The term Islamic banking refers to a banking activity or a system of banking that is in consonance with the basic principles of Islamic Shariah (rules and values set by Islam). Islamic banking is also known as interest free banking system as the Shariah disallows the acceptance of “Riba” or interest rate for the accepting and lending of money. In Islamic banking system, a business that offers good interest rates or services is strictly prohibited and it is in fact considered Haraam(forbidden). Islamic banking offers the same facilities as conventional banking system except that it strictly follows the rules of Shariah or Fiqh al- Muamlat. Islamic banks operate mainly in Muslim countries, but currently they are also operating outside these countries. For instance, the United Kingdom has become the most important location for Islamic financial activity outside the Muslim world. Today, approximately 53 countries have Islamic banking institutions, and at least 70 countries have some sort of Islamic financial services. The largest Islamic banks are located in Gulf Cooperation Council countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates.
The Origin, History and Evolution of Islamic Banking
The origin of Islamic banking system can be traced back to the advent of Islam when the Prophet himself carried out trading operations for his wife. The“Mudarbah” or Islamic partnerships has been widely appreciated by the Muslim business community for centuries but the concept of “Riba” or interest has gained very little diligence in regular or day-to-day transactions.
The first model of Islamic banking system came into picture in 1963 in Egypt. Ahmad Al Najjar was the chief founder of this bank and the key features are profit sharing on the non interest based philosophy of the Islamic Shariah. These banks were actually more than financial institutions rather than commercial banks as they pay or charge interest on transactions. In 1974, the Organization of Islamic Countries (OIC) had established the first Islamic bank called the Islamic Development Bank or IDB. The basic business model of this bank was to provide financial assistance and support on profit sharing.
By the end of 1970, several Islamic banking systems have been established through out the Muslim world, including the first private commercial bank in Dubai(1975), the Bahrain Islamic bank(1979) and the Faisal Islamic bank of Sudan (1977).
Salient Characteristics of Islamic Banking
Islamic banking brings economic empowerment to muslims in the area of
operation. It helps muslim business persons , through financial aid, to remain
It is a basis for expansion into the Islamic economic system since the
establishment of each Islamic bank is also the creation of another bank to
cooperate with others in the international web of Islamic banks. Thus also
creating a link for international interests.
It provides investors with flexibility in the type of accounts within which
they could channel their investment. It thus links capital to labour and
reduces expenditure, to levels, related to the type of investment, the value
thereof and its period.
Islamic banks enable the saving of monetary resources for the future in a
methodology approved by Allah. Thus this leads to protection of wealth.
Sponsoring Islamic activity and the mobilization of resources for
international Islamic support not only investment , but moral as well, i.e.
relief towards muslim refugees and victims of war, etc.
Islamic banks facilitate international and local trade, provide foreign
exchange services and profitably invest the muslim fraternity’s surplus
wealth in conformity to Islamic principles through economically acceptable
development and social projects indispensable for the muslim community....