Islamic Banking windows possible in India

By Syed Zahid Ahmad and K. A. Najmi,

Islamic Jurisprudence or principles of Shariah does not allow receipt or payment of interest. It believes that money has no intrinsic value; however its commercial use is permitted. In the hand of an entrepreneur money turns into capital. Lender of the capital is entitled to share the profit and loss of the business. A lender of the capital puts his money at risk and therefore is entitled for reward in the form of business profit.

The Banking Regulation Act and the directions issued thereunder allow interest on deposits and lending. Despite these requirements there are a large number of products and services carried out by banking companies which qualify as products complying with the Islamic Jurisprudence. It is also possible to make deposit and lending activities Shariah compliant or at least near Shariah compliant, without violating the provisions of Banking Regulation Act 1949 or the regulations framed thereunder. We therefore believe that it is possible to introduce Islamic Banking Window in a conventional banking company within the extant laws and regulations. Such windows may be opened by adding a public counter or specific desk to cater needs of customers seeking Shari’ah compliant banking. Under present banking regulations, following may be found ready to cater as Shari’ah Compliant products and services at Islamic Banking windows.

A. Deposit Side Products & Services

  1. Current Account.
  2. Equity Deposits ( conditions prescribed in contract for bank as trustee of any company)
  3. Mutual Fund Deposits (With floating and fixed maturity).
  4. Safe Deposit Locker Services
  5. Online Trading Services
  6. Resident Foreign Currency Account (For NRI’s returning home)
  7. Foreign Currency Non Resident Deposits (For NRI’s)
  8. Internet Banking services for receiving, disbursing and transferring funds.
  9. Consultancy Services (On Commission basis) to customers seeking Shari’ah Compliant Investments in Mutual Funds.
  10. Consultancy Services (On Commission basis) to customers seeking Shari’ah Compliant Investments in Equities / preferred Shares.
  11. Other deposit account with such modifications as suggested by scholars of Islamic Jurisprudence

B. Lending and Investment Side Products & Services

1. Loan accounts with such modifications as suggested by scholars of Islamic Jurisprudence.
2. Equity Financing (as an Executor if bank acts as a trustee)
3. Lease Finance business
4. Hire purchase business
5. Discounting of bills and Vouchers (on Commission basis)
6. Factoring services
7. Inland transfer of funds for Fee
8. E-Freight Services
9. E Tax services
10. Letter of Credits
11. Issuance of Bank drafts
12. Issuing bank guarantee
13. Mutual Fund Business
14. Disbursement of corporate benefits services
15. Retail Sale of Gold Coins
16. Foreign Inward Remittance Services
17. Gift Cheques Services
18. Gift Card Services
19. Pay Roll Card Services
20. Foreign Travel Card Services
21. Initial Public offer Services
22. ATM Services
23. Broking services

It is also possible for banks to run a collective investment scheme through Islamic window, in terms of contributions made by the investors are pooled and utilized for the purpose of a scheme or arrangement as investment in the form of equity or loan with conditions attached for sharing the profit/loss of such investments. This can act as a substitute for fixed deposit accounts of conventional banks. India needs huge long term investment in infrastructure and other sector. The Banks may form Trustee Company to raise deposits and deploy funds in prescribed trade/industry on specified conditions in accordance with customer’s need. This would allow the banks to meet the customer’s need for Shari’ah Compliant financial products and services because under present banking regulation act, the commercial banks are allowed to act as executors of trusts. It is possible for a bank to draw a suitable sector specific scheme and invest the fund contributed by the investors. The terms and conditions attached to the scheme would ensure that the investment is Shari’ah compliant. By floating different schemes the bank can project that it would help investors in making long term investment in Shari’ah compliant manner. A simple collective investment scheme with in the meaning of section 11AA of Security and Exchange Board of India for investment in equity of a company or business is fully Shariah compliant.

It is strange but true that banks and financial institutions have always believed that the BR Act and the regulation framed there under, do not allow Islamic banking activity as such, no institution has so far tried to verify the truth or otherwise of the assumption. Since such an assumption is not true, it is worthwhile taking a step forward and introduce products under Islamic window which meet the requirements of Law and Shariah. With more than 150 Million Muslims in India, large investment fund available in the Middle East and sustained investment opportunity provided by Indian economic environment, it is an exercise worth taking. Banks having Islamic Banking windows in India and abroad will definitely have an edge over others to draw investment funds for India by ensuring the investors that these investment will be suitably placed in India through Shari’ah complaint linkages.

The banks with experiences in dealing with para banking activities can come out with a large number of products acceptable under Shariah. At international level, Indian banks may have stiff competitions from foreign banks, but in national market there is no competition because at present no bank has offered such services. The bank which makes first announcement may take the lead in procuring a big chunk of the untapped market of Islamic Finance in India. Large investment funds of the Middle East, Brunei, Malaysia, Singapore and other countries may also get attracted towards India as an investment option.

There are some entities operating as co-operative societies or NBFCs who project themselves as carrying on Shariah compliant investment but they are too small and do not have the technical and financial ability to generate faith in investors. An Islamic window in a bank of reasonable size has a good chance of success. To start Islamic banking windows in India a bank will have to satisfy its prospective customers that its activities comply with the Shari’ah principles. There are already in place institutions which have acquired sufficient experience and expertise to provide the necessary inputs. The Shari’ah Advisory Board is one such institution. They have built up capacity to examine the compatibility of a product from Shari’ah angle before it is introduced. The Boards may also help in finalizing the products, identifying the potential market and help in promoting the business.

We would not be surprised if in near future, a banking company announces the opening of a Shariah compliant banking window while carrying on conventional banking. Expectedly after the launch of Islamic banking window in India by a banking company, there would be competition among banks for introducing Shari’ah complaint products. The one having a reasonable size and spread and a local feel, will obviously have a large share of the market. It may not be out of place to mention that the Standard Chartered Bank and HSBC have long experience of running Islamic window in a large number of countries world over.

About the authors:

Syed Zahid Ahmad, Asst. Secretary General, All India Council of Muslim Economic Upliftment Ltd. Trust (Mumbai) is regular contributor to TCN on Islamic banking and finance. He can be reached on Mobile - (+91) 9869 814 113, Fax:- (+91 22) 2347 8884, E Mail - [email protected]

Khurshid A. Najmi is a retired joint legal advisor of RBI who has also submitted the technical draft to Government of Bangladesh for introduction of Islamic Banking in Bangladesh. Mr. Najmi may be reached through mobile 09811328466 or email [email protected].


Islamic Banking Window

This is another act of stupidity by our Muslim leaders.

I can see our majority brothers asking, "now they want a different bank, why cannot they bank in normal banks"?

Our priorities are misguided. Education is the critical issue of the day. Not Islamic Banking. Instead of mainstreaming, we are constantly looking to "lock" us into separatism.

Brother L Mirza,

Assalamu alaikum L Mirza,

Brother what u mean by "STUPIDITY". Pls do the education for yourselves and do the comments. If u r unaware about a matter, pls keep quiet. Conventional banking system is very harm to the society and the world understood it and diverting to islamic finance with an enviable growth, so my humble request is that don't make darkness by closing your eyes.
Its also a part of education to educate ppl to lead the most moral financial deals and transactions in their daily life.

Interest free banking system

Interest free banking system is prevailing in some countries. An attempt is made to establish it in our country also. What is wrong in it? Of course education is important for which we should all do our best. It does not mean that we should not touch other issues. It is not confrontation or anything of that sort.

We have accounts in our existing banking system and deal with it. We will continue to do it. It is not possible for any trader or businessman to avoid the banking system and no industry can be established without having arrangements with any bank. Our national banks play an important role in associating themselves with the development of the country.


Almost all the Islamic banks in the Middle East/Gulf region are only replacing the word 'interest' by 'profit', thereby making fools out of the naive Muslims. In one instance, only the 'Find and Replace' tool of MS Word was used by a reputed consulting firm.
What do you say about their Shariah boards- are they also hand-in-glove or do they not understand modern economic terms?

However, this does not mean an Islamic banking model cannot be operationalized- but it remains to be seen how it is done in practical terms.


It is beyond doubt that Islamic Banking in its real shape is the solution for the financial exclusion of Muslims. This community constitute over 15 per cent of the population in India but they hold only 12 per cent of the accounts in the 27 public sector banks as far as priority sector advances are concerned. The share of other minority communities, which form roughly 6 per cent of the population, is 8 per cent. This is the average for the period between March 31, 2001, and March 31, 2005. Statistics available for the same period with regard to priority sector lending by the 29 private sector banks reveal that Muslims held over 11 per cent of the accounts, while the other minorities held 10.5 per cent.

The figures become even more disappointing in the 44 minority-dominated districts in the country. Muslims, who form over 33 per cent of the population there, hold only 21 per cent of all public sector bank accounts, while other minorities, who form only 2 per cent of the population, hold 5 per cent of all accounts. In the private sector banks, Muslims hold over 20 per cent of all accounts, while other minorities hold 15 per cent.

Sachar Committee report has established beyond doubt that a huge section of the Muslim population has been left out of the ambit of banking services for various reasons. In its chapter titled “Access to bank credit”, it has shown clearly that the access of Muslims to formal banking facilities is much lower than that of other minorities, and this is true for both private and public sector banks. In its detailed analysis, the committee has noted that “the percentage share of accounts, total amount outstanding and amount outstanding per account of Muslims remains disappointing”.

The committee has summed up its findings thus: “The access of Muslims to bank credit, including priority sector advances, is low and inadequate. The average size of credit is also meagre and low compared with other socio-religious communities both in public sector and private sector banks. The position is similar with respect to finances from specialised institutions like the SIDBI and NABARD. Census 2001 data show that the percentage of households availing themselves of banking facilities is much lower in villages where the share of Muslim population is high…. The financial exclusion of Muslims has far-reaching implications for their socio-economic and educational uplift.”


Do we need separate system of banking?

We do not need a separate system of banking. All we need to avoid is usury or very high interest rates on loans which can bankrupt the borrower. This means that instead of using credit cards we should use debit cards, and we should get mortgages with a fixed interest rate throughout the life of the mortgage. Variable rate mortgages may offer reasonable interest rate when one buys the house, but after a few years the interest rate may rise steeply, making it impossible to keep up with the payments. Islamic finance, just like our sharia laws, needs to be sensible, and should not become an albatross which keeps our community backward in relation to other communities.