Islamic Banking

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INTRODUCTION TO ISLAMIC BANKING

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



References: • http://www.theislamicbanker.com/history_islamic_banking/ • http://www.zaharuddin.net/index.php?option=com_content&task=view&id=297&Itemid=72 • http://worldpress.org/Mideast/3741.cfm • http://www.imf.org/external/pubs/ft/survey/so/2007/RES0919A.htm • http://users.bart.nl/~abdul/chap4.html#4.6%20Conclusions

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