Brief History of Islamic Banking and Finance

There is no doubt that the history of Islamic Banking and Finance is quite interesting. In the article, we want to talk about Islamic Finance History briefly. Since the Medieval Times (1,000-1500 AD) Middle Eastern entrepreneurs engaged in financial transactions. However, during that times, these financial transactions used some principles and tactics of European banking systems.

Initial History of Islamic Banking

Arabs and Ottoman Empire used to trade with people overseas, especially with Spain extensively. At that time, they created a particular financial system without interest and introduced a profit and risk-sharing methods.

Since trading relations between Europe and Asia began getting more significant, the Europeans brought their banking system to these countries. Many of them were with an interest-bearing financial system.

As the business relationships with Europe started to grow, these types of financial institutions started to be more well known outside of Europe. Even if these commercial banks serviced local business owners, they only used the bank to transfer money between two accounts. The options of taking a loan and depositing were very limited as the population did not want to engage in interest or usury. In addition, particular co-operative institutions which can offer risk-sharing method existed, but only in particular locations.

The economic demand continued to increase, so for the local businessmen avoiding the conventional bank was not an option anymore. Further, many countries became free from colonial rules, there was an urgent need for banks. Using conventional banks was their only choice, whether companies, individuals, governments wanted it or not. In order to create more satisfactory choices, some professionals introduced an interest-free banking system.

Growth of Islamic Banking System

Interest in this type of banking system kept growing in the following decades. Soon after, Egypt’s Mit Ghamr Savings project became the first well recognized financial organization. All depositors could get small loans for realistic productive reasons in a cooperative organization. In addition, this cooperative made profit-sharing investments in specific enterprises. The Nasser Social Bank incorporated this project in 1971.

Moreover, prestigious conferences such as the Finance Ministers of Islamic Countries and the First International Conference on Islamic Economies addressed the idea of Islamic finance. As a result, interest-free banking became practice from theory to practice and an intergovernmental bank was established in 1975. The first privately held interest-free bank, the Dubai Islamic Bank, launched the same year, with more banks following in countries including Sudan, Egypt and Kuwait.

Since 1975, more than fifty interest-free banks have opened, most of which are located in Muslim populated countries. Islamic Banks did, however, open in Western Europe in the early 1980s. Furthermore, both the Pakistani and Iranian governments introduced an Islamic banking system in the banking systems there.

Modern Islamic Banking

Since the late 1990s, these types of financial institutions have been growing at a rate of ten to fifteen per year, as customers recognize the privileges and benefits they offer as a bank. In addition, the number of banks that provide Islamic financial services is increasing and several conventional banks now provide customers with Islamic financing choices. As a result, Islamic Banks are a viable alternative to the more established commercial banking system. Shariah structuring consulting companies have increased in popularity in the last decade, transforming into a well-developed source for Muslims seeking Islamic Finance solutions.

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