Islamic Banking is a system of banking consistent with shariah laws, which is against the collection or payment of Interest. According to Islam, Interest leads to inflation, and accumulation of Interest leads to increasing the divide between the rich & poor. In an Islamic mortgage transaction, instead of loaning the buyer money to purchase the item, a bank might buy the item itself from the seller, and re-sell it to the buyer at a profit, while allowing the buyer to pay the bank in installments. Islamic banking has a huge potential in India as India is the 3rd largest Muslim populated country in the world. India has 14 percent Muslim population which is more than the Muslim population of Bangladesh, turkey, Egypt, Iran, Nigeria, Afghanistan, Sudan, Iraq, Saudi Arabia etc. Islamic Banking can address the long drawn issue of ‘Financial inclusion’ and will create a ‘feel good’ factor among Muslims. Indian government can gain diplomatic advantages to make financial dealings with Muslim dominated nations and can attract equity finance from gulf countries for infrastructure development, thereby financing the fiscal deficit.