2025, Vol. 8, Issue 2

author(s)
Fasna Edasseri

abstract
The banking system has played a vital role in economic development since ancient times. However, the growing dependence on “interest” has often been criticized as a socially harmful practice. To overcome this issue and promote a fairer financial system, a modern alternative known as Islamic or interest-free banking has emerged globally. Islamic banking operates in accordance with Sharia (Islamic law), which prohibits the charging or payment of interest and instead emphasizes risk-sharing and ethical investments. This model is successfully functioning in several countries such as Malaysia, Indonesia, Bangladesh, Afghanistan, and the United Kingdom. Although the concept holds significant potential, it is often perceived as impractical within India’s conventional banking system. Moreover, Islamic banking in India is frequently misunderstood as a religious or charitable initiative limited to the economically weaker Muslim population. This paper aims to clarify the true concept and principles of Islamic banking, assess its feasibility and scope in the Indian context, and highlight the various financial instruments used by Islamic banks. It also evaluates the advantages and challenges of adopting this model in India. The study concludes that India possesses substantial potential for the successful implementation of Islamic banking. To achieve this, policymakers must approach the concept from an economic and inclusive perspective, rather than a religious one, ensuring the participation and upliftment of financially excluded communities who avoid conventional interest-based banking.