Sharia Banking

Recently SEBI has allowed four mutual funds to launch Sharia funds in India. However, RBI continues to find Islamic banking ‘inconsistent with the existing laws’.
Islamic finance industry has undergone a transformation in the last few years. Today it has started asserting itself as an alternate system of finance. This industry has made a mark by its rapid growth not only in Muslim countries but also in other secular and developed nations as well.


The Sharia bars “unethical or immoral monetary loans” that are intended to unfairly enrich the lender and prohibits Charging and receiving interest.

It also prohibits investment in companies or projects associated with alcohol, gambling and pornography. However, Sharia-compliant funds, structured in accordance to Sharia rules, are allowed in the stock markets of many countries, including India. Sharia funds can be managed as mutual funds, exchange-traded or hedge funds. There nare several Shariah screening institutions which have formulated their own Shariah screening norms under the guidance of their respective Shariah Boards. The better known screening norms in use around the world are those of AAOIFI, Dow Jones, MSCI, S&P and TASIS. “Taqwaa Advisory and Shariah Investment Solutions (TASIS) Pvt Ltd” is the leading Shariah advisory institution in India; it has formulated norms for Shariah screening of Indian stocks, which are widely acknowledged and accepted in the country.


Sharia Index

Sharia Banking in India

Three funds — Benchmark, Tata and Taurus — have launched Sharia-compliant schemes. SBI Mutual Fund is set to come out with its fund early next month. India’s stock exchanges have close to 600-700 companies which follow the principles of Sharia. BSE’s Sharia Index has outperformed the Sensex by more than 10 per cent in the last one month, signalling that such companies have performed well.

The Reserve Bank has not allowed Islamic banking so far. A panel headed by former Deputy Governor Anand Sinha had said that a system that does not allow charging or receiving interest is inconsistent with existing laws. RBI feels charging of interest is necessary for banking operations in India because banks have to borrow, on which they have to pay interest.


Islamic banking, also known as interest-free banking or finance, is a banking system, which promotes profit sharing, but prohibits the charging and paying of interest. This system is based on the principles of Sharia Islamic Law, which are derived from the Holy Quran and the “Hadeeth”, a compilation of the noted sayings of Prophet Mohammad. Islamic Banks everywhere follow these principles in their business.

In Islamic banking, productive activities which promote entrepreneurship, trade, commerce and societal development are supported, while those which earn income sans risk – such as interest (Riba) bearing transactions – and unproductive activities like speculation or gambling are prohibited.

Team Aspirant Forum


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