Islamic banking
Also called: Interest-free banking · Topic: Banking Regulation, NPAs and Financial Stability · NCERT: Beyond NCERT
Meaning
Islamic banking is banking that follows Sharia (Islamic law), which forbids charging or paying interest. Depositors and the bank share in profits and losses instead of earning a fixed interest rate. Finance is given through asset-backed contracts, where every deal is linked to a real asset or trade rather than to lending money for interest. This is why it is also called interest-free banking.
Example
A bank might buy a machine and sell it to a trader at a pre-agreed higher price, paid in instalments, instead of lending the money at interest. The RBI looked at bringing interest-free banking into India but dropped the idea in 2017. Indian banking law is built around interest-based lending.
Don't confuse with
- Zero-interest loans or loan waivers: these still sit inside the normal interest-based system. Islamic banking is a separate model built on profit-and-loss sharing.
Related concepts
- Scheduled bank
- Public sector bank
- Urban cooperative bank
- Universal banking
- Narrow banking
- Financial repression