Following are the salient features of Islamic banking.
While the conventional banks guarantee the capital and rate of return, the Islamic banking system, working on the principle of profit and loss sharing cannot guarantee any fixed rate of return on deposits. Several Islamic banks do not guarantee the capital, because if there is a loss it has to be deducted from the capital, thus the basic difference lies in the very roots of the two systems. Consequently, countries working in conventional laws are unable to grant permission to institutions which wish to operate under the PLS scheme to functions as commercial banks
The Central Bank supervision and control is mainly related to liquidity requirements and adequacy of capital. These, in turn, depend on an evaluation of the value of assets of the Islamic banks
It is evident then that even if there is a desire to accommodate the Islamic system, the new procedures that need be developed and the modifications that need be made to existing procedures are so large that the chances of such accommodation in a cautious sector such as banking is very remote indeed. Any relaxation of strict supervision is excluded because should an Islamic bank fail it would weaken the confidence in the whole financial system, with which it is inevitably identified
In trade financing, there are title transfers twice, once from seller to bank and then from bank to buy and so twice taxed on this account declining the profitability of the venture
Islamic banking is a young concept. It has already been implemented as the only system in two Muslim countries; there are Islamic banks in several Muslim countries and a few in non-Muslim countries as well. In spite of the successful acceptance, there are problems, these problems are mainly in the area of financing.
With only small changes in their practices, Islamic banks can come out of all their cumbersome, burdensome and every so often doubtful forms of financing and propose a clean and resourceful interest-free banking, all the necessary ingredients are already there. The modified system will make use of only two forms of financing that is loans with a service charge and Mudaraba participatory financing, both of which are fully accepted by all Muslim writers on the subject.
Such a system will offer an effective banking system where Islamic banking is obligatory and a powerful alternative to conventional banking where both co-exist and such a system will have no problem in obtaining authorization to operate in non-Muslim countries.
Participatory financing is a sole feature of Islamic banking and can offer responsible financing to socially and economically relevant development projects. This is an extra service Islamic banks offer over and above the traditional services provided by conventional commercial banks.
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