DAMODARAM SANJIVAYYA NATIONAL LAW UNIVERSITY

VISAKHAPATNAM, A.P., INDIA

PROJECT TITLE:
Islamic Banking in non-Muslim Countries

SUBJECT:
Banking Law

NAME OF THE FACULTY:

Ast. Prf. P. Bayola Kiran

Name of the Candidate:

Shaik Javvad Ur Rahaman
Roll No.: 2017083
Semester: 6th semester

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 Acknowledgement

Firstly, I would like to express my sincere gratitude to the Assistant professor, Mr. P. Bayola
Kiran for giving me a golden opportunity to take up this project regarding ― Islamic
Banking in non-Muslim Countries and sincere thanks for the continuous support of my
study and related research, for his patience, motivation, and guidance, which helped me all
the time of research. I could not have imagined having a better advisor and mentor for my
research.

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 Contents
1. Objective of the project………………………………………………………………..4
2. Scope of the Project………………………………………………………………........4
3. Research Question……………………………………………………………………..4
4. Research methodology………………………………………………………………...4
5. Introduction………………………………………………………………………........5
6. History of Islamic Banking………………………………………………………........5
7. Principles of Islamic Banking……………………………………………………........6
8. The Functioning of Islamic Banking………………………………………………......9
9. Islamic Banking in Non-Islamic Countries………………………………………......10
10. Islamic Banking in India………………………………………………………….11-20
i. Operation of Islamic Banking in India…………………………………….....12
ii. Advantages of Islamic Banking………………………………………….......13
iii. Constraints on Islamic Banking in India………………………………….13-15
iv. Dr. Subramanian Swamy v. State of Kerala .......................……………..15-17
v. E. P. Royappa v. State of Tamil Nadu & Anr. ...........................................18-19
11. RBI proposes Islamic window in conventional banks……………………………20-21
12. Islamic Banking in UK...........................................................................................21-24
i. Development...............................................................................................21-23
ii. Challenges...................................................................................................23-24
13. Islamic Banking in Australia........................................................................................23
i. Opportunities...............................................................................................24-25
ii. Challenges........................................................................................................24
14. Conclusion………………………………………………………………………..24-25
15. Bibliography…………………………………………………………………….........26
16.

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 1. Objective of the Project

The objective of this project is to find out about the efficiency of Islamic Banking in Non-
Muslim Countries.

2. Scope of the Project

The scope of the project is limited to the Islamic Banking in India.

3. Research Question
i. What is Islamic Banking and what are its principles?
ii. Whether the Islamic Banking is feasible to be implemented in India?
4. Research Methodology

This project is purely doctrinal type and both on primary and secondary sources are taken
such as websites, books, journals and internet sources. The type of study done here is
Descriptive and exploratory. The referencing style followed. In this project is OSCOLA 4 th
Edition's format of citation. This Research process deals with collecting and analysing
information to answer questions. The Research is purely descriptive in its boundaries of the
topic.

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 5. Introduction

Nowadays Islamic banking is generally obscure in the Western world, yet Islam has around
1,57 billion1 adherents worldwide and is the second significant religion on the planet. The
quantity of Muslims is perseveringly expanding throughout the years. For Muslims, yet
additionally for every single others this framework gives another and distinctive method of
banking. The wellspring of this framework lays in the restriction on enthusiasm for Muslims.

The possibility of Islamic banking is to offer a premium free financial framework, which
incorporate regular qualities and standards and strict perspectives. The information on moral
banking is expanding just as the quantity of moral assets and banks, what affirms the
consistence of individuals to utilize moral methods of banking, similar to the Islamic one.The
role of the Islamic Finance sector in economic development cannot be ignored. Apart from
enhancing financial inclusion, Islamic banking and finance is thought to affect the real sector
with its emphasis on trade and risk sharing, as against the interest-based mode of transactions,
associated with its conventional counterpart. The call from the Quran that “Allah has
permitted trade and forbidden usury” (2:275), meant that Muslims needed financing and
banking models that comply with Shariah. Islamic banking and finance is expected to ensure
justice, equity and fairness to all contracting parties. It must dissociate itself from usury,
gambling, taking of excessive risk, and the financing of forbidden products.

It is important to understand the working of the Islamic Banking first, in order to dwell upon
the question about the efficiency of Islamic Banking in non-Muslim Countries. This project
would throw a light upon the history of Islamic Banking and how it came into being. The
project would focus on the functioning of the Islamic Banks and how they are better than
conventional banking.

6. History of Islamic Banking

The underlying purpose of Islamic banking was in the forties. In that time the main
hypothetical and fundamental methodologies of the framework were created. Later on, in
1963, Sparkasse did an undertaking in Mit-Ghamar, Egypt. It was a task evaluating a
premium free money related framework, which was progressed and is these days known as
Islamic banking. The test reached a conclusion in 1967 as a result of political obstruction.
Islam chose thusly of banking as great and viable.

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In 1971 the premium free "Nasser Social Bank" was established by the Egyptian government
and in 1973 the "Islamic Development Bank" was established with 20 part nations. The goal
is to keep up the social advancement and monetary improvement of part nations and Muslim
people group complying with Sharia. The current enrollment of the bank comprises of 56
nations. After this establishment, numerous Islamic banks began right off the bat in different
Islamic nations. In the nineties they diffused their activities to Europe and Central Asia.
Today there are three states with a totally intrigue free money related framework: Pakistan,
Sudan and Iran.

7. Principles of Islamic Banking

Riba

The forbiddance of Riba is the boycott of financial enthusiasm for all structures. This is an
essential standard in Islam, which sources from Quran and Sunna. It is the most noticeable
contrast between traditional banking and Islamic banking.

Islam separates between Riba-al-Nasiah and Riba-al-Fadl. Riba-al-Nasiah alludes to the

enthusiasm of credit exchanges. In regular financial frameworks interests create benefits
without genuine worth or activity behind it, what is disallowed in Islam. However, credit
exchanges, which depend on amortization, are endorsed. Riba-al-Fadl relates to benefits,
which are accomplished in terms of professional career understandings.

In Islam individuals are just endorsed to trade administrations and merchandise of a similar
amount and worth. That way, the out of line improvement of somebody to the detriment of
another can't happen. Thusly, theories are impractical.

The reason for this disallowance is to accomplish distributive equity. In this way, the
abundance of individuals ought not be considered in the financial framework. The premium
free Islamic financial framework requires the association or benefit sharing
premise/misfortune sharing premise. In this manner, the advantages and liabilities of Islamic
banks are incorporated as in the clients share benefits and misfortunes with the banks in a
pre-chosen proportion. Theoretically, this implies Islamic banks are in a superior situation
than customary banks when outside stuns happen. This leads likewise to a carefully choice
and a persistently control of their clients as they are subject to them. Anyway, conventional
banking and Islamic banking are not as different as people think. 1 This is the reason why they
1
Chong, Beng Soon; Liu, Ming-Hua, Islamic banking. Interest-free or interest-based? IN: Pacific-Basin Finance
Journal

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should be treated equally. Therefore, it would make sense to control both by the same
institution.

Haram and Halal

Haram and Halal are likewise two standards of Islamic banking. These terms are much of the
time related with Islamic food rules. All items, administrations and financial tasks which are
viewed as exploitative, denied and debased by Sharia are called Haram. The term Haram
incorporates pork, liquor, weaponry, prostitution, tobacco, sex entertainment, money related
premium and undertakings, where financial information demonstrates obligation over-burden.

Every other item are viewed as Halal and are allowed by Sharia. The separation must be
applied to the entire worth included chain, what implies from the principal purpose of
development to the last retail location. On the off chance that each purpose of the worth
included chain is allowed by Sharia, the item, administration or monetary activity is watched
Halal. Notwithstanding of that rule, numerous Islamic banks don'.t work in an absolutely
Halal manner. This reality could be a purpose behind the low piece of the pie.

Gharar

Gharar implies hazard, adventure, vulnerability and double dealing and is commonly not
illegal, yet it is said to stay away from incredibly high Gharar. It impacts particularly the
Islamic law of agreement. Each monetary exchange with financial disequilibrium is carefully
taboo and void by law. The emotional examination of what is high and low Gharar can
prompt differences and further negative impact between Muslims. The hazard just alludes to
the topic of an agreement and not to the price tag.

For the most part, the exchange with a still not existing or not existing topic of an agreement
is taboo by Sharia as a result of incredibly high Gharar. Despite the fact that, there exist
legally binding plans, which make this exchange practical.

To maintain a strategic distance from high hazard in a financial activity, every deal contract
needs to incorporate clearly and totally communicated the attributes and accessibility of the
topic of the agreement to both contracting parties, the price tag and the rights and obligations
of both contracting parties.

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The disallowance of Gharar is especially significant concerning money related subordinates.
This standard makes bear deals unrealistic, bringing about a minor item decision for
customary hazard adoring clients.

Maysir and Qamir

Maysir and Qimar implies round of karma, in which you can without much of a stretch
succeed something unintentionally. It is the state in a round of karma, when the obtaining of
property is compelled to the passage of a specific occasion.

Islamic legal advisers imagine that Qimar is a sort of Maysir. The two structures are
respected like a kind of Gharar, show up in budgetary subordinates and are precluded.
Muslims are at issue if capital interests in the securities exchange fall under the standard of
Maysir and Qimar, however most Islamic law specialists choose this kind of capital
speculation as allowed as long as the exercises of the undertakings can be chosen as Halal.

The endeavor with stocks is viewed as round of karma, if the stocks are purchased as
transient capital venture. The buyer decides about the time of his speculation, what makes it
hard to decide if it is considered as round of karma or not. Furthermore, it is difficult to
discern whether individuals are focused on this rule or not.

Sharia Boards

Prior to working as Islamic monetary organization, each bank is locked in to a procedure. The
specific Sharia board needs to examine all items and inner procedures and guarantee them as
Islam similar. On the off chance that this isn't the situation, the bank isn't permitted to initiate
the business activities. It is responsible for the nonstop control of the working exercises and
the assessment of new monetary items. The Management of the Islamic bank advises and
counsels the Sharia board. The Sharia review comprises of inward workers with explicit
ability. They need to control ceaselessly the working exercises and advise the Sharia board
about the outcomes. The Islamic Financial Services Board (IFSB), which is equivalent to the
Basel Committee on Banking Supervision for traditional banks, recommends an additional
outside Sharia review, which happens once per year.

The choices made by the Sharia board are authoritative for the Islamic bank and can vary
contingent upon the individuals from the board. This makes it difficult to look at different
Islamic banks. The choices must be steady with Islamic law and national laws of the
particular nation. The size, sythesis and solid of a Sharia board relies upon the articles of

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affiliation or comparative records of the monetary organization just as on the legal
arrangements of the nation. Individuals from the Sharia sheets are called Sharia-Scholars and
are Islamic law specialists.

8. The Functioning of Islamic Banking

Islamic Banks take a shot at the standards of a premium free banking. Riba or enthusiasm
under Islamic Law fundamentally implies anything in "abundance" – the financial specialist
ought not make an "undue" benefit from the difficult work of the other. In any case, it is
allowed to follow an arrangement of sensible benefit and come back from speculation where
the financial specialist faces a challenge that is very much determined. In this way, Islamic
banks make accessible records which give benefit or misfortune rather than loan costs. The
banks utilize this cash gathered by them and put resources into something that is shariat
consistent, that isn't haraam and doesn't include high dangers. In this way, organizations
including liquor, drugs, war weapons and so forth just as all other high hazard and theoretical
exercises are disallowed. Islamic Banking, in this way, goes about as an operator by
gathering the cash for the benefit of its clients, putting them in shariat agreeable activities and
imparting the benefits or misfortunes to them. The Dow Jones Islamic Market Index appeared
in the year 1999 for speculators ready to put resources into shariat agreeable activities.

There are different items in Islamic Banking that spread the necessities and prerequisites of
the shoppers. Some of them are Mudarbah (benefit sharing – one gathering gives funds, the
different gives skill), Musharaka (joint endeavor – the two gatherings share everything
similarly), Murabaha (cost in addition to benefit), Ijara (letting on rent), Istisna among others.

The idea of Islamic banking has regularly been scrutinized by the two perfectionists just as
present day customary brokers. It is expressed that the instruments in Islamic banking are
basically equivalent to the ones in conventional banking and have a similar reason with
simply unique wording. It is regularly expressed that in the present time of benefit expansion
there is a slender line among riba and benefit. The advanced Islamic Banks have discovered
approaches to work around the customary instruments and remember them for Islamic
financial instruments. One such model is an instrument called mudarabah, which is basically
nothing else except for a home loan and the broker winds up gaining an enthusiasm for the
type of home loan financing cost on it. There are contentions that Islamic Banking depended
on high moral standards which no longer continue as before. A World Bank paper expresses
that regular and Islamic banking strategies are fundamentally the same as one another.

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Another analysis is that the Islamic investors discover their way around the framework and
"oversee" to get a shariat consistence endorsement from a researcher to put resources into.

Nonetheless, Islamic banking over the globe is at a nearly beginning stage and there are a lot
of translations given by researchers worldwide concerning different Islamic fund instruments.
One can't totally adhere to the perfectionist approach, as the Islamic account framework is
hundreds of years old and the cutting edge Islamic Banking framework is an ongoing
development. The Islamic account framework needs to advance with time without
disregarding the basics of Islamic Finance framework according to the shariat.

9. Islamic Banking in Non-Islamic Countries

While Islamic Banking is predominant and is normal in Islamic nations, there are a lot of
non-Islamic nations that are currently opening Islamic "windows" in ordinary banks. These
are offices inside the banks and they offer shariat agreeable items to the clients. China,
United Kingdom, United States, Germany are a portion of the nations that offer Islamic
windows.

The US has the American Finance House LARIBA which is a riba free and shariat grumbling
budgetary organization that is engaged with auto, business, exchange financing, fence stock
investments contributing and so on.

The United Kingdom was the first non-Islamic nation to allow a total shariat agreeable bank
called the Islamic Bank of Britain to work. Truth be told, UK was the first Non-Islamic
nation to have presented Islamic Bonds known as sukuk in the year 2014.

10. Islamic banking in India

The prominent board of trustees on money related division changes, headed by International
Monetary Fund previous boss business analyst Raghuram Rajan, presented its last report to
Prime Minister Manmohan Singh, who is likewise executive of the Planning Commission, in
2008. The advisory group, which was set up by the Planning Commission to prescribe
different approaches to take the nation's money related part changes forward, has
incorporated a couple of focuses relating to Islamic banking. The last report has two pages
alluding to subjects like value financing instead of charging enthusiasm on loaning a key
standard of Islamic banking-which is yet to be permitted by the legislature.

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The council thought it legitimate to add these issues to guarantee that the Muslim people
group likewise turns out to be a piece of budgetary incorporation in the nation. Another factor
that persuaded the board of trustees to remember recommendations for Islamic banking was
the Sachar advisory group report, which has likewise laid out the Muslim people group being
a survivor of monetary rejection. The panel has suggested that miniaturized scale value
financing as an item ought to be remembered for standard banking. All banks and
microfinance organizations should offer these miniaturized scale value financing items.

The Raghuram Rajan report, while supporting the presentation of Islamic banking in India,
has made a praiseworthy commitment in the reason for Islamic banking by legitimizing it
with strong reasons. This ought not be politically deciphered as another minority pacification
measure.

There are numerous preferences in presenting an Islamic window in the banks. For example,
dominant part of organizations in the Stock Exchange are shariat consistent (this number is
more than the shariat protest organizations on the Stock Exchange in Malaysia), hence this
would bring about drawing in tremendous assets in the local market alone.

An Islamic Banking window will empower numerous from the Muslim people group to
approach and put resources into ventures along these lines preparing immense measure of
capital which they may not be eager to place in the banks. This additionally implies India will
have the option to pull in enormous ventures from West Asia and from the individuals who
put distinctly in shariat agreeable activities.

Numerous examinations finds that India has the capability of developing as a noteworthy
market for Islamic financial organizations, if there is an ideal change in administrative
condition and expanded mindfulness among Muslims and India all in all.

According to the Indian evaluation, India has one of the biggest Muslim populace on the
planet yet a huge segment of this has not had the option to get to the financial administrations
on the grounds that according to Islamic standards, giving or accepting premium is restricted
however cash can be loaned on benefit sharing or expense based model.

India with a most noteworthy level of Muslim populace in a non-Islamic nation ought to have
been in the bleeding edge of Islamic financial activities, yet it is yet to be allowed here. It will
tremendously profit the Indian economy by drawing in ventures from the money rich Middle
Eastern economies keeping watch for new speculation goals. Five Indian organizations,

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Reliance Industries, Infosys Technologies Wipro, Tata Motors and Satyam Computer
Services figure in the Standard and Poor's BRIC Shariah Index.

i. Operation of Islamic Banking in India

Islamic Banking is an interest-free banking based on Islamic law, Shariah. In this system, the
depositor and bank will come to an agreement wherein both the parties will share the profit or
losses at the end of the year. The bank will invest in stocks, bonds, infrastructure projects and
so on. If the loss arises, the shareholders of the bank will absorb the loss. In the case of
lending, the banks will not charge any interest but levy a service charge. Overdrafts are
provided, subject to a maximum, free of charge.

Certain Islamic Financial Solutions exist in India today, but are nowhere near the standard of
the global Islamic finance industry. Strictly speaking, there are no Islamic Banks in India.
There are however various types of Islamic Financial Organisations that carry out financial
transactions on an interest free basis. There are several Baitul Mals working in cities as well
as in villages. Only 10 to 15 Islamic banks with deposits of about Rs 75 crore are operating
all over the country in various states. They are actually Non-Banking Finance Companies
(NBFCs) which work on profits/loss basis. Islamic banks by and large cater to the needs of
local area except a few of them operating across districts or states. Their sources of funds are
limited and as a result these banks have to operate on small scale and don‘t enjoy the
economies of scale.2

Islamic banks in India do not function under banking regulations. They are licensed under
Non-Banking Finance Companies Reserve Bank Directives 1997 RBI (Amendment) Act
1997, and operate on profit and loss based on Islamic principles. RBI has introduced
compulsory registration system. In the Monetary and Credit Policy for the year 1999-2000, it
was proposed that in respect of new NBFCs, which seek registration with the RBI and
commence the business on or after April 21, 1999, the requirement of minimum level of net
owned funds will be Rs 2 crore.

Under the Islamic Banking, the Central Bank would have to work out the proper framework
as it requires sharing of profit and loss with depositors and investors, apart from ensuring that
the funds comply with RBI and SEBI rules.3

2
Dr. Jeet Singh & Dr. Preeti Yadav, Islamic Banking In India - Growth And Potential, 2 (4) International
Journal of Marketing, Financial Services & Management Research 59 (2013).
3
Ibid.

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 ii. Advantages of Islamic Banking

Islamic Banking when successfully introduced in India will provide lots of benefits to the
Muslim Community and the country at large namely;

Inclusive Economic Growth: The advent of Islamic Banking in India will throw open fresh
avenues of inclusive economic growth, not only for the Muslim community, but also other
fellow countrymen through novel instruments of finance based on equity and not interest.
This might also help improve the poor socio-economic status of the Muslim community as
highlighted by the Sachar Committee and the glaring economic disparities, which is an
indication of the lack of inclusive economic growth. This may also be attributable to the lack
of participation by the community in the financial sector.4

Growth of FDI: The introduction of Islamic banking in India will offer Muslims a socio-
religiously acceptable mode of finance and investment, motivating not only retail investors,
but also beneficiaries of various Shariah-compliant schemes. Doors will be opened to foreign
direct investment (FDI) and foreign institutional investment, particularly from renowned
business houses of Gulf Cooperation Council countries.5

Availability of Funds for Business: While Shariah-compliant, equity-based microfinance

organisations at the grassroots and apex levels will be able to provide much needed financial
inputs by way of tools, equipment and machinery under the ijarah wa iktina (lease-cum-
purchase), the murabahah (cost-plus financing) instruments of Islamic finance can be used to
provide funds for trading and raw material purchases for manufacturers.6

Free from Exploitation: Renowned scholar and senior adviser to the Islamic Research
Institute of the Islamic Development Bank, Saudi Arabia, Dr Mohammad Umar Chapra has
stressed the need for implementing Islamic Banking and economy system for setting up a true
welfare state. Dr Chapra views that by adopting true Islamic system of economy and banking,
a welfare society could be created where people were saved from exploitation and their basic
needs were met.

iii. Constraints on Islamic Banking in India

No Power to Issue Check: The greatest issue which is a perpetual obstacle for Islamic banks
working in nations with premium based banking is that they can't work as banks except if
4
Ibid.
5
Ibid.
6
Ibid.

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forces of giving checks are given to them. They can't be individuals from repayment/clearing
house except if they acknowledge two conditions in regards to their liabilities and resources
like ordinary banks that need to keep fragmentary money hold with the national bank and
legal fluid resources in their advantages. Therefore banks in India need to keep up store
account with the RBI over which they get premium. The SLR incorporates government and
affirmed protections.

Budgetary Products are Interest Based: A bank authorized by the RBI turns out to be a piece
of the fiscal framework, which implies it can make cash by store age through store
acknowledgment. Since these advantages are premium based, Islamic bank can't hold them.
Subsequently, the national bank can't go about as the moneylender after all other options have
run out in light of the fact that such convenience by the financial authority is additionally
premium based. Islamic banks can't collaborate with ordinary banks dependent on standards
of premium.

Failure to Maintain Capital Adequacy: Another imperative is the powerlessness to keep up

capital ampleness and would be not able to associate with premium based banks and currency
showcase in India.

Failure to Evaluate Projects: Islamic financial focuses more on present moment and medium-
term activities in light of the fact that drawn out loaning includes venture examinations and
surveying long haul productivity. Most such banks are sick prepared to deal with this duty
due to the littleness of their activities.

Unrealistic under the Present Legal Framework: Islamic Banking can't be offered by Indian
banks just as the abroad parts of nearby banks under the present legitimate structure. But a
fundamental contribution like current record, basically no other financial item in India can be
changed to meet the states of Islamic Banking.

Assessment Procedures: Another significant thought is the expense strategies. While

premium is an automated revenue, benefit is rebelliously an earned pay which is dealt with in
an unexpected way. In the event that standards of Islamic Banking are consolidated, at that
point how can it conform to the assessment method is the unsettled inquiry. Besides RBI can't
go about as the loan specialist to such banks in light of the fact that such settlement by the
money related authority is likewise premium based.

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Lawful Tricks: Some Muslim pundits keep up that the Islamic banks conceal the installment
of enthusiasm behind legitimate stunts. They contrast Islamic saving money with "contractum
trinium" - a legitimate stunt planned by European brokers in the medieval times proposed to
permit the charging of enthusiasm for obtained cash, which was against Church lessons. The
stunt was as three distinctive authoritative understandings, which in and of them was not
restricted by the Church.

Indian Banks are managed by the Indian Banking Regulation Act, 1949, the Reserve Bank of
India Act, 1935, the Negotiable Instruments Act and the Cooperative Societies Act, 1866.

A portion of the hindrances of Islamic banking with respect to guidelines are:

a. Section 21 of the Banking Regulation Act requires installment of premium which is against
Shariah.

b. Section 5 and 6 of Banking Regulation Act refuses banks to go into any benefit sharing and
association contract – the very premise of Islamic banking.

c. Section 9 of the Banking Regulation Act precludes banks to possess any kind of undaunted
property separated from private use – this is against Ijarah (for home fund).

Along these lines, to permit Islamic banking impressive measure of changes on law must be
made. One path is to keep the present enactment relevant for existing banks and revise
explicit enactments pertinent for premium free banks. Another administrative body will direct
them and assist them with making and uphold bookkeeping and evaluating gauges. One
explicit change to be made involves the prerequisite that NBFCs would need to contribute in
any event 15% of their all out interest in intrigue based Government protections. A simple
option is to permit them put resources into value of open recorded organizations. Another
change required is the substantial tax assessment from return on value venture instead of
intrigue salary.

iv. DR. SUBRAMANIAN SWAMY v. STATE OF KERALA

Facts:

For this situation a protected test was mounted against the support of the Kerala Government
and the KSIDC in the development of an Islamic speculation organization for pulling in
venture to back undertakings in Kerala. The chief ground for challenge was that the state's
contribution damages the standards of secularism revered in the Constitution. The method of

15 | P a g e
reasoning of the Government for utilizing the Islamic speculation vehicle was to tap the huge
progression of assets created by non-occupant Indians in the Gulf nations.

Going to the meaningful inquiries, the Court originally tended to the subject of whether
Kerala State Industrial Development Corporation's (KSIDC) 11% value in the Al Barakh
Financial Services Ltd., an enrolled non-banking budgetary organization (NBFC) focused on
offering Sharia consistent money related administrations, comprises "undue relationship with
a strict movement adding up to [State] preferring or advancing a religion". It legitimized the
very much perceived position that the Indian constitution doesn't explicitly recommend a
mass of partition among religion and state. Not exclusively are accurate special cases to the
mainstream precept made in the Constitution itself (refering to Art.30(1) which awards
minorities the option to direct instructive foundations and Art.290A which takes into account
move of assets from the solidified reserve of India to specific sanctuaries in Tamil Nadu and
Kerala for their support) however State relationship with strict organizations is
conventionally admissible also both in training (refering to Art.28(2) and 28(3) which permit
the State to regulate and additionally help instructive establishments set by strict gifts or
trusts where strict instruction might be bestowed) and business undertaking (Art.298 which
awards expansive official power to the state to include in business collaborations with no
notice of any exemption against association with strict groups) inasmuch as these endeavours
don't add up to the upkeep or advancement of religion (banished under Art.27).

The Kerala government's warning clarifies that the reason here is to raise assets through
business action for building up the state and this doesn't add up to the upkeep or advancement
of religion. Moreover, collaborations between individuals as recommended in any religion is
required to be treated as a common part of that confidence and any relationship with such
action can't be denounced as advancing or supporting the religion. State interest in a business
adventure which is to be done in adherence with the rules that everyone must follow would
not damage secularism just on the grounds that the organization being referred to is
additionally, what's more, dedicated to consistence with the Sharia.

To the extent infringement of the administrative system is concerned, the Court didn't go into
it being of the view that the RBI had not yet investigated the issue and it was not its purpose
to acquire such an assessment.

With respect to infringement of equity prerequisite under Art.14, the solicitors' dispute was
that the venture was not done in a straightforward way and was along these lines self-

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assertive (intervention has been viewed as a ground for infringement of Art.14 under the
Supreme Court's quite reprimanded point of reference in E.P.Royappa v. Territory of Tamil
Nadu). The organization questioned through Rajeev Dhavan that open sale isn't an outright
necessity and might be left from when objective convincing reasons are available. The Court
acknowledged the last contention expressing that in this case, the idea of the exchange
supported the nonattendance of solicitations for delicate.

Judgment: Subsequent to considering the contentions of gatherings primarily on issues of

sacred law, the Kerala High Court maintained the state's activity in building up the Islamic
monetary establishment.

Analysis:

For the most part talking, regarding the realities of the case, the Court's thinking as sound.
Without having seen at the briefs of the gatherings, the scientist would make reference to two
perceptions.

(a) The Court didn't address any Art.14 challenge on the ground that ramifications of this
endeavour would unduly profit/inconvenience some segment of people in general. This isn't
surprising thinking about that no biased goal was displayed by the respondent State or
organization. In actuality, they asserted that administrations would be given to all.

(b) The Court's somewhat wide contention that all cooperations between people as endorsed
in any religion should be treated as common parts of that confidence is fascinating. There are
numerous situations where the SC has held that just the "basic" parts of a religion are secured
under the basic rights yet I am mindful of no point of reference for this view. Nor does the
Court refer to any reference to help it. In the event that it comes to be concurred, it could
infer that any such angle will be available to state guideline. Numerous ceremonies and
practices are endorsed by sacred texts to be done by families as a unit or by the network; in
any event, when a solitary individual plays out a ceremony, a cleric is regularly present and a
few associations with him/her are a necessary piece of it. It brings up the issue whether it
tends to be said that every single such communication, howsoever fundamental they may be
to the confidence, are "common" parts of it and subsequently not "basic"? Such a
recommendation might be difficult to acknowledge.

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 v. E. P. Royappa v. State of Tamil Nadu & Anr.

Facts:

The petitioner was a member of the Indian Administrative Service in the State of Tamil
Nadu. When the state chief secretary’s post fell vacant he was selected for the post and was
promoted accordingly. The post of chief secretary and first member of the Revenue Board
was soon put into the same category. The petitioner was appointed to that post and was
entitled to the same rank and emoluments as the Chief Secretary was admissible, but he did
not join the post and went on leave. On the return from leave of the petitioner the Deputy
Chairman's post was created in the Chief Secretary’s rank for one year, and he was approved
for that position. It was argued that the continuation of the position of Deputy Chairman in
the rank of Chief Secretary for a period of more than one year would be invalid pursuant to
the Indian Administrative Services (Cadre) Rules of 1954. Thus, Government created a
temporary post of Officer on Special Duty but he did not join it too.

Deputy Chairman's position was abolished and a First Member of the Board of Revenue was
appointed to that post. Under Article 32 of the Constitution, he filed a petition challenging the
validity of his transfer from the post of Chief Secretary, on the following grounds:

a. It was contrary to the provisions of the 1954 Indian Administrative Services (Cadre)
Rules, and the 1954 Indian Pay Rules.
b. It violated Articles 14 and 16 of the Constitution because the offices of Deputy
Chairman, Special Planning Commission and Special Duty Officer were inferior in
rank and status to that of Chief Secretary.
c. It was made in an exercise of power which was mala fide.

Judgment:

The Supreme Court held that the two posts had been created for the discharge of functions
requiring very high quality and specialized experience and that they were not to be counted as
any less responsible than the most senior executive posts for which the petitioner had been
selected. The petitioner’s vast experience in the field of commercial taxes resulted in the
Government appointing him as Special Duty Officer. For these reasons, the petitioner's
contentions failed, the petition was dismissed and each party was ordered to pay and bear the
costs.7

7
E.P. Royappa -Versus- State Of Tamil Nadu & Anr. AIR 1974 SC 555.

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Analysis:

The positions of Deputy Chairman, Planning Commission and Special Duty Officer shall be
equal in status and responsibility. There was also no ground for the government to attribute
bad faith or wrong motive to the petitioner. According to the affidavit it was showed that at
the time of the election the petitioner performed usual duties and exercised care and caution,
and gave advice in the course of duty. In all cases, the Government accepted the advice of the
petitioner. There was also no evidence of acrimony or disagreement between the Government
and the petitioner, and there were no records suggesting that the petitioner advised one way
and the Government acted in the opposite manner. The Chief Minister cannot state on the
affidavit evidence that he has committed acts of violence and intimidation, and therefore the
entire affidavit evidence shows that the petitioner's allegations of malafides against the Chief
Minister had no base and the petition filed by the petitioner was dismissed.

Conclusion

After the appraisal of the two advantages and disadvantages of the foreseen foundation and
use of Islamic Banking in India, the scientist has arrived at the resolution that at 150 million,
Indian Muslims contain the second major Islamic populace on the planet after Indonesia.
However, Indian Muslims despite everything stay a socio-financially in reverse network. The
fundamental guilty party is restraint from monetary framework because of strict belief
systems relating cash which forbid exchanges with elements chipping away at the premise of
'premium'. Around 80% of Indian Muslims are happy to loan to or get from Islamic Finance
Institutions. Muslim possessed organizations have accomplished a sizable extent. SREI
framework has just started utilizing Islamic Financial Products. The interest for Islamic
Banking Products is obviously gigantic.

Be that as it may, Islamic Banking is infeasible under the present RBI guidelines. Indian
Banking framework depends on Certainty of Capital and Returns; the two of which are in
struggle with Shariah principals. Anyway it must be recollected that a couple of Islamic items
could be made reasonable through the NBFC course.

RBI can gain from the encounters in nations like Pakistan and Iran, where the whole financial
framework depends on Islamic Principals and from nations like Malaysia, Jordan,
Bangladesh and Egypt where Islamic Banks work alongside traditional business banks under
a blended financial system.

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The progressions required in the current frameworks would require the association of the
considerable number of partners: the RBI, the Islamic Banks and the Tax Authorities. RBI
needs to permit riba free stores; loaning on PLS premise; The Islamic Banks need to give
ensure on stores; charge laws must be fittingly changed to suit Islamic Banking.

In the event that anyway India chooses to execute the Islamic Banking system, it ought to
follow a two staged methodology in presenting Islamic Banking. Stage 1 would present
Islamic Financing through NBFCs. Simultaneously, banks can steer the idea of premium free
stores. The applicable bank and duty laws can be adjusted during this stage. Stage II would be
presentation of undeniable Islamic Banking.

Islamic Banking speaks to a cauldron of issues and potential. The political, administrative
and authoritative expenses of presenting Islamic Banking are high. Be that as it may, it is
positively not without its advantages. The Islamic Community will profit tremendously from
this activity. The non Islamic people group and corporate will have more extensive decision
of money related items. It will contribute monstrously towards the objective of Financial
Inclusion.

11. RBI proposes Islamic window in conventional banks

The Reserve Bank of India (RBI) has proposed the opening of Islamic window in
conventional banks for gradual introduction of Sharia-compliant or interest-free banking in
the country.

In this regard, RBI has also prepared a technical analysis report and submitted to the Union
Finance Ministry for its consideration.

What is the issue?

 Islamic or Sharia banking is a finance system based on the principles of not charging
interest. The charging of interest is prohibited under Islam.
 However, in recent times both the Union Government and the RBI have been
exploring the possibility of introduction of Islamic banking for a while to ensure
financial inclusion of those sections of society that have remain excluded due to
religious reasons.

How RBI going to implement it?

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Initially, RBI is planning to introduce a few simple products similar to conventional banking
products through the Islamic window. But it will be after necessary notification issued by the
Union Government. In later stage, full-fledged Islamic banking with profit-loss sharing
complex products may be considered on the basis of experience gained in course of time.

What are difficulties in implementing Islamic window in conventional banks?

Indian banks have no experience in the Islamic or Sharia banking. There are also lots of
complexities of Islamic finance. There are also various regulatory and supervisory challenges
involved in the matter.

12. Islamic Banking in UK:

The Islamic financial law has long history but Islamic banking and finance industry came into
existence with profit and loss sharing investment by Egypt’s Mit Ghamr Saving Banks in
1963. After official existence Islamic banking has grown in the area of finance, banking,
insurance, mortgage, and assets management business with annual growth rate of 10-15 %.
But actual development in Islamic banking is started after 1970 with new investment
techniques, strategies and product development (Steward, 2008). Dubai Islamic Bank (DIB)
is known as world first Islamic bank it was formed in 1975. Currently it has 48 branches
which great services. DIB offers higher returns than conventional banking system as well
they provide auto, home and personal finance products (Platt, 2008).

Islamic banking is not only for Muslim community because it provides moral and more
ethical concept of financing and investment. Islamic banking is equalled popular in all
communities in the United Kingdom. Islamic banking has some challenges in the UK because
the financial system is more attractive to conventional banking but Islamic banking has great
opportunities in the UK because in less than five years Islamic banking made a prominent
position in the UK financial market.

i. Development:

The UK is the big financial market and hub of Islamic banking in Western countries. There is
continuous growth in the Muslim population in UK. There is an increase of 400,000 in
Muslim community in only seven year time through high birth rate in community and as well
immigrants from South Asian countries especially Pakistan, India and Bangladesh.

I. Products Development:

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Islamic banking has potential to grow and develop new products in UK because people are
encouraging the Islamic financial products. But the areas in which Islamic banking have not
introduce any product such as credit card, overdraft facilities and easy finance because most
of the Muslims are involve in such services and they are looking same from Islamic banking
window.

II. Market Development/ Customers and Institutions:

United Kingdom has a favourable environment to develop the Islamic financial services
comparatively to other European countries. It is true if we are saying that France is the
biggest Muslim population countries in the West. But when we compared these countries in
term of facilities and services France and Germany placed far behind to UK. Institutions,
there are almost eight institutions involved in Islamic financial services in United Kingdom
but in France and Germany there are one and two institutions have Islamic financial services
respectively.

III. Enhancing the Investment:

The Islamic banking is the best solution in the time of credit crunch. Because in interest
based economy the loan repayment power of customers decline due to the highest rate of
interest and inflation. In this case that person and company again consult with bank for loan
and banks provide it on highest loan or some time due to credit crisis they refuse to reissue.
In this position many of the businesses are declared as bankrupt and insolvent. In the result of
insolvency the company and individual investments are blocked. At the end it is resulted to
crumple and crisis to economy that affect whole the society. Islamic banking protects
economy and society from collapses because it provides the discipline of risk sharing
between the parties.

IV. Role of FSA and UK Government Regularity Authorities:

The UK government is playing important role for growth and development of Islamic
banking services in UK. Population, there are almost 2million Muslim people are residing in
UK and they are playing important role in the UK economy. The UK government recognizes
this importance of the community that they want to invest according to their religion. The UK
government is very helpful to promote and create awareness about Islamic banking to
enhance the investment of Muslim community.

ii. Challenges:

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Islamic banking has some problems in UK because UK is a non-Muslim country and all
banking and financial rules and regulations are established in favour of conventional banking.
Comparatively Islamic banking is so young to conventional banking system in all area such
as fund management, investment policies, market development and products development
and in information system. Here I choose the main challenges which are currently faced by
Islamic banking in UK such as legal and institutional framework, supervisory framework,
awareness, competition and globalization.

I. The legal and Institutional Framework:

Islamic banking is need to more focus on training and coaching the staff because Islamic
banking is totally based on religious and ethical. The staff members must know all the
fundamentals of Islamic banking because new customers enthusiastic about the practice of
Islamic banking especially home finance working, Profit sharing ratio and investment
policies.

II. The Supervisory Framework:

Islamic banking has ineffective supervisory system. Islamic banking is a big institution it
needs a strong and wider network of supervision. But currently most of the banks have three
or four members of committees which have decisions power. It is not much information
about these committees which types of decision they are taken because when I spoke to
customers and non-customers they have not much information about the calculation of Profit
Sharing, Financing and assets purchased from the commodity markets.

III. Awareness of Islamic Banking System:

United Kingdom is the fast growing Muslim population country in the world. Currently there
are 2 million Muslims residing in UK from which almost 50% living in London. In London
area there is only four branches of Islamic Bank of Britain for 1 million people. 8 It is difficult
to manage all these people through this network. At the end it is result that that Islamic
banking is facing the difficulties of funds management that affect the information system and
as well marketing sector of Islamic banking.

IV. Competition and Globalization:

Islamic banking is facing a bigger challenge of competition in UK market because Islamic

banking is still in the early stage which is facing the problems of skilled and trained staff and
8
www.islamic-bank.com.

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shortage of funds as well but conventional banking has advantages over Islamic banking in
United Kingdom.

13. Islamic Banking in Australia:

Muslims are one of the many minorities in Australia. One of the major differences between
the Western and the Islamic financial systems is the use of interest (riba) which is the very
foundation of the Western financial system but prohibited under the Islamic rulings
governing permissible financial transactions. In this paper we will describe the activities and
operations of the Islamic financial institutions and discuss why riba-free banking is likely to
flourish in Australia in the future.

Challenges:

The challenges to establish an Islamic bank are Formidable. To date, no license for
Authorised Deposit-taking Institution (ADI) was issued to conduct Islamic banking business
in Australia. We have other providers of Islamic financial services in Australia, although they
are not banks. The governance processes are stringent. All Directors and key management
position holders will have to be “fit and proper” as per APRA regulations. Adequate risk
management and internal control systems including credit risk, market risk, liquidity risk and
operational risk will have to be in place. Foreign ADIs will not serve the banking purpose of
the general consumers due to restrictions on them under the legislation. Foreign ADIs are not
permitted to accept deposits from individuals and non-corporate institutions of less than
$250,000. This will exclude banking for salary payments, rental payments and other payment
services required by mum and dad customers.

Opportunities:

There are enormous potentials for Islamic banking in Australia which will create choices for
consumers and diversify financial services for Muslims and non-Muslims alike. MCCA and
others have been exploring this opportunity for years. If an Islamic bank is established, it will
create jobs, generate incomes and economic growth for all Australians.

Islamic banking is largely influenced by the principles of the Shari'iah Islami'iah. It places
emphasis on the religious, ethical, moral, and social dimensions to enhance equity and to
promote fairness for the good of society as a whole. It is based on a simple philosophy -
Islamic banks do not pay or charge riba. Instead, they emphasize the viability of projects and

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the profit sharing arrangements of its members. The bank is more than a finance collector and
provider, it also plays an important social developmental role with unique Muslim products
and Islamic financial instruments such as zakat and qard Hassan.

Over a decade ago, an Australian Islamic financial institution was conceived and established.
This institution has had a tremendous response from the Muslim community. The MCCA and
MCCU are now well established and on the way to becoming a fully-fledged Islamic Bank.

14. Conclusion:

Islamic banking is a substitute to customary banking. The primary contrasts are a more
grounded reference to the genuine economy, the effect of Islamic law and the missing
interest. Regardless, the framework is generally not chance sharing. Generally, Islamic banks
frequently utilize real market loan fees as estimating benchmarks. Islamic items, which are
for the most part similar the traditional items, are offered to the customers at greater
expenses. Individuals feel the items are Sharia adjust and pay more for a similar ware.
Consequently, banks gain from Islamic money related items and are the champs. This is
begging to be proven wrong, as Sharia wishes to maintain a strategic distance from the abuse
of individuals. With that framework, Islamic banks can suffer without charging any
premiums, however just in the event that buyers are strict or educated regarding moral issues
and ready to pay for it.

A trouble of Islamic banking and money is that regular financiers are not notable with Islamic
law and Islamic banking. The advancement of such items without having the mindfulness
about it is troublesome. An instructional class with the nuts and bolts of Islamic banking
would help to make the primary themes fathomable. This requires the banks to put resources
into their representatives' instruction, what might be not their enthusiasm as individuals don't
request adequate Islamic monetary items.

15. Bibliography
Journals
 Milena Valeva, Theoretische Grundlegung ethischer Bankbetriebslehre: Die Lehren
aus dem Islamic Banking, 1st ed., Gabler Verlag, 2012, Page 177
 Bashier, Portfolio Management of Islamic Banks “Certainty Model”. IN: Journal of
Banking and Finance 7, 1983, Pages 339 - 354.

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  Khan, Feisal, How ‘Islamic’ is Islamic Banking? IN: Journal of Economic Behavior
& Organization 76 (3), 2010, Pages 805 - 820.
 Chong, Beng Soon; Liu, Ming-Hua, Islamic banking. Interest-free or interest-based?
IN: Pacific-Basin Finance Journal 17 (1), 2009, Pages 125 - 144.
 Daniel Ecke, Islamic Banking: Grundlagen und Potenzial in Deutschland, Hamburg:
Diplomica Verlag, 2012, Page 20
 Dr. Jeet Singh & Dr. Preeti Yadav, Islamic Banking In India - Growth And Potential,
2 (4) International Journal of Marketing, Financial Services & Management Research
59 (2013).

Websites
 ‘What is Islamic Banking and why does the RBI want it in India?’, available at:
https://scroll.in/article/822234/what-is-islamic-banking-and-why-does-the-rbi-want-it-
in-india (Last Modified Nov. 27, 2016).
 ‘Islamic Banking: Can it Save Us from Crises?’, available at:
http://blogs.worldbank.org/allaboutfinance/islamic-banking-can-it-save-us-from-
crises (Last Modified Sept. 11, 2010).
 Islamic Development Bank (ed.): IDB Member Countries. Available at:
http://www.isdb.org/irj/portal/anonymous?
NavigationTarget=navurl://9c2f799fdba05fd8b547aa0e2027b7c9, accessed May 16,
2016

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