Islamic Banking
Many of our friends must have come to know about Islamic banking being introduced in Kerala. Those who know a little more knows that Islamic banking is an interest free banking system. Truly speaking most of us would wonder how a bank can operate if it does not charge any interest on any loan, or why people would invest or deposit in such banks which does not give any return interest on their deposits. If the financial institution starts operating on interest free system as advocated by Islamic shariat, would the growth and development be made possible for any country. Being a Muslim I thought I would be a better person to give an answer to my friend’s queries. According to shariat law it’s a sin to give and receive interest. A question must have popped up in our friends mind, why? To give answer why, I would like to compare the modern banking system with Islamic banking system. There are four factors of production namely land, labour, capital and organization. In Islamic and modern system we pay rent on land, wages to labour, profit and loss sharing on organization. But the difference lies in the capital part. In modern system we pay or receive interest on capital whereas in Islamic system it is again sharing of profit and loss. The Islamic system of banking has more social responsibility and social justice. I will tell you how, when two businessmen approach a bank for loan, one for the setting up of alcohol factory and the other for setting up of a school or hospital. The bank normally gives loan to person starting an alcohol factory because the rate of return is much higher than the other projects. As such the modern banks are more concerned about the interest only. In Islamic banking the loan on such projects are not allowed as these projects are detrimental to the society, thus they are socially responsible. If you look back, between 1960-80 many such loans were given to start up gambling dens through out Europe and America. Las Vegas, Venice. Milan, Madrid, Amsterdam, etc. are examples and if you compare the loan given to socially beneficial projects, you will find it to be nominal.
Islamic banking has social justice. If a person takes loan and any calamity befalls him the bank gives him more time to repay unlike modern bank in which you have to pay the interest whatever your condition may be. And the late you pay the more penalties you have to bear. And if somehow the person is unable to repay the loan the entire loan is written off.
Other major difference is that this system encourages people to work for their livelihood. Sitting idle is not permitted. How Islamic banking system encourages such thing, I will explain you. In modern system the price of any good is a summation of cost of raw material, wages, profit and interest. As such the price of goods increases, higher price leads to low demand which in turn leads to low supply. When supply decreases the production decreases, which in turn leads to retrenchment and lay offs, leading to increase in unemployment. Whereas in Islamic system the price of goods includes cost and the profit. As such the price is low, which stimulates higher demand, leading to higher supply, higher production and eventually higher employment rates.
The Islamic banking leads to devolution of power in the hands of common man, where the deposits made by the people are invested. Every person is an owner and is entitled to profits and loss made by such investments. The profit earned is much higher than the interest given by the modern banks. Whereas in modern banking system a person is entitled to petty interest he would receive on investment. A huge chunk is kept by the banks. Moreover the power is vested in the hands of few banker who control the entire financial system and the common man is kept at the mercy of such bankers.
There is lot to speak on the Islamic banking but I think it would become too lengthy for everyone to read. Thus I conclude that Islamic banking system is good option to invest and the growth of any country is not halted or hindered. In spite it will lead to more rapid growth of any economy and above all will help in the eradication of poverty and misery of the common man.
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