Best answer

Kunal Aggarwal wrote the best answer for this question and got a score of 5/10. The answer is being reproduced below for everyone’s convenience. Of course these answers can always be improved. (Best answer  of a particular only involves those given on that day, later answers may not have been checked)

Islamic banking is a banking system based on Sharia Law. It is based on two major principles:
1. No collection of interest on transactions
2. No financing of activities which are not permitted under Sharia law
3. Introduction of an islamic tax i.e. Zakat
4. No funding of activities which involves any kind of oppression
5. No funding for activities involving speculation

It would help in following ways:
– Parallel banking systems would provide more credit to people especially Muslims
– Interest free loans would be a boon for entrepreneurs, socially disadvantaged and even farmers
– It has the potential to improve social development of the community like better education, literacy and decrease in health problems

However, it does pose few challenges as well:
1. Availability of funds to these banks. People would prefer deposits in banks providing interest rates
2. Applicability of rules like taxes by government, CRR, SLR by RBI would be major challenge
3. Further demand from other religious communities to run their own banking system which will divide the whole system and pose problems for a democracy like India
4. It may crowd out funding for many businesses which are considered illegitimate as per Sharia Law

Way ahead:
1. A long term policy considering all religious communities is the first step
2. Wide ranging discussions involving people, NGOs, Minority institutions are needed to discuss possibilities