Traditional or Conventional Banking is a part of the financial system. It is not an entire financial system. However, when we discuss Islamic Banking we desire that all Shariah allowable financial transactions should be fulfilled by a bank.
The basic difference between benefical mode of investment in banking and Islamic finance is that trading is forbidden for the former and it is must for the later.
There are some grounds for this prohibitions. In the past, when banking in combination of trading was worked together with bankers who became merchants, as well. The economic disaster of 1929-32 showed that this combination of banking with trading to be deadly for a lot of banks. Later on, banking laws were rectified to limit banking activities to risk-free interest type loaning. This type of trading is now strictly forbidden for a bank. By remembering this historical fact we should take precautions for this kind of disaster.
Any kind of affair in interest base loaning is strictly forbidden, in Islamic finance. Thus, for an Islamic financial foundation trading is the only choice for making productive investment.
Because of the above mentioned conflict of fundamentals of the two Islamic banking, it is impossible to be successful without bringing about a radical change in the legal framework in a secular and multinational society like India. To succeed our aims we should consider in terms of Islamic financial system of banking forms. We should not focus on combination of trading with the banking. Because both can be achieved independently.
Thus, Islamic banking will remain limited up to the activities which do not disobey banking law such as mobilizing deposits in current accounts, making interest-free advances on actual service charge basis, collection of bills and cheques, safe deposits vaults, transfer of funds, agency services like payment of bills, payment of pension, collection of taxes etc.
Under these conditions as mentioned before, we may propose following solutions:
For the reason of strict prohibition against any kind of involvement in interest, a devout muslim is unwilling to keep his/her savings even in current account with a bank which would use his/her funds for earning interest.v In order to make deposits in current account fully appropriate with Shariah we may recommend that deposits mobilized from Muslims in current accounts should be used in making interest-free lendings especially to Muslims and the government. Deposits in these accounts ought to be treated by the dealing bank as government business like PPF. The required liquidity reserve as is suitable to the conventional bank deposits in terms of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) may be saved in government account as interest-free loan. Rest of the amount may be paid out to public in general and Muslims in particular as interest- free loans. The cost of handlings for deposits and advances may be divided between government and borrowers proportionally.
Security for Advance
Interest-free loans to the individuals may be made against sufficient indirect / personal guarantee. Post dated cheques may also be taken according to repayment programme.
The lendings to the people might be protected under state governments recovery act wherever suitable. All the payables should be treated as government dues and preference ought to be given in the matter of hearing in recovery suits as also in case that any action would be performed against bouncing of cheques.
Provision for Bad-debts
With some experiences of the banks in the difficulty of failures in such type of loans, enough provision should be made by supplying a charitable fund provided by the government and the borrowers proportionally.
When we think of the mobilization of savings for investment on profit or loss sharing (PLS) basis, a lot of chances are obtainable outside the banking industry. The format of personal fund manager fits most to this type of trade. Existing communal and personal reciprocal funds may also fit Islamic financial practices expose relief in the rules governing their trades. The funds can be mobilized in the form of securities like units issued by the fund manager for different plans altered to suit the need of investors. Collecting funds might be made in mass sum are in repetitive payments (under systematic investment plan). Likewise the repayment of principal( + -) Profit or Loss (PL) might be made in mass sum are payment (under systematic withdrawal plan). An offer can be made to government for lengthening the position of reciprocal funds to the trade of fund managers. Reciprocal funds ought to be allowed to access goods exchange, foreign Exchange, capitalizing of government projects and communal and personal industrial and housing projects.
In terms of PLS (Profit and loss sharing), financing efficient distribution rather mobilization of funds is a hard job. To defeat this problem, offers can be made to government for investing in their various projects by means of Islamic methods under its current policy “Public-Private-Partnership (PPP)”. Different government projects can be financed by means of Musharaka, Murabaha, Istisna, Ijarah methods in a win-win position. Crop lending to farmers and buying farm products at minimal support price (MSP) minus return on funds under administrative price mechanism (APM) can be made by means of Salam. Likewise, food credit to the government can be made available on cost (+) mark-up basis by means of Murabaha.
To enable Islamic financial system participation of agent of experts of Islamic finance, investors, fund manager including communal and personal reciprocal funds, banks, farmers, industrialists and specialized project financing institutions appear to be unavodiable. Broad discussions among all the viewpoint parties with regard to their needs, hopes and restraints in the matter of mobilization of funds and their efficient deployment to use all the possibilities in various markets like capital market, goods exchange, foreign exchange and government projects ought to be held before submitting a realistic scheme to the government for constitution and growth of Islamic financial system.