Application of Islamic Economic Principles to Indian Financial Sectors: Prospects and Challenges

Abstract

Economic system is the integral part of every social system. Globalized economy introduces three types of economic systems which are private, public, and mixed ownership. Despite people take part of these three systems in major countries, the frequent fi nancial crunches and questioning of reliability on conventional fi nancial system, many countries try to bring an alternative fi nancial system that can consistently work on transparency and accountability in all economic spheres. Islamic economic system is solution of such thinking due to its success and safety operations in all practicing countries.

In Gulf Cooperation Council countries, all Islamic banks are performing triumphantly which include 25 banks. Its products and services are based on profi t loss sharing mechanisms which adhere to the principles Islamic shariah. Mudaraba, Musharaka, and Murabaha are the main instruments which are used
mostly in all fi nancial sectors. The present system of commercial banking is based on minimization of risk and maximization of profit. On the contrary, Islamic fi nancing is performed as social fi nancial system so as it is highly attracted by non -Muslim customers also for them that stands as safe and connected to real economy. Even Islamic fi nance is at adolescence stage in its growth in India, its applicability is well subjected overall the Indian fi nancial services such as mutual fund, microfi nance, non-banking financial company (NBFC) based fi nancial system, and venture capital. The recent launching of Cheraman Financial Services Limited and some movements like SBI Shariah mutual funds elevate this study to introduce an alternative system to those people who suffocate in the knot of Interest. India has approximately 175 million Muslims, they are highly to be excluded from access to banking products
and services due to absence interest free fi nancial services.

The gap is prevailing by the lack of mediatory functions such as Islamic financial sectors and other investment institutions. The present RBI regulations such as Repo rate, statutory liquidity ratio, and cash reserve ratio, constrain to practicing Islamic banking in India. However, excessive demand and working forms such as NBFC, Non-Government Organization, and Nidhi, show the ways to applying Islamic economic system in the Indian scenario too. So, the present
study focuses to fi nd out feasible models for implementing Islamic economic principles and its practical products and services in India.

It is an attempt to analyze the prospects, challenges, and drawing solutions to regulatory problems. It also illustrates basic Islamic shariah principles, the Indian financial system with reference shariah based fi nancial services. To do research, exploratory method will be used and data will be collected on secondary basis.