Interest-Free Banking and India

How Islamic finance avoids interest through profit sharing and leasing, why India has no Islamic banks, and how some products operate within Indian rules.

Islamic law prohibits riba (interest). Islamic finance offers alternatives.

How it works

Mudarabah: profit sharing between investors and entrepreneurs.
Musharakah: joint ventures sharing profits and losses.
Murabaha: the bank buys an item and sells it to the customer at a markup, paid in instalments.
Ijarah: leasing.
Sukuk: bonds backed by assets.

Global size

Islamic finance assets globally exceed 3 trillion dollars, concentrated in the Gulf, Malaysia and Indonesia.

India

India has no Islamic banks, because banking laws are built around interest.
In 2016-17, the RBI considered an Islamic window in banks but did not proceed.
Some cooperative societies and NBFCs offer interest-free products.
Sharia-compliant mutual funds and indexes invest in companies meeting certain rules.

Financial inclusion angle

Some Muslims avoid banks due to interest. Interest-free products could bring more people into formal finance.

Kerala

Kerala explored an interest-free infrastructure finance company in the 2010s.

The home purchase

Under murabaha, a bank buys a house and sells it to a customer at a fixed higher price paid over years, avoiding interest while financing the purchase.

Thinking Islamic finance means no profit

Profits come from sharing, markups and leasing instead of interest.

Key takeaways

Islamic finance avoids interest through profit sharing, markups and leasing.
Global Islamic finance exceeds 3 trillion dollars.
India has no Islamic banks but some interest-free products.
Such products could aid financial inclusion.