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FINANCIAL
MANAGEMENT
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ISLAMIC BANKING SYSTEM
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What is Islamic Banking
refers to a system of banking or banking activity that isconsistent 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 Shariah is The Quran followedby the recorded sayings and actions of Prophet
Muhammad
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ORIGIN
Islamic bank can be traced back to the very birth of Islamwhen the Prophet himself acted as an agent for his wife's
trading operations
In 1963, in Mit Ghamr, in Egypt, the first Islamicinterest-free bank came into being
The following types of accounts were accepted:
a) Savings accountsb) Investment accounts
c) Zakat accounts
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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
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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
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STATUS OFISLAMIC 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
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INDIAN BANKING SYSTEM
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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
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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
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Phase III
This phase has introduced many more products and facilitiesin the banking sector
The country is flooded with foreign banks and their ATM
stations
Phone banking and net banking is introduced
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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..
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3. CO-OPERATIVE BANK
a) Primary Credit Societiesb) Central Co-operative Banks
c) State Co-operative Banks
4. SPECIALISED BANKSa) Export Import Bank of India
b) Small Industries Development Bank of Indiac) National Bank for Agricultural and Rural Development
to be continued.
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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 toCentral Board of Directors of 20 members
The Reserve Bank of India Act, 1934 was commenced onApril 1, 1935.The Act, 1934 (II of 1934) provides the
statutory basis of the functioning of the Bank
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Functions of Reserve Bank of India
1. Bank of Issue
2. Banker to Government
3. Bankers' Bank and Lender of the Last Resort
4. Controller of Credit
5. Custodian of Foreign Reserves
6. Supervisory functions
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