the sale of the leased asset to the lessee under a new agreement at the end of the initial lease period.
k) in the event of late payment of rental, the ijara may be terminated immediately. 
l) the lessor may claim compensation for any damage caused to the leased assets as a result of negligence on the part of the lessee.

@Mir, thanks for your explanation of the islamic banking concepts.

Now can you please give the share of each of the below instruments in the global islamic banking (ratio of each instrument within Islamic Banking only - dont be concerned about conventional banking):

Mudarabah

Murabaha

Musharaka

Istisna...

@Raju,

Dear , The following lines have been mentioned by you,

Kaisar and Mir, can you please post an ideate in TooStep explaining all the four basic concepts of Islamic Banking and how these operate alongwith their mechanics of operation?

This will help everybody.  Once we have the ideates as seen by you, we can take it up further and compare it with conventional banking.

I think by mentioning the above lines you have accepted that you don't know much about the Islamic Banking then you should not mix it with conventional banking. Now You can know the concept of Islamic Banking properly by going through the Mir's two recent posts. And for your satisfaction You can make a comparison between Islamic Banking & Conventional But only after knowing and understanding the Islamic Banking properly.

@Raju, You are trying to misinterpret and also trying to mingle Islamic Banking with conventional Banking. I would not like to argue because you will be irritated, I will suggest you to go through the Concept of Islamic Banking and you prove yourself wrong by knowing it properly. It is really a very good concept by which our country can prosper. 

Islam prohibits interest. It does not prohibit sharing of profits. This is the basis of Islamic Banking.

The buy and sale of goods happen upfront and is locked.  So there are no losses. In a majority of cases (99%) no physical movement of goods happen. 

And it can co-exist with the present conventional system of banking without causing any chaos.

RBI can surely introduce Islamic Banking In India. It has proven records of sucess without any recession,however capitalism has seen recession after every 4-5 yrs. Though capitalism can attract sudden growth and strong investment but it cant help the people living below poverty line,the gap between rich and poor goes on increasing. The huge profit and economical growth we see on graph goes directly in accounts of wealthy people,big corporators,politicians ets. But what about average and poor people??? Islamic Economic system provides even distribution of wealth and prevents it to accumulate at one place. As long as profits of bank are concern, they are to facilitate business of country and not to make there own business and push companies into losses by making there own profits through interest. What if a person lends money for business and his business dont work well...He comes on road and banks keep up making there own profits. The banks working on Islamic system neither face any loss nor the person taking lonn goes into loss. Its totally WIN-WIN situation.The growth.stability,strength and happyness of the country cannot be seen only through graph but by the wealthyness and stisfaction of all people including poor and rich.  

Dear Dr. Sudhakar Rao,

Nationalization of Banks should not be seen in isolation. It has to b linked with the cut in foreign aid, resultant devaluation of Indian rupee and shattering of the Indian Economy by that effect to cover up the trade deficit,

In fact, nationalization was not a move to remove poverty, but a false plea to resort to nationalization. as that was a compulsion of the then Prime Minister of India, when in 1966, foreign aid, which was hitherto a key factor in preventing devaluation of the rupee was finally cut off and India was told it had to liberalize its restrictions on trade before foreign aid would again materialize. Although the response was the politically unpopular step of devaluation accompanied by liberalization, but she had to resort to devaluation of rupee in 1966. That started a very bad patch of Indian economy and the trust of the ruling party was dwindling fast and was getting starved of the funds. There was no other alternative than to nationalize the major private banks to utilize their funds to the best populist interests of that Government.

No doubt Prime Minister Indira Gandhi nationalised 14 banks in 1969, followed by six others in 1980, and made it mandatory for banks to provide 40% of their net credit to priority sectors like agriculture, small-scale industry, retail trade, small businesses, etc. to ensure that the banks fulfill their social and developmental goals. and since then, the number of bank branches has also increased from 10,120 in 1969 to more than 1,00,000, BUT poverty has not gone from India even after 41 years of nationalization.

The reason is quite imminent, even the nationalized banks still prefer to get in touch with major industrialists and business tycoons and provide easy funding to them. They are still beyond approach of a poor man, what to say of 40% of their funds to be invested in small-scale, retail, or agriculture sector.

The nationalized banks refrain even financing the education of a poor man's child through education loan to enable them remove their poverty by making them capable of getting good jobs.  They do so even against their own bank's written policy. Not even that the nationalized banks even try to dupe fully literate people by making one or the other lame excuse. I am not quoting this on hypothetical basis. This is my personal experience. Canara Bank at first refused to grant education loan to my son for an MBA course of a foreign university being conducted by some Indian institute with the reason that he was not eligible for loan for any foreign course in India. BUT, when I asked the Manager to show me the rules of the Bank in support of his argument, instead of showing me any specific instruction in support of his point, he handed over the bunch of bulk instructions of the corporate office to me to find that myself. Even when I showed him his own bank's ruling favoring such loan and when the sanction of loan was within his power, even then he was reluctant to do that and stated that he would have to send the case for clarification to his HQ which may take not less than a fortnight in processing, and also would not ensure whether the loan would get sanctioned or not. By the time the date of deposit of the first installment would have been over. With much argument when he became ready, even on fulfilling the prescribed condition for the loan amount with my personal guarantee, he insisted me to bring papers of some immovable property with more than double the value of the loan. I had to produce the registration papers of my house to get that loan sanctioned.

Just imagine, a poor and illiterate person, who does not have any property to mortgage or is unable to bring forth their own ruling position to get any financial help, how far these nationalized banks are going to help remove poverty of India?

it creates lot of problem like religious and other manner there can be a chance for partiality,    in this case our prime minister must reconsider for the betterment of country not for the vote bank

What would happen to the current system if an Islamic Banking System is introduced? Would it still be there? There would be severe chaos our banking system. 

People would Que up to an Islamic Banking Institution for a car or housing loan then. No one would then go to an SBI or HDFC or any other regular banks for loans. Then what would happen to these banks. 

Actually, the Islamic Banking System can be tried out in a small way (as a pilot project) in rural areas for giving small credit facilities to small and marginal farmers only.

Another thing - come to think of it - the economies of the gulf countries were pathetic before the oil era. Most probably, till the 60's, Shanghai or Mumbai or Sydney would have had a better and robust commerce and economy than all the gulf countries put together. This proves that the Islamic Banking method was not helpful (in a major way) in the development of the "modern day" commerce and industry.

And then, many Arabs put their money in western countries too.

Muslims of India are doing fine with the present banking system then why this idea of introducing Islamic Banking except vote bank politics.

In business and commerce nothing moves smoothly without profit. Profit motive keeps entrepreneurs on the toe to earn and advance.  Socialism and communism were originally designed with the motive of serving the society irrespective of profits, This model failed everywhere except in China where things move on more on the basis coercion and dictatorship than on social cause. Banks without earning interest will turn into radar less boat. The foreign investment or funds from other countries moves for earning more returns and not for charity. Funds from Arab countries may be aimed for other motives. Why the same fund is not diverted for Pakistan for their development! Why the country looks to America for funds? The objective of nationalized banks in India was to serve the social cause but they became the source of corruption, nepotism and tardiness. Private banks are stealing the limelight. I can not advocate banks or investments without profit motive and without charging interest.

Microsolar Brain