Citations & References:"Everyone knows that a key concept of Islamic teaching is the avoidance of interest payments that are fixed in advance (interestingly, this prohibition is not different from that of other faiths at certain stages of their development), but much less well-known to non-Muslims are the social teachings that lie behind the prohibition, and the variety of concepts that are permissible in economic transactions among Muslims," the Moon began a discussion, when she arrive after saying Basmalah and Salaam."Islamic finance has its roots in the teachings of the Prophet (ﷺ)—himself a merchant—and is grounded in the social, moral and cultural precepts of the Qur’an. Much has been written about the relationship of Islamic finance to Qur’anic teachings; but much less, until very recently, about how Islamic finance is related to traditional economic doctrines, and how Islamic finance might perform in a turbulent and unstable time.Islamic finance began with Islam in the early 7th century. The first Islamic financial institution established was the Bait al Maal or public treasury set up by the Prophet (ﷺ). Later, during the times of the Rashidun Caliphate, various new issues and questions came to light, discussions were held amongst the companions of the Prophet, radhiyallahu 'anhum, and judgements were reached. This process is called Ijtihad, and many economic reforms were made through Ijtihad, but it was always important to maintain consistency with the Quran and Sunnah. Early in his Caliphate, the first Caliph Abu Bakr Al Siddique, radhiyallahu 'anhu, had to deal with a revolt against the paying of Zakat. Zakat was the main financial tool to ensure social welfare and justice in Islamic society, compelling the rich to share their wealth and income with the less privileged. The second Caliph Umar Ibn al-Khattab, radhiyallahu 'anhu, formalized the management of the Bait al Maal, which dealt with the revenue and expenses of the Islamic State. Later Umar identified Bait al Maal’s main revenue sources to be Zakat, Sadaqah, a land tax called Kharaj, a tax on non Muslims residing in Muslim States called Jizya, and other customs duties and toll income. The funds collected in the Bait al Maal were used for various governmental expenses and for public welfare activities, paying allowances to the needy, the elderly, the disabled, orphans, widows, etc.The Islamic civilization flourished between the late 6th and the early 11th centuries. Muslim traders conducted financial transactions based on the Shariah rulings, using financial tools like Musharaka (joint venture) and Mudaraba (trust financing), Wakala (agency), Qard Hasan (benevolent loan), Salam (forward contracts) and Ijara (leasing). Some evidence of the achievements of early Islamic financial activities are as follows: The Prophet (ﷺ) acted as an agent for his wife’s trading business and collected a commission as revenue; Islamic financial systems encouraged trade and business contracts to be written and witnessed, reducing possibilities of conflict; Trade and Islam arrived in Malaysia and Indonesia before the Europeans. Shipping business in the Indian Ocean used Mudaraba or trust financing as a form of financing. Besides the owners of the ship and cargo, the captain of the ship and each sailor was also a partner, not earning a salary but sharing in the profit along with the owners. As such, everyone had a stake. History shows that rarely did mutiny, deliberate drowning or damage of cargo on Muslim ships happen, compared with regular shipping; Expansion of various forms of trade in the Islamic world led to the development of Islamic mercantile law in accordance with Islamic Shariah law. In comparison, Europe at this time was using a mediaeval form of business cooperation known as Commenda.From the 12th century on to the middle of the 20th century, Islamic finance gradually disappeared. Some of the reasons for this were as follows: The fall of the Ottoman Empire; The dominance of Western countries and conventional financial institutions;. The onset of colonization around the Muslim world, with Shariah institutions consequently losing their capabilities under the colonial powers; The continued growth of business and finance in Europe, developing larger enterprises, using the small savings of the masses to finance investment projects; The application of any existing Islamic financial principles and tools went into inertia and disuse; The differences between conventional finance and Shariah restrictions got blurred amongst most people, including the Muslim population.The concept of modern Islamic finance emerged in the mid-20th century with Asian and Arab Muslim-majority countries gaining independence from Western colonial powers, searching for their own identity and being inspired by Islamic economics, distinct from both the Western capitalist and Eastern socialist models. Islamic finance and banking evolved from the concepts of Islamic economics, based on the profit and loss-sharing (PLS) system, and is considered more equitable and stable. The idea of interest-free financing has existed since the birth of Islam, but its reintroduction into the world of finance is only a few decades old.Modern Islamic banking is about 60 years old. The guiding principle of Islamic banks is the Shariah law, which prohibits the payment or receipt of interest and recommends the sharing of risk and of profit/loss between the bank and its customers. Islamic finance also emphasizes socio-economic justice and equitable distribution of wealth. This is in stark contrast to conventional banks, which operate primarily on an interest basis and on a profit-maximization principle. Previously, the prohibition of interest made banking difficult for religiously oriented Muslims globally, and especially in the Gulf region – they either left their money in current accounts with no interest in conventional banks or stayed outside the formal banking system altogether, which hindered the free flow of capital between global financial markets and the GCC (Gulf Cooperation Council). The advent of affluence in the region, with the discovery of oil and the introduction of petrodollars, magnified the problem. The introduction of Islamic banking was a major solution, providing a distinctive means of financial intermediation. Islamic banking was conceptualized through the efforts of Islamic political activists, Muslim legal scholars, economists and businessmen, applying Shariah law to the modern economy and innovatively structuring traditional Islamic financial instruments to provide customers with most of the services associated with conventional banks, within Shariah restrictions. Today, Islamic banking has established its place globally.During the early part of the 20th century, towards the end of the colonial era, several religious scholars in Egypt, India, Pakistan, Malaysia and Indonesia began to rethink the Shariah rulings relating to the financial aspects of the life of a Muslim and tried to reconcile the Shariah prohibition of interest or Riba with existing conventional banking. Significant academic research took place in these Muslim-majority countries during the 1940s and 1950s, which led to institutional experimentation in Islamic finance and banking. Some of the major developments during the following decades are as follows: Dr Ahmad El-Najjar, an economist, first experimented with the idea of interest-free banking by setting up the Mit Ghamr savings project in Egypt in 1963. This was the world’s first interest-free bank, set up through community effort and the pioneering endeavours of its founder Dr El-Najjar. The bank was modelled on the German cooperative savings bank, using the principles of rural banking. The Islamic cooperative savings bank had three types of accounts: first, Savings account. This account was aimed at collecting the savings of depositors and allowed withdrawal on demand; the depositors, like the members of a cooperative, could also take small, short-term interest-free loans for productive purposes. Second, Investment account. This account allowed restrictive withdrawal, almost like the fixed deposits in conventional banks, and the funds in these accounts were invested in Shariah-compliant projects on a PLS basis shared between the bank and the investors; part of the profits/losses was passed on to the depositors, proportionate to their deposits. Third, Zakat account. This special account collected Zakat money from the members and redistributed the funds amongst the poor and needy as per the Quranic guidance of possible Zakat recipients.The Mit Ghamr experiment had unexpected success and the savings deposits grew each year. However, the secular government in Egypt had reservations about the religious basis of this first Islamic bank and despite its success the project was abandoned for political reasons. The closing down of the Mit Ghamr experimental bank was not the end of Islamic banking, rather it was the beginning of this new and unique banking niche within the global banking industry. Within a few years Egypt had 9 Islamic banks and 9 years after the inception of the Mit Ghamr experiment, in 1972, it was integrated into the Nasr Social Bank.Around the same time as the Mit Ghamr experiment was pioneered in Egypt, on the other side of the world in Malaysia, the Tabung Haji institution was set up, also in 1963. The purpose of this institution was to manage the savings of Hajj pilgrims by investing them in a Shariah-compliant manner over a period of time and then the savings would be used towards their Hajj expenses. Hajj is the pilgrimage to Makkah that is compulsory for all able-bodied Muslims once in their lifetime provided they have the financial ability. The Tabung Haji institution is in operation to date, and it set up the platform for Malaysia to play a leading role in the global Islamic finance and banking industry. Malaysia’s first fully fledged commercial Islamic bank, Bank Islam Malaysia, was set up two decades later in 1983.The Islamic Development Bank (IDB) was established in 1975 to foster economic development and social progress amongst the member Muslim countries and to enhance the growth of the Islamic finance and banking industry. Its head office was set up in Jeddah, Kingdom of Saudi Arabia (KSA). Currently the bank has 57 countries enrolled as its members; a prerequisite for members is to be a member of the Organization of Islamic Cooperation (OIC). The core functions of the IDB include the following: Participating in productive projects in member countries via equity participation or lending; Providing financial assistance to member country governments; Providing funds to Muslim communities in non-Muslim countries; Promoting foreign trade amongst member countries.The oil boom in the 1970s triggered a rapid growth of Islamic financial institutions in the Middle East and North Africa. The world’s first fully fledged commercial Islamic bank was the Dubai Islamic Bank, set up in Dubai, United Arab Emirates (UAE) in 1975. It was established as a public limited company with a capital of AED50 million and the governments of Dubai and Kuwait owned 20% and 10% of its shares, respectively. The bank has grown, with both governmental and public support since its inception, and currently is the largest and most reputable Islamic bank in the country.Islamic finance concepts have been in existence and practiced for centuries, but have been institutionalized only in the last few decades, offering Shariah-compliant products and services. With the development of viable Islamic alternatives to conventional finance products, large numbers of Muslims are seeking Shariah-based solutions to their financial needs. Some non-Muslims also are Islamic bank customers, and some conventional banks are offering Islamic products on a limited scale via the Islamic windows within their regular distribution channel or by special branches or subsidiaries specifically established to offer Islamic banking products. Over the last five decades there has been rapid growth in Islamic finance institutions, instruments, regulations, educational and training facilities, publications and conferences and seminars on the topic. The remarkable growth of an industry only a few decades old, with growing global interest, indicates the tremendous opportunities existing in this niche business for the participating banks.Modern Islamic finance and banking, when first introduced, suffered from a lack of understanding by the existing industry as well as by potential customers. As such it was quite a while before significant success was achieved by this niche segment of the finance and banking industry. The industry developed through three periods. The first was a period of conceptualization (1950–1975), when Islamic scholars raised Muslim consciousness about the prohibition of interest, mostly from a religious aspect. The second was a period of experimentation (1975–1990), PLS Islamic banks were set up, Islamic financial instruments and institutions were established, Western financial institutions entered the market and the sector was accepted as an interest-free alternative to conventional banking. The third period (1990–present) is about earning recognition, confidence and credibility in domestic and international markets, the innovation of products and the standardization of products and procedures.The design of modern Islamic banking has mostly followed the structure of conventional banks, with the exclusion of interest-based transactions, replacing interest with a PLS system. Significant innovations in this unique banking system are yet to come, and so up to now the industry has mainly endeavoured to provide reasonably Shariah-compliant alternatives to the products and services offered by the more universally accepted conventional banks. Hence, some mismatch can be seen between the current structure of the Islamic finance and banking industry and its original objectives. The significant similarity of Islamic banking products and operations to conventional banking allowed the conventional banks to enter this niche segment of the industry with windows or subsidiaries. This also allowed Islamic banking to grow faster, as it was not viewed as isolated from the global financial infrastructure.The revival of Islamic finance can clearly be linked to the religious movements in Muslim countries after they gained independence from the colonial powers to restore their Islamic values, including those related to financial and commercial dealings. Islamic banks provided Muslims with the opportunity to bank and invest in accordance with their religious beliefs and without interest, while previously they had to deal with interest if they wanted to participate in the banking system. The Muslim population numbers 2.01 billion (2023), which is about a quarter of the estimated global population of 8 billion. Moreover, Islam is the fastest growing religion and some Muslim countries are the richest in the world, like Qatar, Brunei, UAE, Saudi Arabia, etc. Most Muslim countries apply Shariah law to some extent in their social framework.Starting from the Middle East, Islamic finance grew and expanded in South and South-East Asia. Bahrain and Malaysia have played pivotal roles in their respective regions to enhance research, innovation and development in the areas of Islamic finance. Bahrain was the first GCC country to contribute to the progress in this industry by setting up and supporting the development of several major international Islamic regulatory and standard setting bodies, like the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI). Bahrain Central Bank has also provided a highly supportive role in the development of the Islamic finance industry. On the other side of the world, Malaysia, starting from Tabung Haji, is another major player and driving force in the internationalization of the sector. With the support of the Malaysian government, Bank Islam Malaysia was set up and the country has a well-designed dual banking system to meet the demands of a large Muslim population aspiring to Shariahcompliant banking. Today Malaysia is one of the most developed Islamic finance centres and the base for another major international Islamic regulatory and standard setting body, the International Financial Services Board (IFSB).Pakistan, despite its decision to go completely Shariah-compliant in the financial sector, still operates on the dual banking system. The rapid growth experienced in the GCC countries over the last few decades has also served as a catalyst in the growth of Islamic finance and banking. KSA, UAE, Qatar and Kuwait have all formally set up regulatory structures to support Islamic finance and banking, and all of the GCC countries are using the dual banking system. Significant development in Islamic finance and banking is also evident in the rest of the Muslim nations in the Middle East, North and East Africa, as well as in South and South-East Asia – for example, Egypt, Jordan, Libya, Bangladesh and Indonesia.Islamic finance and banking has been spreading in some non-Muslim countries as well over the decades. Amanah Bank was set up in the Philippines in 1973. In Europe, Islamic banking first arrived in Luxembourg in 1978 and during the 1980s many other experimentations happened in Islamic finance and banking. In 1982, Faisal Finance House was set up in Geneva. Since 2002 the Bank of England and the Financial Services Authority in the UK have taken several measures to encourage and develop the sector and make London a major international hub of Islamic finance, and have licensed several Islamic banks. Dallah Albaraka Group established the first fully fledged Islamic bank in the UK in 2004, called the Islamic Bank of Britain. The bank was acquired by Masraf al Rayan of Qatar in 2014 and rebranded as Al Rayan Bank. In Europe, besides the UK, France, Germany, Italy, Luxembourg, Switzerland and the Netherlands are also trying to serve the minority Muslim population and take advantage of the opportunities in the fast-growing Islamic finance sector.In Singapore, the first Islamic bank, Islamic Bank of Asia, was incorporated in 2007. Singapore currently plays a significant role in Islamic finance, especially due to its geographic and economic proximity to Kuala Lumpur, Malaysia, a major Islamic finance hub. Hong Kong is also participating in Islamic finance. In the USA Lariba, the American Finance House, has been operating since 1987. University Islamic Bank is another provider of Islamic finance in the USA. The major provider of Islamic finance in Canada since 1980 is Ansar Financial and Housing Cooperative, which plays a valuable role in providing Shariah-compliant home financing and other investment options. Similarly, Australia also offers some Shariah-compliant home financing.The Islamic finance and banking industry today comprises the following sub-sectors:Islamic banking. This includes the deposit-taking banks that operate within Shariah guidance, like the Bahrain Islamic Bank. Conventional banks offering Shariahcompliant products may also participate via an Islamic window within their main operations or an independent subsidiary, like HSBC Amanah.Islamic insurance or Takaful. These are the Shariah-compliant insurance companies, like the Qatar Takaful Company.Islamic capital markets. These include Shariah-compliant shares, bonds, mutual and other investment funds and products, indices and the secondary markets.Islamic non-bank financial institutions. Within this sub-sector are the variety of financial institutions that are not banks and operate within the Islamic financial principles. Some of these are Islamic finance companies, Islamic housing cooperatives, Islamic leasing and factoring companies, Islamic microfinance, charitable endowments (called Waqf in Arabic), private equity and venture capital firms, Hajj and Zakat management bodies, etc."The Moon was about to end the discussion, she said, "Muslims interested in living by their faith and following the Shariah rulings related to their financial and banking transactions were prohibited from dealing with interest and were unable to use conventional banking since most of their products are interestbased. To meet this demand from Muslims, Islamic finance and banking is growing and is now accepted and identified as a new, niche sector within the global finance industry. It has spread significantly in the Muslim-majority countries in the Middle East and North and East Africa, as well as South and South-East Asia, with Bahrain and Malaysia being major hubs. The sector is also gaining a significant foothold in the Western world, serving the Muslim population as well as taking advantage of the potential in this unique sector. And Allah knows best."
- Syeda Fahmida Habib, Fundamentals of Islamic Finance and Banking, 2018, Wiley
- Muhammad Ayub, Understanding Islamic Finance, 2007, John Wiley & Sons
