FINANCIAL

MANAGEMENT
ISLAMIC BANKING SYSTEM
What is Islamic Banking

refers to a system of banking or banking activity that is

consistent with the principles of the Shari'ah (Islamic
rulings) and its practical application

Principles emphasise moral and ethical values in all

dealings, have wide universal appeal

The principle source of the Shari’ah is The Qur’an followed

by the recorded sayings and actions of Prophet
Muhammad
ORIGIN

Islamic bank can be traced back to the very birth of Islam

when the Prophet himself acted as an agent for his wife's
trading operations

In 1963, in Mit Ghamr, in Egypt, the first Islamic

interest-free bank came into being
The following types of accounts were accepted:
a) Savings accounts
b) Investment accounts
c) Zakat accounts
BASIS OF ISLAMIC BANKING

the banking system has to avoid interest

Another Islamic principle is that there should be no reward

without risk-bearing

Consider two persons, one of whom has capital but no special

skills in business, while the other has managerial skills but
possesses no capital. They can co-operate in either of two
ways

1.Debt-financing (the western loan system)

2.Mudarabah
Mudarabah is the basis of modern Islamic banking
on a two-tier basis

1st tier: The depositors put their money into the

bank's investment account and agree to share
profits with it

2nd tier: Entrepreneurs seek finance from the

bank for their businesses on the condition that
profits accruing from their business will be shared
between them and the bank in a mutually agreed
proportion, but that any loss will be borne by the
bank only
STATUS OF ISLAMIC BANKING

Islamic banking is no longer a novel experiment

Islamic banks are evolving financial and investment

instruments that are not only profitable but are also ethically
motivated
INDIAN BANKING SYSTEM
History of Banking in India

Can be divided into 3 phases

PHASE-1
The General Bank of India was set up in the year 1786

In 1865 Allahabad Bank was established and first time

exclusively by Indians

During the first phase the growth was very slow and banks
public has lesser confidence in the banks
Phase-II

Government took major steps in this Indian Banking Sector

Reforms after independence

Seven banks forming subsidiary of State Bank of India was

nationalised in 1960

14 major commercial banks in the country was nationalised

This step brought 80% of the banking segment in India under

Government ownership
Phase III

This phase has introduced many more products and

facilities in the banking sector

The country is flooded with foreign banks and their ATM

stations

Phone banking and net banking is introduced

Financial Structure
The Indian financial system comprises
the following institutions
1. COMMERCIAL BANKS
a) Public sector
b) Private sector
c) Foreign banks

2. DEVELOPED BANKS

to be continued…..
3. CO-OPERATIVE BANK
a) Primary Credit Societies
b) Central Co-operative Banks
c) State Co-operative Banks

4. SPECIALISED BANKS
a) Export Import Bank of India
b) Small Industries Development Bank of India
c) National Bank for Agricultural and Rural Development

to be continued….
5. RESERVE BANK OF INDIA
established in April 1935 with a share capital of Rs. 5 crores

nationalised in the year 1949

superintendence and direction of the Bank is entrusted to

Central Board of Directors of 20 members

The Reserve Bank of India Act, 1934 was commenced on

April 1, 1935.The Act, 1934 (II of 1934) provides the
statutory basis of the functioning of the Bank
Functions of Reserve Bank of India

•Bank of Issue

•Banker to Government

•Bankers' Bank and Lender of the Last Resort

•Controller of Credit

•Custodian of Foreign Reserves

•Supervisory functions
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